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Will Bankruptcy Affect Your Severance Entitlements?

Bankruptcy & Insolvency

Bankruptcy & Your Severance| Authors: Jared Lecker & Simon Pelsmakher


In 2017, Sears Canada employees faced the full brunt of an employer declaring insolvency layoffs followed by a bankruptcy. They remained vulnerable to laws that paid no mind to employee wages, vacation pay and severance. A vast majority of Sears employees and pensioners lost their entitlements, while directors walked away from the carnage with generous exit packages for themselves. It left ordinary Canadians shocked, and wondering whether this could happen to them.

Fortunately, the landscape changed on November 1, 2019. The Bankruptcy and Insolvency Act (Canada) and the Companies’ Creditors Arrangement Act (Canada) received major facelifts that give due consideration to employee and pensioner entitlements. These laws will now govern the treatment of Papyrus and Pier 1 employees following the recent unfortunate announcements about their respective employers filing for bankruptcy protection.

Protections for Employees during Insolvency & Bankruptcy

An important cornerstone of the upgraded laws imposes a duty of good faith on all “interested persons” during insolvency proceedings. This enhancement is based on the Supreme Court of Canada enshrining it as a common-law baseline consideration in all contractual dealings, which now specifically include insolvencies and bankruptcies.

With this foundational provision in place, the law expanded the definition of director liability. Under certain conditions, courts could order a repayment from directors if a corporation paid dividends or traded shares twelve months prior to declaring bankruptcy. The law also extended courts the power to claw-back lucrative severance, bonus and incentives commonly offered to directors, officers and supervisors during bankruptcy proceedings. These provisions should discourage executives from taking actions that undermine the financial interests of employees and pensioners. However, the laws are fairly new and we need time to determine whether they hold up to their intended purpose.

Understanding Layoffs

All employees working for a business in dire financial straits should understand their rights. When a business faces financial trouble, payroll is often the first place they look at for savings. For seasonal industries, like farming, construction and tourism, temporary layoffs occur on a regular cycle. Regardless of industry, employers must plan the layoff period in advance and provide employees with a recall date. The law offers struggling businesses this leeway to manage their financial affairs. Such layoffs limit your rights to termination pay and severance.

However, a layoff remains distinct from a termination, where the law entitles employees to notice and severance.  Some unscrupulous employers try to walk in a gray zone between these two scenarios to avoid paying the butcher’s bill that accompanies terminations. They will put employees through unpredictable cycles of sham layoffs, hoping to frustrate them into quitting. Worse, they will begin a campaign of harassment and bullying hoping for the same end result. Neither scenario is legal. You need to contact us right away if your employer is not playing fair because of his or her own financial woes. The rules are very clear in this matter.

Insolvency Layoffs: Your Rights

A business is deemed insolvent when they are unable to meet their financial obligations. In this event, they can turn to the courts for “emergency life support”. The Bankruptcy and Insolvency Act sets provisions on how businesses can operate 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 works to restructure the business to get it back into the black.

In most cases, receivers leave employment relationships alone. However, the law allows them to conduct insolvency layoffs as a temporary measure. The receiver must follow guidelines laid out in the ESA (Employment Standard’s Act). 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.

Sale of an Insolvent Business

Most problems in these circumstances begin when the receiver decides to sell the assets of an insolvent business to another buyer who wants to carry on the business. Here, the outcomes for employees remain unclear. The law does not hold receivers “personally” responsible for wrongful dismissal. Therefore, in prior years, zealous receivers became motivated to save money on costly termination payments. They applied to courts to have all employment relationships terminated. And they usually got their way.

Until recently, this remained a black hole that failed employees in a province with employment laws that otherwise fiercely defended them. The revised laws, in theory, should keep this type of bad faith treatment in check to ensure trustees balance the rights of employees and pensioners, along with all other creditors.

Protection of Employee Seniority

Another matter that causes eruptions in employment relationships in these circumstances is the matter of employee seniority. A decisive ruling in the case Carlessimo v. Brains II Inc. set a precedent, preserving employee seniority during the receivership period. The buyer of the assets terminated Mr. Carlessimo who had just returned from layoff as if he was a new employee, giving no consideration to his years of service. The court promptly held the new employer responsible, awarding Mr. Carlessimo wrongful dismissal damages that fit his circumstances.

Bankruptcy

If your company’s finances are just too far gone, the receiver will not be able to restructure or sell the business. In this event, your employer will have little choice but to file for bankruptcy. The business becomes a corpse and the receiver will liquidate all assets in a fire sale.

Your prospects for securing back wages or severance may be quite grim because you now become a creditor. This puts you in a line, along with taxes owed to the government, costs related to the receivership and debts held by secured creditors, like banks.

Bankruptcy: Recovering Vacation Pay

However, there are a few payments you might still be able to collect. 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.

Wage Earner Protection Program

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

Virtually all employees place an enormous amount of trust in working relationships with their employers. They expect employers to make good on their skills and time investment. And for the most part, the law stands firmly on the side of employees. Insolvencies and bankruptcies rip up this trust and leave many employees helpless.

The law is closing the legal loopholes that allowed businesses to walk away from their termination obligations in the past. However, it remains freshly minted and untried in the courts. We always advise employees in these unfortunate circumstances to consult with us to ensure you receive the maximum you can get under the law. This remains a complicated area for anyone to navigate alone.


About the Authors

Jared Lecker | Toronto Employment Lawyer

Jared Lecker, B.A. (Hons.), LL.B, is an employment lawyer and associate at Lecker & Associates. He is a fierce employee advocate, supportive when counselling clients with their employment contract negotiations. He meticulously argues for them against human rights violations, wrongful and constructive dismissals.


Simon Pelsmakher | Toronto Employment Lawyer

Simon Pelsmakher, B.A. (Hons.), J.D., is an employment lawyer and junior associate at Lecker & Associates. He has a strong passion for defending employee rights.  Fluent in English and Russian, Simon represents clients in wrongful dismissal, contract negotiations and human rights violations.

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