When an employer declares or is declared bankrupt, or goes into receivership, it can be terrifying for an employee. Not only will employees be about to or already have lost their job, but because a bankruptcy event has occurred there are not enough funds to pay everyone owed. At the bare minimum a final paycheck will be owed, but often months of pay or other entitlements will be unpaid.
Employees can easily come to the wrong conclusion about their rights in this situation. Given that they will be competing with banks and large corporations who will have extensive legal agreements, it may seem like the employee has no hope of receiving anything.
This is not true at all. It is vital to seek help from a legal professional as soon as possible if your employer goes bankrupt to secure what is owed to you because the timelines are very short.
Definition and Effect of Bankruptcy
Bankruptcy means that the ‘person’, is for all legal purposes is now a ‘bankrupt’ which is a separate legal status. They no longer have legal capacity regarding property until either discharged or all the assets have been distributed. This can be caused voluntarily via an assignment for the general benefit of creditors, or involuntarily by having a bankruptcy proposal rejected or committing an Act of Bankruptcy.
A ‘person’ as defined in s. 2 of the Bankruptcy and Insolvency Act (BIA) not only includes people in the conventional sense, but also corporations, partnerships, unincorporated bodies and the successors to all those types of bodies.
The bankrupt cannot dispose of or deal with any property, be it real estate, money, physical assets such as a car or store inventory, or anything else. A bankrupt is also heavily restricted in what type of legal proceedings they can be involved in. Instead legal ownership of all the property of the bankrupt is transferred to a trustee who is appointed to manage the liquidation and distribution of the assets to pay off the debts to creditors, which includes the employee.
It is critical to submit the Proof of Claim (Form 31) as soon as possible, preferably before the first meeting of creditors, which must take place within 21 days of the trustee’s appointment. A failure to do so can severely limit an employee’s ability to claim unpaid wages. If a trustee distributes with notice of an employee’s claim, due to its priority the employee will likely be able to recover from the trustee directly.
Employee Entitlements for Wages under the BIA
For any employer who is either bankrupt or subject to a receivership, a priority charge is created over all the current assets (i.e. cash, cash equivalents, inventory and accounts receivable) of the employer at the date of bankruptcy. The Companies’ Creditors Arrangement Act (CCAA) which can be used by corporations that owe more than $5,000,000 to creditors has rules to the same effect.
The claim of any current or former employee for unpaid wages, salaries, commissions or compensation (which includes vacation pay, but does not include statutory severance) in the six months prior to the date of bankruptcy for any amount up to a total of $2,000, ranks above almost every other claim. Among the only claims that would be paid before this are those of the Canada Revenue Agency (CRA) for unremitted source deductions, and funeral costs if the bankrupt is deceased.
As an employee, the unremitted source deduction provision are actually in your favor, as an unremitted source deduction are for your own personal income tax, Employment Insurance (EI), and CPP payments that your employer is making on behalf of you, reducing your own tax load. Things like bank mortgages, child support payments, property taxes, car loans, or commercial agreements are all subordinate to the employee wage claims.
Employee Entitlements for Pension Contributions under the BIA
Like the priority charge for wages, claims for unpaid regularly scheduled pension contributions other than the CPP are also paid before almost everything else, except the very few claims that rank ahead of wage claims and the wage claims. However, this covers all the employer’s assets, not just the current assets. The CCAA has roughly equivalent rules.
Employee Entitlements for Wages under the Employment Standards Act (ESA)
Similar to the rules under the BIA, an employer is liable for all unpaid wages for six months prior to bankruptcy, this includes statutory holiday pay and overtime pay, but not termination pay or statutory severance. For unpaid vacation pay, the employer is liable for twelve months prior to bankruptcy. However, there is no limit on the total amount that can be claimed unlike under the BIA or WEPP.
The ESA allows an employee to claim directly from any and all the directors of the corporation personally for the unpaid amounts, and from any shareholder that is party to a unanimous shareholder agreement. It does not require the employee to exhaust proceedings against the employer before going after directors or eligible shareholders.
The Wage Earner Protection Program Act
Under the Wage Earner Protection Program (WEPP) if an employee is owed ‘eligible wages’ which includes the unpaid wages and termination and statutory severance pay, they can claim up to seven times the maximum weekly insurable earning under the Employment Insurance Act, less regulatory deductions. For bankruptcies on or after January 1, 2020 the maximum that could be received is $6798.57. It does not matter if the employee was terminated, resigned, retired or the contract ended.
It is important to speak to a lawyer before using this program however, as the Federal Government will take over the recovery action for the amount of the claim paid by WEPP and subrogates itself regarding the employee’s legal rights including BIA entitlements. The total amount of unpaid wages and vacation an employee is entitled to under the ESA can easily be much higher than the maximum under the WEPP, and any further legal action has strict reporting and repayment requirements to the Federal Government.
Click here for more information on common law severance entitlements which an employee would also likely be able to claim in this scenario. We invite you to contact us at De Bousquet PC if you require assistance in this matter.