AT THE INTERSECTION OF CORPORATE AND EMPLOYMENT LAW: PRINCIPAL EMPLOYER – SUB-EMPLOYER RELATIONSHIPS AND LEGAL RISK MANAGEMENT – 6. The Position of Principal and Sub-Employers in Relation to Labour Claims in Bankruptcy or Composition Proceedings

Where, as a result of economic crisis or insolvency, the principal employer or the sub-employer is declared bankrupt or obtains a composition moratorium under the provisions of Enforcement and Bankruptcy Law No. 2004, the recovery of workers' claims is removed from ordinary litigation procedure and becomes subject to the rules of compulsory enforcement and bankruptcy law.

Pursuant to Article 206 of the Enforcement and Bankruptcy Law, severance, notice and wage claims relating to a defined period preceding the end of the employment relationship enjoy first-ranking preferential status in bankruptcy or composition proceedings, subject to the statutory conditions. As a rule, the preferential treatment of workers' claims in the bankruptcy estate is limited to the final year preceding the date on which the employment relationship ended.

To forestall this risk before it materialises in such situations of insolvency, companies may exercise the power conferred on the principal employer by law and deduct unpaid workers' wages directly from the sub-employer's progress payments. Where a composition moratorium is granted, as a rule no enforcement proceedings may be brought against the debtor company and proceedings already commenced are stayed.

However, within the exceptional circumstances provided for by law, it may become possible under certain conditions to pursue attachment proceedings in respect of first-ranking preferential workers' claims. In bankruptcy, such claims must be registered with the bankruptcy estate and their statutory preferences taken into account.

In composition proceedings, the composition provisions and the special rules on preferential claims must be assessed separately according to the nature of the claim. Where there are insufficient assets in the estate, or in the event of bankruptcy, workers are not left wholly without protection. The "Wage Guarantee Fund" established under Unemployment Insurance Law No. 4447 meets workers' unpaid wage claims through İŞKUR.

For this fund to be engaged, however, the conditions laid down by law must be met and the necessary documents submitted to the institution. Where the bankrupt party is the sub-employer, the principal employer's joint and several liability under Article 2/6 of the Employment Law is not extinguished.

While registering their claims with the estate of the bankrupt sub-employer, workers are also entitled, if they so wish, to bring proceedings and enforcement action directly against the principal employer, whose financial position is more secure. Having made payment to the workers within the scope of that joint and several liability, the principal employer may register a recourse claim in order to participate rateably in the bankrupt sub-employer's estate.

Conclusion for Companies: In times of economic crisis, the financial insolvency of a sub-employer whose services are used leaves the principal employer face to face with the workers. To manage this risk, regularly verifying the sub-employer's social security premium and wage payments, together with supporting documents, at each progress payment period, and maintaining strong security clauses in commercial contracts, is a vital protective shield.