When an employer files for bankruptcy, employees may wonder what happens to their employment and noncompete agreements. The Bankruptcy Code gives debtors broad authority to assume or reject contracts, which can impact an employee’s rights and future obligations. Most employment agreements are considered executory contracts, meaning the debtor can choose to honor or reject them, with important consequences for both parties.

If an employment agreement is assumed, the debtor must cure any defaults and continue to honor the contract. If rejected, the contract is treated as breached, and the employee may have a claim for damages rather than continued employment or payment. Personal service contracts — those relying on an individual’s unique skills — are generally not assignable without the employee’s consent, and courts often bar their assumption or assignment without agreement.

Noncompete agreements present additional complexity. Rejection of an employment contract does not automatically invalidate a noncompete clause; some courts enforce these provisions even after rejection, while others do not. The enforceability of noncompetes may also depend on state law. Employees should closely monitor bankruptcy proceedings and be prepared to assert their rights, including filing a proof of claim if necessary. Read full article here.