From mainstream giants like Express, Hudson’s Bay and Forever 21, to boutique players like Anne Fontaine’s US affiliate and Liberated Brands, familiar fashion retailers are facing distressed situations and shedding stores, employees and share value for their investors at an alarming pace. Often overlooked in these restructurings are the legal and strategic implications of how fashion retailers manage their workforces during economic distress situations, such as those many brands are currently facing.
When a fashion retail business is in distress, its most complex and emotionally charged decisions usually centre on employees. Common issues include headcount reduction, WARN Act compliance, wage and hour issues, final pay and benefits obligations, communication strategy and minimising claim exposure and litigation risk.
These employment-related considerations should be deeply intertwined with the appropriate bankruptcy strategy for each fashion retailer. A brand’s restructuring lawyers and employment counsel must work collaboratively in planning and implementing an appropriate strategy, whether it’s in or out of court, or a restructuring or a complete wind-down of the entire business.
Common employment pitfalls in distressed retail situations
If workforce decisions are not appropriately coordinated, legal exposure can escalate quickly. Some of the key questions a legal team must address in distress situations include:
• WARN Act compliance: Are mass layoff notices required under federal or state law?
• OWBPA compliance: Are older workers being disproportionately laid off as part of a reduction in force and, if so, are there legitimate business reasons for that?
• Final pay obligations: Do state wage laws require immediate payment of wages, unreimbursed business expenses and/or payouts of accrued but unused vacation or PTO?
• Severance policies or practices: Are employees terminated as part of a reduction in force entitled to severance pay under existing company plans or common practices?
• Union/collective bargaining issues: What obligations exist to unionised workers under collective bargaining agreements?
• Benefits continuation: What is the company’s continuing COBRA or healthcare obligation?
• Retention and incentives: Who are the key employees, and what retention bonuses or key employee incentive plans can be implemented under the Bankruptcy Code?
• Internal messaging: How can the company prevent workforce morale issues, worker panic, data leaks or mass quitting?
• External communications: How does the company preserve goodwill with existing employees, media, customers, vendors and other key constituents?
The answers to each of these questions have strategic implications for the broader wind-down or restructuring of any business, particularly in the retail industry. Mishandling any of these employment issues can jeopardise the success of an assignment for the benefit of creditors, a Chapter 11 bankruptcy case or an asset sale.
How bankruptcy and employment counsel collaborate to protect brand value
Engaging employment and restructuring counsel early and ensuring they work collaboratively will create alignment across financial, operational and employee relations considerations. For example:
• Store closures: Decisions about when and how to close retail locations affect both WARN notice requirements and lease rejection timing under the US Bankruptcy Code. Consider the case of a retailer that has multiple stores in the same geographic area. Difficult decisions may need to be made about which personnel to retain if some stores will remain open for longer than others, and assessing the risk associated with making those determinations.
• DIP financing and severance: When a Chapter 11 debtor-in-possession seeks financing or intends to sell substantially all assets, it must disclose and budget for severance and retention plans. Coordinated planning avoids last-minute surprises that can thwart a deal.
• Prepetition planning: In some cases, implementing layoffs before a bankruptcy filing creates priority liabilities that must be paid in full. Employment and bankruptcy counsel should work together to minimise these risks and coordinate filings accordingly.
• Communications strategy: Crafting messaging that protects the company’s reputation and reduces the risk of litigation or unrest is crucial for retailers. Consistent, legally sound communication with employees, customers, vendors and landlords is also key to maintaining credibility in the market.
A coordinated strategy is no longer optional
Retail executives, general counsel and boards of directors are asked to make difficult decisions in short timeframes when a business is facing economic distress and potential bankruptcy. When employment and bankruptcy counsel are seated at the same table from the outset, distressed retailers have the best chance of minimising legal exposure, preserving brand value and protecting the interests of stakeholders.
Keith A. Markel is a partner and head of the labour and employment department, and co-head of the luxury brands practice, at Morrison Cohen. Keith can be reached at [email protected]
David J. Kozlowski is a partner in Morrison Cohen's bankruptcy, restructuring and governance department. David can be reached at [email protected]
Alana R. Mildner Smolow is counsel in the labour and employment department at Morrison Cohen. Alana can be reached at [email protected]
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