Are restaurant employees entitled to severance when the restaurant closes?

There is no federal or state law requiring private employers to pay severance when closing a restaurant. Severance is only legally required if it is promised in an employment contract, employee handbook, or written policy. However, if the restaurant is subject to the federal WARN Act and fails to provide 60 days advance notice, employees are entitled to back pay and benefits for each day of the notice period that was not provided, up to 60 days.

Can restaurant employees file for unemployment when a restaurant closes?

Yes. Employees who lose their jobs because a restaurant closes are eligible for unemployment insurance benefits in every state. To qualify, employees must have earned sufficient wages during the base period, be able and available to work, and actively seek new employment. The weekly benefit amount is typically 40 to 50 percent of the employee's average weekly wage, up to a state maximum. Employees should file claims as soon as possible after the closure.

What is the WARN Act and does it apply to restaurant closures?

The federal WARN Act requires employers with 100 or more full-time employees to provide 60 days advance written notice before a plant closing or mass layoff. Most independent restaurants do not meet the 100-employee threshold and are not subject to the federal WARN Act. However, several states including New York, New Jersey, California, and Illinois have their own mini-WARN Acts with lower employee thresholds. Employers who violate the WARN Act owe affected employees back pay and benefits for each day of the required notice period that was not provided.

What Happens to Employees When a Restaurant Closes

This is one of the most searched questions in the restaurant closing space, and the honest answer is: it depends on the state, the size of the employer, and whether the owner follows the law. Here is what actually happens -- both what employees are entitled to and what owners are legally required to do.

Final Wages

Every state requires that employees be paid all wages earned through their last day of work. What varies is the deadline. California requires same-day payment on the day of discharge. Massachusetts requires same-day payment and includes accrued vacation as earned wages. Texas requires payment within six calendar days. Florida, Virginia, Indiana, and Tennessee require payment on the next regular payday.

The most common mistake restaurant owners make is treating the final paycheck as something to sort out after the chaos of closing. It is not optional and the deadlines are firm. Late final wages expose the owner to personal liability in most states, and in California the penalties accrue daily.

Accrued Vacation

Whether employees are owed accrued vacation depends on state law and your written policy. California and Massachusetts treat accrued vacation as earned wages -- you cannot avoid paying it out, regardless of what your handbook says. Texas, Florida, Indiana, and Tennessee only require vacation payout if your written policy promises it. Before you set a closing date, calculate your total accrued vacation liability. For a restaurant with 20 employees averaging 40 hours of accrued vacation at $15 per hour, that is $12,000 in additional closing costs that many owners do not budget for.

The WARN Act

The federal Worker Adjustment and Retraining Notification Act (WARN Act) requires employers with 100 or more full-time employees to provide 60 days' advance notice before a plant closing or mass layoff affecting 50 or more employees. Most independent restaurants do not hit this threshold. However, multi-location operators who employ 100 or more people across all locations need to count all employees together.

Several states have their own WARN Acts with lower thresholds or longer notice periods. New Jersey and Massachusetts both require 90 days' notice and apply to employers with 100 or more employees. California's WARN Act applies to employers with 75 or more employees. If you are in one of these states and have a larger operation, get legal advice before you announce the closure.

Unemployment Insurance

Employees who are laid off due to a restaurant closure are generally eligible for state unemployment insurance benefits. As the employer, you are not required to do anything special to enable this -- employees file their own claims with the state unemployment agency. However, if your unemployment insurance account is not current (premiums paid, quarterly reports filed), employees may face delays in receiving benefits and you may face penalties.

Health Insurance

If you provide group health insurance and have 20 or more employees, federal COBRA law requires that you notify employees of their right to continue coverage at their own expense for up to 18 months after termination. The notification must be sent within 14 days of the qualifying event (the closure). Failing to send COBRA notices exposes you to penalties of $110 per day per qualified beneficiary.

The Trust Fund Recovery Penalty

This is the one that follows owners personally. If your restaurant withheld payroll taxes from employee paychecks but did not remit them to the IRS, the IRS can assess the Trust Fund Recovery Penalty against you personally -- even after the business closes, even after bankruptcy. The penalty equals 100% of the unremitted taxes. This is not dischargeable in bankruptcy. If you are behind on payroll tax deposits, address this before you close. For the full picture, see Restaurant Employee Closing: What You Owe and What Follows You.

What Owners Should Do

Set a closing date far enough in advance to calculate all final wage and vacation liabilities. Notify employees as early as legally required and practically possible. Pay all final wages on time. Send COBRA notices if applicable. Ensure all payroll tax deposits are current. The employees who worked for you deserve a clean exit, and the legal exposure from getting this wrong follows you personally.