This article appeared in the September 17 issue of the American Staffing Association’s Staffing Week E-newsletter. Although aimed at all staffing agencies, medical staffing companies could be affected even more by client bankruptcy because the majority of America’s hospitals are already operating in the red. The bottom line is to continuously monitor your clients’ credit terms and their payment trends.
With the U.S. economy showing some weakness in areas such as home construction and mortgage financing, staffing firms might begin to worry about the financial strength of their clients. Economic downturns can lead to business failures that put companies that provide services in troubled sectors of the economy—such as staffing firms—at increased risk.
Staffing company owners often wonder whether their firms have any basis for claiming priority status for unpaid client invoices when a client is in bankruptcy. Unfortunately, unless the claim is secured in some way, the answer generally is no.
Because employee wage claims enjoy priority status in bankruptcy, staffing firms commonly ask whether unpaid client invoices can be treated as a claim for unpaid wages. In most cases, however, the staffing firm has already paid its employees when the client’s claim in bankruptcy is filed, so courts treat such claims as for unpaid vendor invoices, not wages.
Some years ago, ASA considered seeking an amendment to the federal bankruptcy law to grant priority status to staffing firm claims. The association was advised by bankruptcy experts that this would not be feasible. ASA was told that, since 1898, Congress has granted preferences to just two industries—farming and fishing—and then only in very limited circumstances and with a low dollar cap (currently $5,400) on the amount of the claim entitled to priority status.
The bankruptcy experts concluded that there was virtually no chance of success in getting preferential treatment for the staffing industry. It was unlikely that Congress could be persuaded that staffing firms are uniquely different from other business services or are suffering significantly greater hardship. Moreover, any relief granted would be very limited in terms of dollar amount.
Given the remote chances of success, and the limited relief even if the effort was successful, ASA decided not to pursue an amendment.
Because of the “supplier beware” legal environment created by the bankruptcy laws, it is always a good business practice, regardless of the state of the economy, for staffing firms to be careful about extending credit to clients and to closely monitor their receivables.