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WorldCom Cleared To Pay Severance

Oct 1, 2002 | The Wall Street Journal

A federal bankruptcy judge on Tuesday cleared the way for WorldCom Inc. to pay full severance to about 4,000 employees who have been laid off by the troubled telecommunications company in recent months.

WORLDCOM HAS SO FAR made $22 million in payments to the laid-off workers, but each of them got only $4,650 because of a cap set in place by the bankruptcy code. Many employees have complained that amount of money was far below what they are owed.

WorldCom, in a bid to enhance employees’ morale, asked the court last month for permission to pay an additional $36 million in severance payments, which includes any severance still owed, unpaid commissions to its sales staff, vacation pay, medical benefits and expenses for which employees weren’t reimbursed.

In many cases, workers at companies operating under bankruptcy protection have to get in line with other unsecured creditors for severance benefits and other back pay — a process that can leave them with mere pennies on the dollars that they are owed.

WorldCom’s case is a stark example of the dramas playing out across the battered telecommunications sector, which so far this year has accounted for six of the 10 largest U.S. bankruptcies. The nation’s No. 2 long-distance company, WorldCom began to hit big trouble in April, when it disclosed a huge revenue shortfall. In June, the company first disclosed the accounting improprieties that have since mounted to at least $7 billion and resulted in fraud charges against the former chief financial officer. As it tried to halt its skid into bankruptcy by conserving cash, the Clinton, Miss., company informed 12,800 of its roughly 75,000 workers that they would be losing their jobs.

In past layoffs, WorldCom’s policy was to make severance payments in a lump sum, equal to one week of pay for every year of service with a minimum of six weeks’ pay. But shortly before a mass layoff on June 28, the company changed its policy so severance would be paid in increments every other week, like paychecks. That meant that payments were suspended on July 21, when WorldCom filed for Chapter 11 bankruptcy-court protection with $41 billion in debt. The company’s bankruptcy filing was the largest in U.S. history by the size of its assets.

WorldCom, which will continue to operate under Chapter 11 while it works out a plan to restructure its debt, wasn’t trying to deprive workers of severance when it made the change, said spokesman Bradford Burns. The company was only trying to conserve cash in hopes of staving off a bankruptcy filing and still thought it would succeed, he said.

The upshot was that WorldCom saved about $36 million in payments, a drop in the bucket for the company and its big creditors but a huge sum for ex-employees. WorldCom then asked the bankruptcy court for permission to pay the full severance and other benefits such as health-insurance premiums. In filings with the court, the company argued the move would be good for the company and its creditors alike because it would preserve the goodwill of existing employees. The official committee of the company’s unsecured creditors supported the motion.

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