Insolvency Layoffs, Bankruptcy and Lost Wages.

Insolvency Layoffs | Bankruptcy | torso of a man holding a sign that says no work today

Insolvency Layoffs, Bankruptcy and Lost Wages | Authors: Bram Lecker and Simon Pelsmakher, Student-at-law

Insolvency Layoffs and Bankruptcy

Three words Sears Canada employees have now come to dread are insolvency layoffs and bankruptcy. These terms also touched a chord with workers across the land. Could this happen to you? What are your rights and entitlements under those circumstances? Will you receive your unpaid wages, severance and vacation pay? If you work for a company in dire financial straits, then insolvency layoffs are a reality, as is a bankruptcy. You will want to read this article carefully so you understand your rights.

How and When Can Layoffs Occur

Temporary layoffs are a common occurrence in seasonal industries like farming, construction and tourism. And they are legal under very specific circumstances. They usually take place on a regular cycle, are for specific periods of time and employees receive a recall date. These are bona fide layoffs and the law limits your rights to termination pay and severance.

However, when businesses are in financial trouble, some unscrupulous employers try to use these provisions underhandedly in place of terminations to save money. Terminations are costly for employers because employees are entitled to notice and severance.  Permanent layoffs as opposed to “sham layoffs” are completely against the law.

You need to contact us right away if your employer let you go without termination pay, under the guise of a layoff, without following the rules.

Insolvency Layoffs: Your Rights.

When businesses are insolvent, i.e. unable to meet their financial obligations, they can turn to the courts for help.The Bankruptcy and Insolvency Act sets provisions for businesses to operate “on emergency life support”  in the face of genuine insurmountable financial pressure. The process is called Receivership and the court appoints a Receiver to manage the corporate assets on a temporary basis. It offers the business reprieve from creditors. The receiver restructures the business to get it back into the black.

In this situation, insolvency layoffs are permitted as a temporary measure. The receiver must follow guidelines laid out in the ESA (Employment Standard’s Act).

In most cases, receivers do leave the employment relationships alone. During the layoff, you remain an employee of the company. When the restructuring period is over, you will be recalled back to work. Perhaps life will go back to normal if your position has not changed. If it has, then the changes must be negotiated with you. Should the terms not be acceptable to you, or if the revitalized business no longer requires your services, your employer must offer you adequate termination pay and severance, commensurate with your circumstances.

The rules are very clear in this matter.

Sale of an Insolvent Business

However, the problems start when the receiver decides to sell the assets of an insolvent business to another buyer who wants to carry on the business. This is where outcomes remain unclear for employees.

The law does not hold receivers “personally” responsible for wrongful dismissal. Therefore, prior to the sale, zealous receivers have a penchant to save money on costly termination payments. They do this by applying to courts to have all employment relationships terminated. And they usually get their way.

Sadly, this is a large black hole that fails employees in a province with employment laws that otherwise fiercely defend employee rights. This provision in the Bankruptcy and Insolvency Act is a legal avenue for businesses of all stripes to walk away from their termination obligations. Complacency with changes to these law left Sears’ employees with the short end of the stick. How many of us remember strikingly similar stories about Nortel employees decades ago? Little has changed since.

Receivership and Protection of Employee Seniority

However, as employment lawyers exclusively representing employees, we do see hope. The courts recently upheld employee seniority during receivership in the case of Carlessimo v. Brains II Inc. The buyer of the assets terminated employees who had just returned from a layoff following the receivership. The court preserved the employees’ seniority during the receivership period and held the new employer responsible for wrongful dismissal damages.


If your company’s finances are just too far gone, the receiver will not be able restructure or sell the business. In this event, your employer will have little choice but to file for bankruptcy.  Your prospects, as an employee are quite grim in this situation.

The business becomes a corpse. In all likelihood, you will not be able to recover lost wages, benefits or termination entitlements from your employer. Most of the assets from any ensuing fire sale will be “hoovered up” between taxes owed to the government, costs related to the Receivership and debts held by secured creditors like banks.

Bankruptcy: Recovering Lost Wages

However, there are a few payments you might still be able to collect from your bankrupt employer. One of them is vacation pay. This amount is collected by employers throughout the year and held “in trust.” It has a super priority, even above the Canada Revenue Agency. If your employer failed to preserve your vacation pay entitlements, then you could go after the directors, personally. This can be a solace, albeit a small one, for employees caught up in this unfortunate mess.

Another option for wage recovery is WEPP (Wage Earner Protection program). This is a Federal Government program to help employees who worked for bankrupt companies that do not have the assets to pay  outstanding wages. WEPP also covers those impacted by the CCAA (Companies Creditors Arrangement Act).

Specifically, the Federal Government will cover your unpaid wages, up to a maximum of $3,946.16. This includes commissions, bonuses and benefits accrued to the date when the bankruptcy or receivership started. In addition, If you were formally terminated, WEPP guarantees any termination pay and severance owed to you by your employer.

All employees can turn to WEPP as long as you are not an officer or director of the company. To be eligible, you must submit an application within 56 days of the following:

  1. The date of the bankruptcy/receivership; or
  2. The date that the employer terminated your employment; or
  3. The date that the receiver in charge of the receivership process terminated your employment

Seeking Legal Help

Lecker & Associates exclusively represents employees of Ontario.  We have over 35 years of experience in this field. Negotiating notice & severance and wrongful dismissal cases remain cornerstones of our practice. Legal advice is always prudent if you are caught up in insolvency layoffs or when your employer files for bankruptcy. The claims process for lost wages are complex and the laws are multi-faceted. Our employment lawyers are well equipped to advise you better than anyone else.

We encourage you to visit our Employee Rights Blog often. We update it frequently with information useful to all employees of Ontario. If you enjoyed this article, please consider sharing it.