updated 4/7/2006 7:12:59 PM ET 2006-04-07T23:12:59

Auto parts maker Delphi Corp. can offer as many as 13,000 hourly employees lump sum payments of $35,000 to retire, a bankruptcy judge ruled Friday, marking a key milestone in its effort to scale back staff amid falling production.

Troy, Mich.-based Delphi, one of the world’s largest suppliers of auto parts, filed for bankruptcy protection in October and is trying to shed what it says are increasingly unsustainable labor agreements that have left it overstaffed and saddled with costly benefit programs.

Judge Robert Drain, of the U.S. Bankruptcy Court in Manhattan, approved Delphi’s plan to offer eligible employees a $35,000 lump sum payment in exchange for their retirement. The payments will be funded by former parent General Motors Corp., which agreed to do so under a broader labor deal.

Delphi, GM and their largest union, the United Auto Workers, announced that deal in March. Under the agreement, some 113,000 GM workers could be eligible for early retirement incentives or buyouts of between $35,000 and $140,000, depending on seniority and whether they want to keep health care and other benefits.

At Delphi, GM’s former parts division and largest supplier, 13,000 UAW-represented workers could be eligible for the retirement payments of $35,000. In addition, 5,000 Delphi workers will be eligible to return to GM.

The agreement, which both GM and Delphi say is key to turning around their businesses, hinged on Delphi getting permission from the bankruptcy court.

Delphi has said its operating costs will drop significantly if enough workers opt in to the plan, though it won’t know the full amount of savings or costs of the plan until employees sign up. Delphi says it now pays workers upward of $78 an hour in wages, benefits and “legacy” costs such as retiree health care and pensions.

The company has blamed its financial struggles in part on union contracts it inherited in its spinoff from GM back in 1999.

Last week, Delphi filed a request with the bankruptcy court seeking permission to void its labor contracts and retiree benefits. The UAW, which represents 70 percent of Delphi’s hourly workers, has threatened to strike if the court agrees. A hearing on this issue is set for May 9.

In a separate matter earlier Friday, Drain indicated he would approve a recently reached agreement between GM and unsecured creditors of Delphi that are looking to challenge GM if the auto maker attempts to seize big payouts from a restructured Delphi.

Delphi’s unsecured creditors’ committee, which includes representatives from companies including Electronic Data Systems Corp. and General Electric Co., wants GM to provide it with various documents so that creditors can examine any claims GM has made or makes on Delphi’s assets

On Friday, attorneys in the case said GM and the unsecured creditors have reached an agreement in which GM will cooperate with the committee so long as the parties can agree to the scope and other terms of the creditors’ inquiry.

The parties plan to file their agreement with the bankruptcy court.

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