financial trouble

Companies in Financial Trouble | When to Distrust Your Employers

When companies are in financial trouble, the Sirens sing loudly, Enron is the most recent dramatic example.

In the old days, if your company was struggling, you generally knew about it and could factor that in your planning. Today, with New Age Accounting, your previously seemingly huge and secure employer can close the door tomorrow and file for bankruptcy. Pensions invested in company stock become worthless. You can find yourself terminated without notice, severance, pension or legal claims against the company. That’s tough.

How can employees best protect themselves when they suspect their companies are in trouble? Here are some suggestions:

  • Work on early detection concerning your company’s true financial prospects so you can get out before your company goes out;
  • Don’t rely on your employer’s assertions about its financial condition;
  • Know your legal rights.

Early Detection

Without question, you are better off if you can detect that your company is in trouble and leave before it leaves you. This is not necessarily very easy to do. Failing corporations generally attempt to look like successful businesses right until the very end, hoping that a piece of new business or a large receivable will come in and stave off creditors. This deception may be critical to their continuing operation to reassure employees, banks, insurance companies, creditors and shareholders of their financial soundness.

Besides obvious signs that your employer may be in big financial trouble such as the existence of unpaid taxes or judgments, creditors calling, or delays in meeting payroll, pay attention to the following:

  • Efforts to bring in new business partners;
  • Significant reduction in purchasing of new inventory or in necessary capital expenditures;
  • Delays in developing or bringing anticipated new products to market;
  • Sudden changes in high level management;
  • Overly aggressive accounting practices;
  • Significant sales of stock by upper management.

Don’t forget to do your own simplistic evaluation of the strength of the company business based on common sense. Consider:

The Market

Is the market for your company product currently healthy? Is there some reason to suspect the market for your company product is going to decrease? Is there any reason why competition will not increase in the future? Is there or will there be a new competitive product that could be superior? Is the market getting saturated? Are consumer/business needs or tastes changing or likely to be changing in the future in a way that will impact your company’s business? Are patents expiring? Are corporate customers having financial problems with their business?

Cost and Profit

Is the cost of production going to increase significantly because of an increase in price of raw material? Is the company likely to have to decrease product price to successfully compete because of lower production cost of competitors elsewhere in the world? Does the company seem to be lax in cost or spending controls particularly with respect to expenditures and compensation for senior management? Is there excessive compensation for senior management?

Corporate Growth

Is the company over-expanding into areas where they lack expertise or market share or where there is no synergy with their core business? Do you work at a company that has grown exceptionally fast? Is fast growth a fundamental mantra of the company?

Remember, what goes up very fast can also go down very fast.

Corporate Financial Records

Is the company generally conservative with respect to its accounting methods? Is there pressure to exaggerate corporate sales?

Your Own Situation

Are you being rewarded enough to compensate for the risk you are assuming with your company? Will you be all right if your company fails?

Don’t Rely on Management Promises

Above all, if you suspect your company may be in bad condition, do not trust reassurances or rosy pictures painted by management. You must make your own evaluation of the situation.

The sorriest situation occurs when a new employee unwittingly wanders into the storm on his own ­ i.e., leaves a secure position to take a new job with a troubled company. Companies with financial problems often recruit new employees to replace employees leaving the sinking ship to acquire new high-level managers and other talent in the hope that these employees will pull them out of their troubles. In this process, companies may conceal their true financial condition to the new employees they induce to come to work there. Beware! If you are being recruited by another company that makes an offer that is too good to be true, it may be!

Be particularly leery of compensation packages that are very heavily weighted with respect to future bonuses and stock options. Insist on seeing financial statements and try to find an independent knowledgeable source of information about the financial condition of the company. Obviously, once a company files bankruptcy, even if you have a contract, enforceable promise or viable discrimination claim, unless there is insurance, there are not likely to be any corporate proceeds available to pay the claim.

Know your Legal Rights

A company can file for bankruptcy under either Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code. If your company files under Chapter 7, your company is closing its doors forever. If your company files under Chapter 11, it can, if creditors allow, work out a plan to limit its indebtedness and then reorganize itself and continue in business.

While you don’t have many meaningful rights with a failing company, you do have some. These include:

  • If your company has more than 100 employees and has a layoff of 50 or more employees at one facility, they are required under federal law (the Worker Adjustment and Retraining Notification Act) to give employees 60 days notice before a layoff absent an “unforeseen business event.” This right is only important if your company is still in business;
  • If you continue as an employee while the company is undergoing its reorganization in Bankruptcy Court, you have a priority right to be paid your wages;
  • If you are terminated and your company files bankruptcy, you have a priority right to be paid unpaid wages and any accrued vested bonuses. This right has priority over other bankruptcy claims by creditors;
  • While most legal claims are extinguished in bankruptcy, some are not. Fraud and claims involving corporate wrong doing may not be extinguished;
  • If you are terminated as a result of your company’s failure, you have the right to unemployment payments.
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