Law Advisor Blog


A Victory for Distressed Employers Facing FLSA Claims

Justin P. Fasano

Creative Hairdressers, Inc. (“CHI”) was one of the nation’s largest independent family-owned chain of hair salons, operating approximately 800 hair salons under the Hair Cuttery, Bubbles, and Cielo brands.  CHI employed over 10,000 full and part time employees.  While it had been in financial trouble for years, in March 2020, CHI was forced to close all of its salons and furlough most of its employees due to the shutdown orders issued at the beginning of the COVID-19 pandemic.  As a result of the shutdown orders, it lacked funds to pay employees for hours they worked for March 15 to March 21, 2020, the closure date.

CHI filed for chapter 11 protection in Maryland on April 23, 2020.  It filed with its bankruptcy petition several motions, including a motion for authority to borrow funds to fund operations and a motion to pay pre-petition wages.  The Court approved both motions on April 27, 2020, and CHI paid its prior unpaid payroll, albeit a few weeks late.

Before CHI filed bankruptcy, a former employee initiated a class action complaint on behalf of all employees, which was stayed by the filing of the bankruptcy case.  The complaint sought pay for the hours worked between March 15 and March 21, 2020, liquidated damages, and other relief.  After CHI filed bankruptcy, the former employee filed a proof of claim on behalf of the purported class.  Because the claim for wages was satisfied when CHI paid them after the petition, the class claim sought only liquidated damages under the Fair Labor Standards Act for the failure to pay the payroll on time.

At issue before the Bankruptcy Court was whether or not the class claim was a wage claim entitled to priority under 11 U.S.C. §507(a)(4)(A).  Section 507(a)(4)(A) of the Bankruptcy Code, at the time of the opinion, gave priority to payment for “allowed unsecured claims, but only to the extent of $[13,650] for each individual…, earned within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for— (A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual.”  11 U.S.C. §507(a)(4)(A).  

As a practical matter, any debtor seeking to confirm a chapter 11 plan has to pay priority claims in full.  Allowing the class claim as a priority claim would have had the effect of requiring full payment not only of the former employee’s wages but also any civil penalties they would have been awarded as a result of the delay in payment, while other creditors received pennies on the dollar.  If CHI was unable to pay the civil penalties, it might have had to convert its bankruptcy case to a chapter 7 liquidation.

The Bankruptcy Court found that the liquidated damages claims were not priority wage claims.  The Court found that wages are generally defined as “payment[s] for labor or services, usually based on time worked or quantity produced” and found that statutes affording priority status to claims must be construed narrowly.  Because the penalties in this case were generally awarded to compensate employees for damages caused by delay, and not to compensate them for services, the liquidated damages claims were not similar enough to wage claims to afford them priority status.

The opinion is a victory for distressed employers facing FLSA claims.  While a portion of a typical FLSA claim is for wages, the larger portions of such claims consist of various penalties, attorneys’ fees and costs.  The CHI opinion makes clear that only the wage or wage-like portions of the claim are entitled to priority.  This means that such employers have a greater chance of reorganization in Chapter 11 bankruptcy rather than liquidation.  It also means they have greater leverage in any negotiations preceding a bankruptcy.

This decision is currently being appealed.  While it was being appealed, the Bankruptcy Court issued a separate opinion which determined that the penalties were not allowable as a non-priority claim because the non-payment was not made in bad faith, because the non-payment occurred due to factors outside the control of CHI, and because CHI made every effort to quickly cure the non-payment.  That decision is also under appeal.

The first bankruptcy decision, denying priority status to the class claim, is available at In re Creative Hairdressers, Inc., No. 20-14583-TJC, 2021 WL 5894636 (Bankr. D. Md. Dec. 13, 2021).

The second bankruptcy decision, denying allowance of the class claim in its entirety, is available at In re Creative Hairdressers, Inc., No. 20-14583-TJC, 2022 WL 586732, at *7 (Bankr. D. Md. Jan. 27, 2022).

Both appeals are currently being heard by the United States Bankruptcy Court for the District of Maryland. 

For additional information regarding Chapter 11 cases contact Justin Fasano or any of the other members of our Bankruptcy Group; Craig PalikSteve GoldbergJanet NesseChris Hamlin or Doan Phan