New law establishes insolvency fund

In October 2003, the Bulgarian parliament adopted a law creating a new fund to guarantee employees’ pay claims in the event of their employer's insolvency. Trade unions had demanded such a fund for many years.

For over a decade, Bulgarian trade unions have called for the establishment a special financial instrument to protect workers' wage claims in the even of their employer' insolvency, reflecting the principles of International Labour Organisation (ILO) Convention No. 173 on the protection of workers' claims (employer's insolvency) and the EU Directive (80/987/EEC) on the protection of employees in the event of the insolvency of their employer. The wider context is the major problem that has arisen during Bulgaria's economic and political transition, whereby hundreds of thousands of employees do not receive the wages due to them (BG0307205N). This problem affects enterprises of all sizes in all branches of industry, both private and state-owned.

In response to this pressure, during the past few years the government and the right-wing opposition in parliament developed two draft bills on guaranteeing employees’ claims in the event of their employer's insolvency. Since the opposition was more active on this issue, in October 2003 parliament passed its bill on the matter. The new law is in line with Article 25 (on 'The right of workers to the protection of their claims in the event of the insolvency of their employer') of the Council of Europe's revised European Social Charter, which has been ratified by Bulgaria, and clears the road to the ratification of ILO Convention No. 173

The purpose of the new law is to provide a maximum degree of protection for workers where insolvency proceedings have been opened against their employer. To achieve this, a special fund is to be established to secure the payment of part of the unsettled claims of the workers affected. The protection of employees’ claims will thus be ensured through the establishment of a guarantee institution, the 'Fund guaranteeing the claims of workers and employees in the event of insolvency of the employer'.

The main points of the new law are as follows.

  • The protected claims include the gross wage due under individual and collective employment contracts, and one-off indemnities for monetary obligations payable by the employer by virtue of a regulation, in the event of insolvency proceedings against the employer, as well as in cases when the employer suffers temporary financial crisis, but no insolvency proceedings have been opened.
  • Rights based on the law apply to people working under a legal employment relationship in companies, organisations and activities against which insolvency proceedings may be opened under the Law on Commerce or under special laws.
  • Those entitled to benefit under the law are workers with a legal employment relationship, regardless of the contract’s term, if the relationship started at least six months before the date of opening of insolvency proceedings.
  • The claims protected by the law cover a period of three months before the date of opening of insolvency proceedings. The scope of protected claims may not exceed the gross wages of the workers, specified in the employment contract, for the past three months.
  • The procedure starts with the worker who wants to obtain payment of protected claims filing a request to the management of the enterprise, and ends with the payment of the protected claims by the Fund guaranteeing the claims of workers and employees in the event of insolvency of the employer, by order of the Fund's director.
  • Following the payment of protected claims to workers from the Fund, the latter will be entitled to file a claim for reimbursement of the money paid from the employer or the proceeds of its bankruptcy.
  • The Fund will be financed by employers' contributions and other sources of funds, without employees having to contribute.
  • The employers' contribution to the Fund is initially set at 0.5% of actual paybill. The level of contributions will be specified every year by its supervisory board, based on a proposal by the director, depending on the financial resources of the Fund and consultations with the Minister of Finance, and will be endorsed by the Law on the State Budget.
  • The Fund has a single-tier of management, involving the supervisory board and director. The supervisory board consists of: four representatives of nationally representative employers’ associations (BG0310103F); two representatives of nationally representative workers' organisations (BG0307204F); and a representative of the Ministry of Labour and Social Policy. The director is elected by the supervisory board, based on a proposal made by nationally representative employers’ associations.
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