Deferred Compensation Note Structure and Unsecured General Creditor Priority
Unsecured deferred compensation notes surrender statutory employee wage priority, placing unpaid earnings in the lowest-ranking general corporate creditor tier.
novation of wages
Meaning
Legal agreement replaces an existing obligation to pay an employee with a new obligation or a different debtor. Executing a novation of wages requires the consent of the employee, the original employer and the party taking over the debt. This process moves the liability for unpaid salary or bonuses from one entity to another, often as part of a business sale or a spin-off.
It stops being a mere assignment of debt because the original employer is completely discharged from the burden once the new contract is signed.
Obligation Transfer
Moving the responsibility for compensation ensures that the person performing the work knows exactly which entity is responsible for their paycheck. During a merger, a novation of wages might be used to transition the founder and staff to the payroll of the acquiring company. This prevents the confusion of having multiple entities liable for the same period of service.
It requires a formal document where all three parties acknowledge the change.
Liability Release
Discharge of the original employer is the primary benefit for a founder who is selling their company. Without a novation of wages, the selling entity could still be sued if the buyer fails to pay the staff for the transition period. This clean break allows the seller to close their books and distribute the remaining proceeds without holding back reserves for potential labor claims.
It is a vital step in the wind-down of a legacy entity.
Corporate Restructuring
Complex reorganizations often use this tool to move talent between subsidiaries while maintaining the continuity of their benefits and seniority.