Sears Case Reveals ‘black hole’ in employment law

This article was written by and original published on Adovcate Daily

 Toronto Employment Lawyer & Labour LawyerSears Canada’s denial of severance pay to 2,900 laid-off workers while under creditor protection highlights a “black hole” in Canadian employment law, says Toronto employment lawyer Bram Lecker.“Canadian employment law is very progressive, very protective of employees — except on the occasion of insolvency. And then it falls. There’s a black hole,” says Lecker, principal of Lecker & Associates, a Toronto employment and disability benefits firm that primarily represents employees.

“We see it all the time.”

He says Sears has gained protection from its creditors under an “archaic” piece of federal legislation, the Companies’ Creditors Arrangement Act, (CCAA) that gives it wide latitude, with the court’s permission, to suspend employees’ provincially mandated severance pay and other entitlements while it reorganizes its financial affairs.

“Sears isn’t the only company that puts its employees through this,” Lecker tells AdvocateDaily.com. “That legislation has to be abolished.”

Sears Canada has also received a judge’s permission to pay $9.2 million in bonuses to keep managers and other key staff on board. This has been greeted with shock and disbelief in light of its denial of severance pay to laid-off employees, The Canadian Press reports.

Lecker says it’s important not to confuse these bonuses with the severance pay issue. Retention bonuses are commonly offered to key staff to ensure they stick around to keep the business operating while it struggles to get back on its feet, he says.

All laid-off Sears Canada workers, including managers, will have had their severance pay suspended under the CCAA, he adds.

Although revamped in 2009 to protect employees’ wages and pensions, it’s still a “pretty draconian piece of legislation from a severance perspective,” says Lecker. It was first enacted in the Great Depression when employees’ interests were not as well protected as they are today.

He says large companies often choose to seek creditor protection under this law rather than the more restrictive Bankruptcy and Insolvency Act (BIA).

The CCAA allows companies, through their receiver or security holder, to apply to the court for permission to suspend severance and other statutory employee benefits, all without the intercession of an insolvency trustee appointed under the counterpart BIA, he says. “That’s important because trustees are really independent and ostensibly act on behalf of all creditors.”

Under the Act, “companies can’t go to court and get anything they want,” he says. Instead, they must get the approval of an insolvency trustee, who is required to balance the interests of creditors and debtors and report back to a specialized bankruptcy judge, usually within 90-120 days, explains Lecker.

In most circumstances, Canadian courts are highly protective of employees, especially compared to those in the United States, Lecker says.

“There is one exception: a solvency application, where judges seem to forget everything they apply every day about employment law and protection. They seem to prioritize the interests of secured creditors and the company that’s under protection.”

Lecker says Sears Canada, partly owned by Sears Holdings Corp., has a corporate culture typical of many Canadian companies with U.S. roots, sometimes referred to as “multinationals.”

He notes that Illinois, where the American Sears is headquartered, is an “at-will” state that allows employers to terminate employees for virtually any reason.

Companies with close ties to at-will states often have an anti-employee animus and don’t respect Canada’s labour laws, Lecker adds. “I’ve worked on dozens and dozens of cases against Sears. They had to be taught hard lessons over the years about the reality of employment law in Canada.”

Under the CCAA, all provincially mandated and common-law severance benefits to laid-off Sears employees have been frozen, subject to the company being able to emerge from creditor protection, he says.

“If any of those employees came to me — and we are getting calls from Sears people already — we tell them the same thing: you have rights, but the rights are stayed until reorganization is sorted out,” says Lecker.

He advises Sears workers to speak to a lawyer and consider sending the company a demand letter to put it on notice that they will be going after it for severance when things are sorted out.

Otherwise, all they can do is wait and see if the company comes out of creditor protection — and a judge has not “terminated” their seniority — at which point their severance claims can proceed, he adds.

“If the company has any intention of continuing in business, even in a scaled-down fashion, I’d say there’s about a 40 to 45 per cent chance that these people will get something out of this,” says Lecker.