A Guide to Employee Rights When a Company Closes Down

Updated December 5, 2022

If you lose your job due to a company shutdown, there are many federal and state laws that protect the rights of terminated or laid-off employees. Organizations may have their own independent policies and regulations regarding these processes as well. Understanding your federal, state and contractual rights as an employee during a company shutdown can help you remain informed and prepared for the next steps in your career. In this article, we discuss what happens when a company closes down, the types of rights available to you and provide a list of employee rights when a company closes down.

Related: Dislocated or Displaced Workers: Definition, Causes, Industries and How To Explain

What happens when a company closes down?

If a company needs to close down, there are several steps that happen in order to ensure the successful termination of processes. These steps include notifying employees, distributing final paychecks and providing off-boarding documents to the staff. Business owners may also be responsible for emptying the building of all company-related items, finalizing rent leases or contracts and terminating business licenses. In the weeks or months before the shutdown, staff within each department of a company may follow processes to transfer or close current customer accounts, file termination documents and prepare for the next step in their careers.

Related: Structurally Unemployed: Definition and Examples

What are the types of employee rights?

When a company shuts down, employees have access to several rights that protect their income, insurance coverage and employment status. These rights may come from federal mandates or from internal policies and contracts. Employees may receive rights during a company shutdown from the following resources:

  • Contract rights: Contract rights come from individual contracts. Employees covered by a union or collective bargaining agreement may receive protection from the terms of these contracts in the event of termination due to a company shutdown.

  • Company policy: Employees may have rights covered by company policies and regulations. These rights may include an extension of benefits programs, severance pay or written notice of company shutdown.

  • Statutory rights: Statutory rights are protective measures mandated by the federal or state government. Employees have the legal right to certain resources in the event of a company shutdown, including unemployment benefits and government assistance.

Related: What To Do When You Get Laid Off at 50 (Plus Tips and Job Recommendations)

What are my employee rights when a company closes down?

Below is a list of employee rights in the event of a company shutdown:

Final paychecks

If you've lost your job due to a company shutdown, you have the right to receive your final paycheck within the timelines set by your state government. The timeline of receiving your final paycheck may vary depending on the state in which you live but could be as soon as your last day of employment. In some states, your employer may have until the next regularly scheduled pay date to deliver your final paycheck. In many states, employers must include all of your accrued and unused vacation time, sick days and paid time off on your final paycheck.

Severance pay

Severance pay is a predetermined salary you can receive after being terminated or laid off due to a company shutdown. The amount and length of time you may receive severance pay often varies, depending on your employer's policies and your individual employment contract. Typically, severance pay is at the discretion of your employer and not included in federal or state regulations. However, in the case of mass lay-off, including in the event of company shutdown, some states require severance pay for all affected employees.

Related: Guide to Severance Pay for Fired Employees

Health benefits

If you're enrolled in your employer's health care benefits, you may have legal rights to continue receiving coverage for at least 18 months after the company shutdown. A federal law called the Consolidated Omnibus Budget Reconciliation Act (COBRA) may provide you with legal access to your workplace insurance policy for a period of time after the end of your employment. COBRA also applies to any dependents you may have who are also receiving coverage. Federally, COBRA applies to companies with more than 20 employees, but states may have independent laws that extend to smaller organizations.

Shutdown notice

The federally mandated Worker Adjustment and Retraining Notification (WARN) Act requires employers to give at least 60 days' notice to their affected employees of a company closure or mass lay-off. If an employer fails to provide you with this notice, you can collect wages and benefits for each day of failed notice. WARN applies to organizations with 100 or more employees. However, there are some exceptions to the 60-day notice period, including:

  • Closure due to strike or lockout

  • A natural disaster such as hurricane, flood or pandemic

  • Business circumstances that were not reasonably foreseeable

Unemployment insurance

If you've lost your position due to a company shutdown, you qualify for and have the right to unemployment insurance. Unemployment insurance is a predetermined, weekly amount of compensation to provide aid while you seek alternative employment. In order to apply for unemployment insurance benefits, you can visit the U.S. Department of Labor's informational page that outlines eligibility requirements by state and provides you with the next steps to apply. Unemployment is available to all employees who didn't voluntarily terminate their employment. This includes those who have lost their jobs due to company-wide closures.

Employment assistance

While not a federally mandated requirement, there are some employers who will offer employment assistance in the case of company shutdowns. This may include helping you contact a job placement agency, paying for a recruitment agency to assist you or recommending you to their affiliated companies. If your employer does offer employment assistance in the case of company shutdown, the terms are likely to be found in your offer letter, severance agreement or employee contract.

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