When retailers go bust, workers often get nothing

  • Retail workers thrown out of jobs by corporate bankruptcies often also lose severance and pensions
  • Proposed legislation would put workers on par with bankers, lawyers and consultants — who typically get paid in full in Chapter 11 bankruptcies
  • Industrial and mining companies have perhaps the worst record of shedding retirement and other benefits when they go bankrupt

U.S. Rep. Tim Ryan, D-Ohio, and U.S. Sen. Joe Manchin, D-West Virginia, know first-hand the financial devastation their constituents face as factories and coal mines shut down in their respective states, thanks to a rash of corporate bankruptcies in the manufacturing and energy industries. That scene is now playing out in malls and on Main Streets across the country as retail chains close shop. And it’s throwing tens of thousands of workers out of jobs without so much as a few weeks pay.

“We’ve seen this in northeast Ohio for 30 years — companies go bankrupt, almost everybody gets paid, but workers are at the back of the line. It’s been the case as long as I can remember,” Ryan told CBS MoneyWatch. “The issue of retirement security is a huge issue, the economy clearly isn’t working for workers.” 

Ryan and Manchin will later this month or in early April reintroduce legislation — Ryan in the House and Manchin in the Senate — to prioritize workers’ claims in corporate bankruptcies.

“Pawns in the game”

Simply put, the measure would classify worker claims in bankruptcy as administrative costs, putting them on par with the investment bankers, lawyers and consultants who get paid in full through a bankruptcy proceeding. 

“Workers at every turn are pawns in the game,” said Ryan, whose congressional district covers a large swath of northeast Ohio. That includes Lordstown, which after losing its steel mills decades ago, is lately bleeding auto factory jobs. Only two auto-parts makers remain after the closure of General Motor’s Lordstown assembly plant. 

The congressman, who confirmed he’s considering a White House run, also cited the demise of steel in Youngstown, Ohio, and the bankruptcy of auto parts maker Delphi as among the events that left auto and steel workers in his state without jobs and in some cases, without full pensions. 

That’s because when a company files for Chapter 11 bankruptcy protection, any pension and severance payments that workers built up over the years are labeled as unsecured debt and get pushed far down on the priority list for getting paid.

Partial pensions for 20,000 Delphi retirees

In Delphi’s case, the onetime division of GM filed for bankruptcy in 2005 and handed over its pension obligations to the federal Pension Benefit Guaranty Corp. four years later. The PBGC — the government entity that guarantees pensions when an insured plan closes without enough money to cover benefits — is paying out only partial pensions to about 20,000 salaried retirees, roughly a third of whom live in Ohio. 

What some people may not understand is that workers, through collective bargaining, agreed to give up a portion of their wages to be invested and then returned in their pension, usually decades later, Ryan said. “It’s not a pension that came out of nowhere,” said the lawmaker, adding it’s “completely unfair” to take away all or part of funds from workers who earned it.

The fall of Sears

Among retailers, that scenario recently came into play at Sears. The PBGC recently took over the retailer’s two pension plans, which cover 90,000 people and were underfunded by an estimated $14 billion. Sears Chairman Eddie Lampert, the billionaire investor who purchased what remains of the retailer out of bankruptcy, has argued that his efforts saved more than 40,000 jobs.

Still, the fact that U.S. bankruptcy law groups workers’ claims alongside lower-priority creditors leaves tens of thousands of workers in the retail industry with little means of redress amid a slew of bankruptcies and layoffs.

Blaming private equity practices

“Our bankruptcy laws prioritize corporate and Wall Street interests over working people,” said Lily Wang, deputy campaigns director for United for Respect, an advocacy group. “Ryan’s bill is a step in the right direction to improve the status of employees in the bankruptcy process, and we need to do more to fundamentally fix this broken system so that our severance, health care and pensions are protected.”

Asked about the string of retail bankruptcies, Ryan said the country is now seeing scenarios like the one that occurred with Toys R Us, “where private equity firms come in and do a number on the company. The next thing you know, they close down, sell off the assets and workers aren’t made whole.”

As Toys R Us closes its doors for good, a look back at its legacy

In the case of Toys R Us, Bain Capital and KKR — two of the three companies that took over the retailer in a $6.6 billion leveraged buyout — each contributed $10 million to a financial assistance fund for employees laid off without severance when the chain closed 735 U.S. stores last year.

While welcome after a months-long campaign by workers, advocates said the $20 million fell significantly short of the $75 million needed to cover severance payments to employees under policies in use for decades at the iconic retailer, which declared bankruptcy in September 2017. 

West Virginia’s Manchin first introduced the workers’ protection bill in late 2017, drawing support from the United Mine Workers of America (UMWA). 

The number of active coal miners in West Virginia has withered to about 13,000, but tens of thousands of retired miners face losing health and pension benefits after the coal companies that employed them went belly up.

On the brink of collapse

Peabody Energy, for instance, in early 2016 stopped paying into a health care fund for retirees of Patriot Coal, a since-liquidated company Peabody spun off in 2007.

With the coal industry and miners were in the spotlight during the last presidential campaign, some 10,000 retired coal miners demonstrated in Washington, D.C., in September 2016, urging Congress to fill the gap created by companies during the bankruptcy process. 

Pensions plans covering 1.5 million coal miners, truckers and bakery workers are currently on the brink of collapse, according to the UMWA. Without legislative action, the miners’ pension fund will be insolvent in its 2022-23 fiscal year, and “any further industry bankruptcies will cause the fund to collapse,” the union said in a statement. Eighty-six thousand people now get a pension through the UMWA fund.

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