Broke Bosses and Employee Rights in Corporate Restructuring and Bankruptcy

Crowe Soberman Insolvency Team
| 4/19/2017
Broke Bosses and Employee Rights in Corporate Restructuring and Bankruptcy

Businesses close every day in Canada, and for those that end with a bankruptcy filing or a court appointed receivership proceeding under the Bankruptcy and Insolvency Act (“BIA”), there are certain rights for employees that are enshrined into federal legislation to protect their status in either scenario.

The priority for employees to be able to recover their claims, and the issue of fairness with respect to employee rights as a result of business failure, has always been an issue in commercial restructuring. The issue became an increasing focus in the recession of the mid 2000s, as larger national companies such as Nortel, either closed or restructured.

Potential employee claims for any unpaid wages, outstanding vacation pay, severance and termination pay are protected under the BIA and via the Wage Earner Protection Program (“WEPP”), which is administered by Human Resources and Skills Development Canada (“HRSDC”).

Under the BIA, employee claims for outstanding wages and compensation that are owed in the six-month period leading up to the bankruptcy or receivership are secured against all current assets of the company, for up to $2,000 per employee. This amount is the same in either a bankruptcy or receivership proceeding and is considered a priority claim ahead of all other creditors, including secured creditors, with certain exceptions. The balance of any additional amounts owed to employees is considered an unsecured claim. Any additional payments to employees in a distribution by a Licensed Insolvency Trustee (“LIT”) or Receiver would rank side-by-side with a company’s other liabilities to creditors.

Once a receivership or bankruptcy proceeding occurs, the LIT or receiver is obligated to administer the Wage Earner Protection Program. The program was enacted in 2008 at a time when distributions to creditors in large estates were being held up in lengthy legal proceedings where creditors were arguing over priority. Employees are required to fill out a proof of claim form that the LIT or receiver reviews and then forwards electronically to the HRSDC. The HRSDC then sends a one-time payment directly to the employee. One important distinction is that in order to qualify for a payment under WEPP, employees must have had their employment end. In some receivership proceedings a receiver may be conducting a sales process of the company as a going concern that may not result in the employees losing their positions.

The lump sum payment covers eligible wages up to an amount of four-times the maximum weekly insurable earnings under the Employment Insurance Act ($3,946.16 for 2017). Employees usually receive their payment approximately four weeks after the information is received. When an employee applies to the WEPP, they agree to sign over their claim for unpaid wages to the government up to the amount of the WEPP payment. After the payment is made, the government recovers the amount paid to the employees through the bankruptcy or receivership proceedings by notifying the LIT or receiver of the amount it paid.

This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.

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Hans Rizarri
Hans Rizarri
Partner, Corporate Recovery & Turnaround