presently stated, the Paragraph covers only "pension, insurance, or similar employee benefit plans." We submit that the word "similar," confined as it is by specific reference to "pension" and "insurance" plans, is restrictive language. As now worded, the Paragraph may exclude other very worthy benefit plans which we believe are not intended for exclusion. Some of the plans which may not be covered by the restrictive wording of the Bills are specifically authorized by Section 302 (c) of the Labor-Management Relations Act, 1947 (29 U.S.C.A. § 186 (c)), as fringe benefits subject to collective bargaining. They include plans providing for scholarship, legal services, and child care centers; it is likely that 302's list of benefit plan will continue to grow in the future, as it has in the past, to accommodate the future needs of the 70% of the population in the middle income category. Moreover, Section 302's list of plans is not all-inclusive. We therefore urge the Committee to adopt the term "employee benefit plans" which is the same term employed in the Pension Reform Act of 1974. (See Sections 3 and 4 thereof). This would permit federal bankruptcy law protection now in and in the future of all employee benefit plans, without the necessity of future difficult, time-consuming legislative amendments.

Paragraph (a) (4) is defective in another important respect. It provides only one basis for measuring plan contribution-an amount per individual— and as such, it, too, is drawn too narrowly. Unions and employers use many different measures for calculating plan contributions. ILGWU uses a percent of payroll basis; the Mine Workers use a stated sum per ton of coal basis; other measuring rods also exist and still others may exist in the future. The amount due benefit fund should not be measured only on a per worker basis. If the new priority is to be accurately drawn and if frequent amendment is to be avoided, no particular measurement basis should be specified. Instead, the Act should be worded to encompass whatever measuring rod labor and/or management may be utilizing. This can be done by eliminating any reference to a measuring basis and providing instead for whatever fund indebtedness has accrued during a stated period.

One of the most serious defects in Paragraph (a)(4) is its limit on the amount of fund delinquency entitled to priority. As now written, the Bills provide only for a recovery of the difference between the $1200 limit for direct wages under Paragraph (a)(3) and the amount of the direct wage priority collected, up to a maximum of $300. The sum of $300 is the outer limit or absolute maximum per worker for sums owed to benefit funds of all kinds existing in all of America's many industries and enterprises, now and into the indefinite future. It is clearly inadequate.

The $300 maximum figure which may mean in practice a much smaller figure is woefully inadequate. Consider the unionized garment worker who makes $4.50 an hour. The worker's gross pay for about two months would consume the $1200 provided for direct wage priority, leaving nothing for the benefit funds. No recovery of benefit fund contributions would therefore be possible under Paragraph (a)(4). If the loss of a job has not put a worker on the welfare rolls, the loss of health benefits to a stricken worker or members of his or her family would very likely do so.

We therefore urge that no particular amount or limit be placed upon the benefit fund priority. Rather, the priority should be measured by the amount owed for the one-year period now provided in (a) (4), without limitation. The language of (a) (4) should be changed as with (a)(3) to specify one year "before the date of the petition or the substantial cessation of the debtor's business, whichever is earlier." Such language would give maximum protection to those who have tolerated defaults while business life trickled away in order to preserve jobs. Their vain hopes should not be dealt a double blow.

Our last major criticism of the Bills concerns Section 4-602 and the power of the trustee in bankruptcy to reject further performance of a labor contract, just as he can a commercial contract. We strongly urge that the Bills be revised to deny such power of rejection to trustees.

Prevailing legal authority favors the view that a trustee in bankruptcy can reject a collective bargaining agreement (so long as it is not subject to the Railway Labor Act), on the theory that the Bankruptcy Act makes no distinction between kinds of executory contracts. This is the holding in Shopmen's Local Union No. 455 v. Kevin Steel Products, Inc., 519 F. 2d 698 (CA-2, 1975); Carpenters Local Union No. 2746 v. Turney Wood Products, Inc.. 289 F. Supp 143 (W.D. Ark. 1968); and In re Klaber Bros., Inc., 173 F. Supp. 83 (S.D.N.Y. 1959).

We do not believe that the Federal Bankruptcy Act was intended to effect a disruption of the day-to-day operations of the debtor's estate. In fact, the policy behind the law is the reverse: preservation and enhancement of the estate. But the disruption in labor relations which results from terminating the collective agreement endangers the estate, which is precisely the contingency sought to be avoided by permitting rejection of executory contracts.

Collective bargaining agreements are an integral part of the workplace. They are inseparable from a worker's tools and his workbench. The United States Supreme Court has repeatedly recognized their uniqueness. In cases such as John Wiley & Sons v. Livingston, 376 U.S. 543 (1964) and Howard Johnson Company, Inc. v. Detroit Local Executive Board, 417 U.S. 249 (1974), it has even inposed liability under a collective agreement on successor employers because the agreement is an essential part of the enterprise.

If a trustee in bankruptcy has the power to reject a collective bargaining agreement, the security of the bankrupt estate is undermined. Rejection of the labor contract makes preservation of the estate difficult if not impossible. Equally inportant is the fact that workers are victimized by rejection of the labor agreement. Though rejection of the agreement may reinstate the right to strike, the right is an illusion. Workers are not likely to engage in strikes which may result in the demise of their jobs. The collective bargaining agreement is even more important in a bankruptcy situation than in the ordinary case; without it even the most powerful union may be rendered powerless in the face of the prospect of lost employment. Consequently, in order to promote the policies underlying the Bankruptcy Act and the federal labor policy, trustees should not be given the power to reject collective bargaining agreements.

Embassy Restaurant, Joint Industry Board and cases such as Kevin Steel remain on the books. The principles they declare continue to exert a pernicious influence on the lives and well-being of millions of working people. These principles may be responsible for plunging many workers into personal bankruptcies at a time in the economic, social, and political life of this nation when all efforts should be marshalled to restoring and revitalizing buying power. Working people must be kept off welfare rolls. The need for prompt enactment of the changes we have outlined is therefore compelling. We urge this Committee to adopt the suggestions we make today for they are in the interests not only of the many millions in the nation who work but of the nation as a whole.

On behalf of the ILGWU, the AFL-CIO, the United Auto Workers, and the Amalgamated Clothing Workers of America, I thank you for the opportunity of addressing you.

TESTIMONY OF MAX ZIMNY, GENERAL COUNSEL, INTERNATIONAL LADIES GARMENT WORKERS UNION, AFL-CIO

Mr. ZIMNY. My name is Max Zimny. I am general counsel of the International Ladies Garment Workers Union. I am speaking to you this morning not only on behalf of the ILGWU, but also on behalf of the AFL-CIO, the United Auto Workers, and the Amalgamated Clothing Workers of America.

I wish to focus this morning on the wage priority section, both the direct take-home wage as well as the indirect wage which are the benefit fund provisions. They are reflected in the bills as section 4-405, paragraphs (a) (3) and (a)(4). I also want to focus on section 4-602 which deals with the right of trustees to reject executory agreements which the courts have construed to include labor agreements.

I will focus primarily on the wage priority provisions. Mr. Gibbs who accompanies me this morning will deal with section 4-602, the right of the trustees to reject the labor agreement, in much greater detail.

Workers have always been treated as a special class under the Bankruptcy Act; this is not at all surprising because they comprise perhaps the largest component of the middle-income group in Amer

ica. The middle-income group consists of about 140 to 150 million Americans, some 70 percent of the population.

Wage earners are singular captives of the economic situation that they find themselves in. They are employed on a job for a single cmployer, and they and their family depend upon that job and upon that employer for their daily sustenance. Unlike tradesmen, suppliers, and other business people who are in an arm's-length relationship with the bankrupt employer and who can harmonize and balance off their business misfortunes with a bankrupt with other transactions, and can and often do pass on their losses to the consumer-which, incidentally, includes the large wage-earners class the worker is without the ability to do so. Moreover, the worker is among the last to know of his or her employer's misfortunes.

Trades people get word in the marketplace, sometimes very swiftly. The commercial credit agencies pick up the news and pass it on to the trade in various credit reports. Accordingly, tradesmen can balance off their losses, sometimes canceling them completely. They can hedge their bets by various cash on the barrel transactions. The worker simply cannot do this. Moreover, when the economy is as it has been for the last several years, the possibility of changing jobs to offset the misfortunes of the employer is a theoretical rather than an actual possibility. The worker, therefore, stands as a peculiarly susceptible subject of his employer's misfortune.

He remains in employment sometimes suffering complete wage deprivation; more often suffering partial wage deprivation. Most frequently, he suffers deprivation of contributions to employee benefit plans which in this day and age encompasses an extremely broad and critical area of human needs. They encompass not only health, insurance, and pension coverage which are somewhat expressed in (a)(4) of the bill, but they also encompass many other things such as legal services, scholarships, day care, and the like.

Fringe benefits are steadily expanding to meet the needs of our complex society. They will continue to expand in the future. One need only view section 302(c)(5) of the Taft-Hartley Act and the new Federal Pension Act (ERISA), to see the steady expansion of the employee benefit plan and its coverage. The concept of the benefit plan is therefore a steadily expanding one.

Equally obvious is the fact that wages cover not only direct takehome pay. When unions and employers negotiate, they negotiate a total wage package which is then divided, depending on the particular circumstances of the industry and of the times, into so much for direct take-home pay and so much for medical, dental, legal, pension, and other employee benefit coverage.

But wages are as truly one as they are the other. Yet the Bankruptcy Act has never caught up with this readily conceded economic reality. The Bankruptcy Act goes back to 1800 and the wage priority goes back to 1841 when, interestingly enough, the direct wage priority covered a 6-month period, though the amount was $25. The wage priority continued to develop until 1926 for our present purposes, when the present wage priority was established in the Bankruptcy Act. The 3-month period and the $600 amount go back to 1926, though

in the Chandler Act of 1938 the present position of the wage priority, just after the administrative expenses, came to be.

But no change either in amount or time span of the wage priority has taken place since 1926. Though the definition of workman has been changed by successive amendments, there was never a change in the definition of wages. It was for that reason that the labor movement workers, and other people sensitive to the wage priority were startled when the Supreme Court in 1959, in the Embassy decision declared that an indebtedness due an employee welfare fund was not within the wage priority.

A divided court came to this conclusion, though both the majority decision and the minority conceded the inequity of the result. The majority of the Court felt bound by the historic circumstances under which the wage priority was enacted, as far back as 1841, finding that no change in the definition of wages was made at times when fringe benefits plans were unheard of.

Therefore, the Court declared that it remained for Congress to change the definition of wages rather than the Court which felt itself bound by the historic circumstances which attended the enactment of the wage priority.

Now what has happened as a result of the failure to enlarge the wage priority to include fringe benefits is that millions of dollars are lost each year to employee benefit plans

Mr. EDWARDS. Do you have some figures on that?

Mr. ZIMNY. Our union did a study in 1973. It was the last time we did a survey on the subject. The survey was in the New York area which represents about one-third of the union. We found that about $900,000 was lost yearly as a result of business failures, almost all of which fell within the Federal statute. Some of these failures go into New York State insolvency proceedings where the wage priority includes fringe benefits, as it does in several other States.

But by far the bulk of the failures go into Federal bankruptcies. As you know, simply going into a State insolvency is an act of bankruptcy and at the option of creditors the matter is transferred into the Federal court. If you multiply the 1973 figures by the portion which New York bears to the membership of the total union, you come up with millions of dollars lost per year just for our union.

Almost every sector of the economy which is characterized by a predominance of small producers has a similar experience. There was a study made by the Commerce Department many years ago, and I still think it is valid, about the percentage of failures in the apparel industry.

These were not in poor economic times. The percentage of failures arrived at was 16 to 17 percent per year. Certainly during the last 2 years and perhaps for sometime to come that figure may be increased. It is my guess that we are talking about something like 20 percent annual failures in an industry like the apparel industry. I do not think that we are unique.

I think the construction industry is the same. I think that small retail establishments are the same. I think that food handling is the same. The steel industry, which Mr. Lawson will tell us more about, also has a surprisingly large amount of small businessmen doing

business within it. This is also true of the auto industry, best known for its large automakers. The auto union includes many small producers, many more than one would suspect. It was for that reason that I was asked to stress UAW support of my statement.

Now I would like to discuss with you specific sections of the act. I would like to share with you my feelings about what I deem to be the inadequacies of both the direct wage priority, paragraph (a)(3), and paragraph (a) (4) which is the benefit fund priority.

In (a) (3) the time span for direct take home pay has not been altered from its initial establishment in 1926, some 50 years ago.

The proposed law still covers 3 months. It seems to us that this should be enlarged, must be enlarged if you are going to fairly embrace the direct wages which are lost. Now we have been asked before how long workers tolerate a failure to pay wages? Well, the frank answer is that a total failure to pay wages, is not tolerated for very long. Three months would be enough to deal with that. But the partial payment of wages is tolerated much longer. It is tolerated not only from the cessation of the business or the filing of the petition, which are the triggering events under (a) (3), but it is tolerated from the time the business substantially ceases operations. Workers don't wait until total cessation of the business to accept part payment.

They begin to tolerate less than full payment in an effort to save the jobs, their sole source of income, from the time things became dismal, though not totally dark, for the employer in trouble.

Mr. BUTLER. What are the protections other than this priority that a laborer generally has for nonpayment of wages? Is it not a crime to fail to pay wages after a given interval of time in many States?

Mr. ZIMNY. It is a crime in some States like New York, Pennsylvania, and a few others. It is not a crime in most States. Moreover, the enforcement of the criminal sanction is spotty and uneven. Let me tell you something about the New York experience.

We have a criminal sanction on the books. But the district attorneys will not handle it because they are underbudgeted and crimes of assault, robbery, the more dramatic crimes, sap all their resources.

You cannot get them to take on a case. They don't have the manpower or the money for it. If you go to the State labor department, you will find that underfunding is an equally serious problem and it takes a long time and sometimes never at all, when what is technically on the books as a crime is prosecuted.

In Pennsylvania, in which we have members-our union is in Pennsylvania-I had one situation where a fellow went into the hole over $100,000. He was finally brought before the criminal authorities.

He just did not have the money. What finally occurred was he was fined $1,500 and that was the total penalty. But losses to the funds were over $100,000, a default which was the subject of a Federal bankruptcy. The criminal enforcement statutes, while we like to have them, are of questionable value.

Similarly the State insolvency statutes which contain the broader wage preferment, catch only a small percentage of failures. They hardly touch the more serious problems arising from the failures.

Mr. BUTLER. My question is what are you doing, you collectively as to your panel here today, about improving State enforcement of