What Happens to Your Pay if the Shop Closes or Is Sold

Why this matters

Owners of small shops retire, sell to a bigger company, merge with a competitor, or simply close. When it happens, the crew usually hears about it days before, sometimes hours. In that window, a tech has money on the line that nobody will hand them unless they know to ask: the last paycheck and how fast it is due, banked vacation, commissions and spiffs already earned, the employer match in the 401(k), and health coverage. The rules come from different places: state wage law for the paycheck and vacation, federal tax law for the retirement plan, and federal and state continuation law for health insurance. They do not line up neatly, and the employer that owes you may be about to stop existing.

This is general information. It is not legal advice, and the point where you should call someone is marked below.

First, which event is it?

The answers below depend on what kind of change is happening, and the owner may not volunteer it. Ask.

• Closure. The business stops operating. Your employment ends, the employer owes final wages, and there may be no one left to pay them if the business is insolvent.
• Asset sale. A buyer purchases the trucks, the customer list, the phone number and the name, but not the company itself. Legally, your job with the seller ends at the closing and the buyer may hire you, usually the next day, as a new employee. This is the most common way small service shops change hands.
• Stock or ownership sale. The buyer purchases the company itself. The same legal employer continues under new owners; your employment, your accrued vacation and your plan generally carry on unchanged unless the new owners change policy going forward.

Why it matters: in an asset sale, most of the end-of-employment rules below are triggered even though you may never miss a day of work. In a stock sale, usually none of them are.

The final paycheck: state law sets the clock

There is no federal deadline. The Fair Labor Standards Act requires that you be paid for every hour worked, at least minimum wage and overtime, but it does not require a final paycheck sooner than the next regular payday, as the U.S. Department of Labor's own final-pay guidance notes. State law is the layer that decides, and it varies from the same day to weeks:

• California: on discharge, including a layoff or the end of employment in an asset sale, all final wages are due immediately (Labor Code 201). If they are paid late, the employer owes a waiting-time penalty of a day's wages for each day late, up to 30 days (Labor Code 203).
• Massachusetts: on the day of discharge.
• Many other states: by the next regular payday, or within a set number of days.

Check your own state labor department's final-pay page. Know the date before the last day.

Your final check should include every hour worked through the last day, overtime figured on the regular rate, any commissions and nondiscretionary spiffs earned under your pay plan's terms, and, where state law or the written policy requires it, accrued vacation. Commission plans often define when a commission is "earned" (job completed, invoice paid); read yours, because that definition decides what is owed on the last day.

Deductions from the final check are limited. Under the FLSA, a deduction for tools, a truck, or a damaged item cannot take your pay below minimum wage or cut into overtime owed (29 CFR 531.35), and many states restrict such deductions much further or require your written authorization. Returning company property is still your obligation; a shop holding back your whole check until the scan tool comes back may be breaking state law even though you owe them the scan tool.

Accrued vacation and PTO

No federal law requires vacation to be paid out. Again, the state decides, and states fall into rough groups:

• Must pay earned vacation at separation, regardless of policy: California treats vested vacation as wages that cannot be forfeited (Labor Code 227.3), and states including Colorado, Massachusetts and Illinois also require payout of earned vacation.
• Follow the written policy: many states let the employer's policy decide. If the handbook says unused vacation is forfeited at separation, it may be.
• Sick leave is different. Most state paid-sick-leave laws do not require payout of unused sick time. Whether a combined PTO bank counts as vacation for payout purposes depends on the state.

In an asset sale, some buyers offer to carry over your balance. In a state that requires payout, the seller generally owes it at the closing whether or not the buyer honors it, because your employment with the seller ended. Get the balance in writing before the closing either way.

The 401(k) and the employer match

Your own contributions are always 100 percent vested. What can be at risk is the employer match, which may follow a vesting schedule (for example, vesting a share each year over several years).

Two federal rules protect you in exactly this situation:

• Plan termination. If the seller terminates the plan, all affected participants become fully vested in their accounts, match included (Internal Revenue Code section 411(d)(3)).
• Partial termination. If an employer lays off a large share of plan participants, the IRS presumes a partial termination when the turnover rate for the plan year is 20 percent or more, and the affected participants become fully vested. A closure or a sale that ends many jobs often crosses this line.

What you can do with the money: leave it in the plan if allowed, roll it into the buyer's plan or an IRA, or cash it out. Cashing out before 59 and a half generally means income tax plus a 10 percent additional tax (IRC section 72(t)), with an exception if you separate from service in or after the year you turn 55. An outstanding 401(k) loan is usually offset against your balance when employment ends; you can avoid tax on that amount by depositing the same amount into an IRA or another plan by your tax-filing deadline, including extensions. A SIMPLE IRA is always fully vested and is already yours.

Health insurance

COBRA lets you continue group health coverage, at your own full cost plus a small administrative charge, for generally up to 18 months, but it applies to employers with 20 or more employees. Many states have mini-COBRA laws reaching smaller employers. The catch in a closure: COBRA continues an existing plan, so if the business stops offering any group health plan at all, there is nothing to continue. In that case, losing coverage gives you a 60-day special enrollment period on HealthCare.gov or your state exchange. In an asset sale, ask whether the buyer's plan starts immediately or after a waiting period, and how the gap is covered.

Advance notice

The federal WARN Act requires 60 days' notice of a plant closing or mass layoff, but it applies only to employers with 100 or more employees, and most state versions start well above the size of a typical residential shop. For a shop of three to forty people, there is usually no advance-notice law, which is why the crew often finds out at the Monday meeting.

A worked sale, two states

A tech paid hourly at a base rate written R, weekly pay periods, paid each Friday for the prior week. The shop is sold in an asset sale closing Tuesday the 14th. The buyer hires the whole crew on Wednesday the 15th.

FRI 10  last regular payday (covers prior week)
MON 13  owner tells crew: sold, asset deal
TUE 14  sale closes 5 pm, seller employment ends
        California: all final wages due today
WED 15  first day for buyer: offer letter, new I-9
FRI 17  next regular payday
        next-payday states: final wages due
        California: paid today = 3 days late

What the seller owes. The week of the 6th to the 12th, 42 hours: 40 hours at R plus 2 overtime hours at 1.5 R, which is 40 R plus 3 R, or 43 R. Monday and Tuesday, 17 hours: 17 R. Three spiffs earned under the pay plan's terms and not yet paid: 3 R. Accrued vacation: 52 hours, which is 52 R.

In California: all of it is due at the closing on the 14th, vacation included, because vested vacation is wages: 43 R plus 17 R plus 3 R plus 52 R, which is 115 R. If the seller waits and pays on the regular payday, Friday the 17th, it is 3 calendar days late. At a day's wages of 8 hours, the waiting-time penalty is 3 times 8 R, or 24 R on top.

In a next-payday state whose law follows the written policy, where the handbook says unused vacation is forfeited at separation: wages are due by Friday the 17th, and the vacation may be lost. Final pay: 43 R plus 17 R plus 3 R, which is 63 R. The difference from California is the 52 R of vacation, about a week and a third of pay at 40 hours a week, and the state line decided it, not the employer.

The match. The tech is 40 percent vested in the employer match under the plan's schedule. If the seller terminates the plan at the sale, the tech becomes 100 percent vested, so the 60 percent that would otherwise have been forfeited is kept. If instead the buyer takes over the plan and the tech keeps working there, service usually keeps counting toward the same schedule, and nothing is forfeited because employment under the plan did not effectively end. If the plan neither terminates nor transfers, and the sale ends the employment of 20 percent or more of the participants in the plan year, the partial-termination rule likely fully vests the affected participants anyway. Which of those happened is a question for the plan administrator, in writing.

What changes the answer. In a stock sale, none of the above triggers: same employer, same vacation balance, same plan. In a closure where the business is insolvent, the money may simply not be there: wages earned in the 180 days before a bankruptcy filing get priority up to a cap that is adjusted periodically (11 U.S.C. 507(a)(4)), which puts them ahead of most other debts but does not guarantee payment. Some states, Massachusetts and New York among them, can hold certain owners or officers personally liable for unpaid wages.

What to do in the window

• Ask what kind of transaction it is, and when your employment with the current company ends.
• Get in writing: your last-day hours, your vacation balance, any earned-but-unpaid commission or spiff, and who will issue your final check and W-2.
• Download your last stubs and plan statements before system access is cut off.
• Get your own tools out of the shop and the truck before the locks or keys change, and return company property with a written inventory.
• Read the buyer's offer letter for pay plan, PTO starting balance, waiting period for benefits, and whether your start date counts as new. See related: Evaluating a Job Offer Beyond the Hourly Rate.
• File for unemployment if you are not hired by the buyer; see related: Seasonal Layoffs and Unemployment Insurance.

The fork where you stop handling it yourself: if final wages are late past your state's deadline, vacation you believe is owed is refused, or the business files for bankruptcy, take your stubs, your written balances and the timeline above to your state labor department's wage claim unit or an employment attorney. Wage claims are time-limited, and in a bankruptcy you file a proof of claim with the court by its deadline.

References

• California Labor Code sections 201, 203 and 227.3 (final pay, waiting-time penalty, vacation)
• Internal Revenue Code sections 411(d)(3) and 72(t); IRS guidance on partial plan terminations
• U.S. Department of Labor, guidance on final paychecks, COBRA continuation coverage and the WARN Act
• 11 U.S.C. 507(a)(4), wage priority in bankruptcy
• See related: Evaluating a Job Offer Beyond the Hourly Rate, Seasonal Layoffs and Unemployment Insurance, PTO Accrual and Payout From the Tech's Side, Raising a Paycheck Error