Close Close Close: Mervyns and Vacation Pay

So Mervyns California is in Chapter 11 bankruptcy and plans to close its stores after the 2008 holiday season. In shutting down its operations, it seems that employee pay is very low on Mervyns’ list of debtors.

Per this memo that was sent to Andrew Ross of the San Francisco Chronicle, the bankruptcy court ordered Mervyns to stop paying to employees their vacation pay until a full review was made on October 30. Below is the full text of the memo:

From: Mervyns.Communications

Sent: Thu Oct 23 16:26:26 2008

Subject: Revised 10-23-08 — Mervyns Associate Vacation Update

Dear Mervyns Associate:

Mervyns will soon begin holding GOB sales and winding down operations as part of a Section 363 sale process under Chapter 11 of the U.S. Bankruptcy Code.

Yesterday, the Creditor’s Committee filed a motion to convert the Company’s bankruptcy filing from Chapter 11 to Chapter 7, and also filed an injunction to stop Mervyns from paying accrued vacation.

Mervyns vigorously opposed this development, but this afternoon the Bankruptcy Court ordered Mervyns to stop paying employees for accrued vacation until next Thursday, October 30. At that time, the Court will conduct a full review of the issue.

I am very disappointed with the actions taken by the Creditors’ Committee and the Court’s decision. We did all that we could, along with our advisors, to fight for our employees’ vacation pay, and will continue to do so.

This is not a final decision. As noted above, the Court will conduct a full review of this issue next week. We will be sure to provide a full update on the outcome of next week’s Court decision. As tomorrow will be the final day for most HQ associates, we will ask you to provide your personal e-mail addresses when you pick up your final pay, so we may contact you on that matter. Or, you can visit www.kccllc.net/mervyns for court filings and claim information.

Thank you for your patience.

Sincerely,

John D. Goodman
President and Chief Executive Officer

I have no doubt that the organization fought hard for its employees. After all, they need to retain employees through the store closings. Unfortunately, this is probably very little comfort to employees who are most probably living paycheck to paycheck. Perhaps I’m making too broad an assumption, but I worked retail for close to 10 years and I seem to recall that the hourly wages weren’t particularly high.

When a company enters bankruptcy in California, employees of the company become just another creditor in what can be a very long line of creditors, which means that the employees may not get paid for accrued vacation for a long time, if at all. The employees’ cases would be put in order by the Bankruptcy judge by importance and the company would be required to pay it along with any other debt based on its ability to pay.

A recent case in California addressed whether or not company officers could be made personally liable for vacation payout if the company could not. From In the (Red) Business Bankruptcy Blog:

When insolvent companies are unable to make payroll or to pay accrued vacation or other amounts owed employees, the question often arises whether directors, officers, or shareholders face personal liability for these unpaid amounts. The California Court of Appeal recently addressed that issue, examining whether particular sections of the California Labor Code, as well as section 17200 of the Business and Professions Code (California’s unfair competition law), impose personal liability.

The Court of Appeal Decision. In its April 2008 decision in Bradstreet v. Wong, the Court of Appeal for the First Appellate District held that owners, officers, and managers of an insolvent company, which later filed bankruptcy, were not personally liable for unpaid wages, overtime, vacation pay, and other amounts based on a series of alleged California Labor Code violations. The Court also ruled that these individuals were not liable to pay restitution under Business and Professions Code section 17200

As stated, full review is due to happen on October 30. I will be keeping a keen eye out for any decisions made.