US Seeks Power to Rewrite Employment Contracts Outside of Bankruptcy
Employees who work for troubled companies and municipalities under contracts specifying pay, benefits and bonuses could see those agreements go by the wayside.
The U.S. government is seeking the power to rewrite employment contracts outside of bankruptcy court when it intervenes to help save troubled companies, the New York Times reports. The Treasury Department wants to be able to modify employee contracts when it seizes financial institutions, and President Obama’s auto task force wants to change union contracts at General Motors and Chrysler, according to the story.
Meanwhile, in a closely watched case, a bankruptcy judge has given the city of Vallejo, Calif., permission to alter its contracts with firefighters and other workers. U.S. Bankruptcy Judge Michael McManus turned down workers’ arguments that state labor laws protected the contracts, holding that federal bankruptcy law trumped the state provisions. Other cities are hopeful the case suggests that their worker contracts, protected by statutory and constitutional provisions, can also be changed by bankruptcy courts.
University of Pennsylvania law professor David Skeel said contracts are often at risk in economic downturns. “We run roughshod over some contracts and not over others,” he told the Times. “Right now, employment contracts seem to be the type of contract that is viewed as eminently rewritable.”
A column in Forbes magazine complains that a populist backlash has made tearing up contracts a “national sport.” The article says a watershed U.S. Supreme Court decision during the Depression era gave government broad leeway to alter private contracts. The decision, HomeBuilding & Loan Association v. Blaisdell, held that a Minnesota law exempting property from foreclosure did not violate the Constitution’s contracts clause.
Law professor David Gregory of St. John’s University told the Times that if the U.S. government modifies contracts outside of court, it would be easier to change provisions regarding retiree benefits.
“The issue is, how can the government calibrate and contour and control the process of reorganization,” without the time, expense and compromise of bankruptcy proceedings, Gregory told the newspaper. “The executive branch is proposing to do what the bankruptcy courts have had the exclusive prerogative to do.”
