(This is not legal advice and is for informational purposes only.)
Despite the measures introduced by the federal and the Ontario governments, the sad reality is that some businesses may not survive the COVID-19 pandemic. This is a worry for many employees who worry how they will get paid if their employer becomes insolvent or goes bankrupt.
Difference between insolvency and bankruptcy
There is a difference between insolvency and bankruptcy. Insolvency is the financial state of being unable to pay debts. An insolvent debtor can either try to resolve their insolvency through restructuring, debt consolidation or a consumer proposal or they can file for bankruptcy. Filing for bankruptcy is a legal procedure which is guided by the Bankruptcy and Insolvency Act (“BIA”) in Canada.
Fortunately, for employees who are owed wages, or who are owed termination or severance pay and whose employer files for bankruptcy or is in receivership under the BIA, there are some protections as outlined below.
Wage Earner Protection Program
Pursuant to the Wage Earner Protection Program (“WEPP”), a federal program administered by Service Canada, employees may be entitled to payment of eligible wages. Specifically, the WEPP “compensates eligible workers for unpaid wages, vacation, severance and termination pay they are owed when their employer declares bankruptcy or becomes subject to a receivership” under the BIA.
If bankruptcy is formally commenced or the company goes into receivership, a trustee or receiver is appointed. This individual or company provides the employees with information on the WEPP and on any unpaid compensation. The employee must file a proof of claim with the trustee or receiver regarding any amounts the employee believes he or she is owed. The employee then has to apply for payment to Service Canada and any proof of claim must be submitted at this time. Applications must be provided to Service Canada within 56 days of either the last day of employment or the date of bankruptcy/receivership.
The maximum amount payable to an employee is 7 weeks’ maximum insurable earnings under the Employment Insurance Act, (i.e. 7 weeks x $573 per week) less a reduction of 6.82% currently pursuant to the WEPP regulations.
Priority between secured and unsecured creditors
Chances are that if an employer owes their employees wages, they also have other debts to creditors. So who is paid first?
Generally, secured creditors have unique and often “greater” rights than unsecured creditors as they can take independent action to recover on any security they hold over the property of the bankrupt employer/business.
Under the Employment Standards Act (“ESA”), wages have priority over and must be paid before other unsecured creditors, to the maximum of $10,000 per employee. The exception is any distributions made pursuant to the BIA.
The advantage of the WEPP is that the employee who has unpaid wages is not treated like an unsecured creditor of a bankrupt employee who is paid for owed monies at the end of a business windup and out of any sale of assets and only if there any funds left after the secured creditors are paid off. Rather, as long as the employee meets the eligibility criteria, because the funds are administered by Service Canada, the employee is certain to receive up to a maximum of 7 weeks of their EI insurable earnings.
Directors’ Liability for Wages
There is another protection available to employees of insolvent or bankrupt companies.
Further to s. 81 of the ESA, if a corporation files for bankruptcy or becomes insolvent, the director(s) of the corporation can be personally held liable for unpaid wages for up to 6 months’ income, earned vacation pay, holiday pay, and overtime pay. Note that the personal liability for unpaid wages does not include liability for severance pay or termination pay but would include salary, commission earnings, and non-discretionary bonuses.
Similarly, s. 131 of the Ontario Business Corporations Act (“OBCA”) also states that the directors are jointly and severally liable for unpaid wages up to 6 months’ pay as well as accrued vacation pay.
Note that the directors’ liability provision under the OBCA must be enforced through court proceedings while the s. 81 liability under the ESA can be enforced relatively swiftly and inexpensively by making a complaint with the Ministry of Labour.
If your employer has gone bankrupt during this pandemic or is on the verge of bankruptcy, consult an employment lawyer to see what steps you should take and what rights you have to claim any unpaid earnings, bonuses, and vacation pay.