An analysis of the treatment of employee pension and wage claims in insolvency and under guarantee schemes in OECD countries: comparative law lessons for Detroit and the United States.

• Author: Secunda, Paul M.
• Position: Organization for Economic Cooperation and Development - Introduction through II. Country-by-Country Profile of Employee Benefit Claim Treatment in Insolvency, p. 867-909

Introduction I. Brief Introduction to Comparative Employee Benefits and Bankruptcy Law A. Government-Provided Pensions vs. Employer Provided Pensions B. Characteristics of Occupational Pension Plans C. Characteristics of Wages and Other Employee Benefits D. Prevalence of Government Insurance or Guarantee Schemes E. Overview of Insolvency Proceedings and Priority Creditor Rights F. Arguments for and Against Insolvency Priorities for Employee Claims II. Country-by-Country Profile of Employee Benefit Claim Treatment in Insolvency A. Current Treatment of Pensions and Wage Claims in Insolvency in the United States 1. Pensions 2. Other Employee Benefits B. Canada's Current Treatment of Pensions and Wage Claims in Insolvency 1. Pensions 2. Other Employee Benefits C. Treatment of Employee Claims in Insolvency Under EU and ILO Law 1. Discussion of EU Directive and Scope 2. EU Court of Justice Case Law Interpretations of Employer Insolvency Directive 3. ILO Convention 173: Protection of Workers' Claims (Employer's Insolvency), 1992 III. Presentation of the Results of OECD Comparative Analysis of Employment Claim Treatment in Insolvency and Guarantee Schemes A. Trends in Treatment of Pensions and Employee Benefits Claims In Insolvency Proceedings Across OECD Countries 1. State-Run Pension Schemes vs. Statutory Pensions vs. Employer-Operated Pensions a. Pensions b. Other Employee Benefits 2. The Uncomfortable Place of Employee Creditors in the Insolvency System 3. Growing Prominence of Guarantee Funds 4. Distinction Between Priorities Given Different Pension Claims 5. Distinctions Between the Scope of Protection for Wage-Related Benefit Claims 6. Subrogation Rights of Guarantee Funds 7. Overall Treatment in Insolvency of Pension vs. Wage Claims and Country Models B. Tables on OECD Country Treatment of Pensions and Wages in Insolvency and Under Guarantee Schemes Conclusion Appendix INTRODUCTION

When the City of Detroit filed for bankruptcy protection in the summer of 2013, it was the largest municipal bankruptcy filing in American history. (1) Many critics lay blame for the city's misfortunes on out-of-control employee pension and retiree health legacy costs. (2) Such criticisms were indeed consistent with similar claims concerning the effect of out-of-control legacy costs in the private sector leading to high-profile corporate bankruptcies throughout the world. (3)

Although there is a continuing dispute over whether the Michigan State Constitution provides protections for the pension benefits of Detroit city employees in the ongoing bankruptcy case, (4) to most people it is clear that pension and other wage claims of employees against the City are now very much in jeopardy. (5) This begs the following question: what protections, if any, do these employees have under the U.S. Bankruptcy Code or under any guarantee or insurance scheme when it comes to their employment claims against Detroit? Although the answer to that question is far from clear given the lack of precedent in this largely underdeveloped area of municipal bankruptcy and public employee benefits law, (6) there is a fear that there could be substantial cuts to city employees' and retirees' benefit and wage claims. (7) Even worse, some city employees in Detroit, like police officers and fire personnel, will be placed in an even more precarious position if they lose their pensions as a result of bankruptcy because they are not eligible to receive government pension payments under Social Security. (8)

To put the plight of the Detroit city employees into an international and comparative context when it comes to considering how their pension and wage claims should be treated in bankruptcy, it is instructive to consider how similar employee pension and wage claims would be treated in corporate insolvencies in other countries. It is necessary to focus on corporate insolvencies in other countries as the relevant comparison because in most other countries, municipalities do not have the same financial independence to borrow money and take on debt by participating in the municipal bond market as those in the United States. (9) Additionally, exploring the corporate bankruptcy systems in other countries provides a beneficial way to consider how to approach municipal bankruptcy situations in the United States, especially because corporate and municipal bankruptcies in the United States have a number of features in common when it comes to employee-creditor claims. (10)

Indeed, similar to the situation playing out in Detroit, corporate insolvencies around the world have not only resulted in job losses for employees, but also in losses of significant pension and wage benefits. (11) In turn, employees, who are considered the most vulnerable of company creditors in the insolvency process because of their lack of voice and their lack of ability to diversify their risk, (12) have been forced either to wait for significant periods of time to receive payment while the insolvency process takes its course (13) or to navigate complex insolvency procedures. (14)

This Article therefore undertakes a comparative analysis of the treatment of pension and wage claims in insolvency proceedings and under guarantee schemes in the thirty-four member countries of the Organization for Economic Cooperation and Development (OECD) to understand whether the United States's approach to employee claims in bankruptcy (in both the corporate and municipal context) is consistent with international norms. After completing the comparative analysis (which is comprehensively set out in the Appendix), this Article then highlights common approaches to these issues, as well as important distinctions, presenting several tables to summarize the results.

As an initial matter, there is a distinction in most countries between pre-filing (prior to bankruptcy) employee pension or wage claims and post-filing claims. Whereas pre-filing claims are subject to varying degrees of priority treatment (as discussed below), post-filing claims are generally treated as administrative expenses of the bankruptcy estate and given priority over most other unsecured creditor claims. (15) With regard to pre-filing employment claims, outstanding occupational pension contribution claims (whether based on a defined benefit plan or defined contribution plan scheme) receive some preferential treatment under most of the studied countries' insolvency laws, but are limited to a capped amount for a specified period of time before the filing of the bankruptcy petition. (16) As for claims for unfunded or underfunded occupational pension liability (generally in the defined benefit context), they are treated as unsecured claims. (17) Wage claims, for their part, generally receive some preference in bankruptcy in most of the countries studied, but again only up to a capped amount for a specified period of time before the filing of the bankruptcy petition. (18)

In addition to insolvency schemes, most of the OECD countries have pension and/or wage guarantee schemes to protect employee claims and to complement the existing insolvency system. To the extent that employees receive payment for their claims under these guarantee schemes, the guarantee organizations will often become subrogated to the rights of the employees (including generally to whatever priority these employees might have) in the insolvency proceeding. (19) These types of subrogation rights mean that the guarantee scheme will be acting in the place of employees with more bargaining power because of its ability to put forward a larger overall claim. In turn, this dynamic leads to a larger recovery of employee claims from the insolvent employer and helps ensure the continuing vitality of the guarantee scheme. (20)

In categorizing the various approaches OECD countries apply to employee claims in insolvency, this Article relies to a significant extent on the country models developed by Gordon Johnson. Johnson identified four different systems that countries utilize to address employee entitlements in cases of employer insolvency. (21) This Article employs a slightly modified three-system version to further emphasize similarities in how countries deal with employee protection concerns raised by employer insolvencies. As described in this Article, Model One countries provide bankruptcy priority, but offer little or no insurance or guarantee protections (e.g., Chile and Mexico). Model Two countries adopt a hybrid approach and provide both some form of bankruptcy priority and a guarantee fund for employee claims (e.g., Canada, France, Ireland, Sweden, and the United Kingdom). These Model Two countries are further divided into robust and limited sub-models based on the extent of the bankruptcy priority offered and the extent of the protection offered by the country's guarantee schemes. Finally, Model Three countries provide no bankruptcy priority, but only a guarantee fund approach (e.g., Finland and Germany).

Of course, even within these country models, there are significant variations relating to: (1) strength of the creditor priority (e.g., absolute priority vs. some lesser priority); (2) capped versus uncapped claims (as far as how much the priority or guarantee fund covers); (3) the length of employee payments covered by the claim (e.g., three months prior to the bankruptcy filing vs. twelve months prior to the bankruptcy filing); (4) whether pensions, wages, both, or neither are covered by the insolvency and guarantee provisions; (5) what constitutes "wages" for purposes of the insolvency and guarantee schemes; and (6) the manner in which the insolvency and guarantee schemes operate separately or complement one another through mechanisms like subrogation. (22)

All in all, most OECD countries are Model Two countries that have adopted hybrid systems that combine some form of priority for both pension and wage claims with some form of guarantee fund to complement the insolvency...