Do I have rights as an employee when my company goes bankrupt?
The effective unemployment rate (those out of work and those who have stopped looking for work) is, in some regions, in double digits. No doubt, some of this unemployment is due to businesses being petitioned or assigned into bankruptcy or receivership (typically, a receiver is a person placed in custodianship of a business to, often, liquidate the assets under either court order or by a lender under the powers granted in a lending agreement).
If you are in this situation or your company may soon be facing the prospect of bankruptcy or receivership, do you have any rights?
Under the Canadian Wage Earners Protection Program, any employee who is NOT: (i) director or officer; (ii) in a managerial position; (iii) have a controlling interest in the business; or (iv) did not have an arm’s length relationship with the foregoing, can be eligible to receive payments for unpaid wages. However, employment must be terminated due to bankruptcy or receivership of the employer.
Assuming one falls within this class, an employee is eligible for unpaid wages (including vacation, severance, disbursements, bonuses and, as decided by a B.C. case, union dues and health care premiums usually paid by the employer) for the six months period preceding the date of the employer’s bankruptcy or receivership if it occurred before July 8, 2008.
The maximum amount an employee can be paid is effectively the greater of $3,164.00 or 4 weeks of the maximum EI earnings (currently $3,254). It is actually a bit more complicated than that but this is the effective maximum rate.
Here is where things get a little more difficult. Suppose the business has little to no assets and the trustee in bankruptcy or receiver receives little for liquidating the assets of the business to satisfy creditor claims. In this case, is the employee still eligible for the maximum eligible amount?
Much to the dismal of secured creditors, employees have a “super priority” of $2,000 maximum over and above secured creditors, other than registered equipment financiers, and the government. In plain English, IF (see below why this is in capital letters) the assets of the business are not enough to satisfy the creditors, all the employees have to be paid up to $2,000 each before the creditors receive anything (lender side bankruptcy lawyers are up in arms over this). The employees may not be paid their maximum but they could be eligible for up to $2,000 each before the creditors.
This works well in theory but many businesses that go under were basically using government remittances (EI and CPP) to fund the business in its last days. These “source deductions” are held in trust for the government (they were never the business’ monies to begin with) and the trustee or receiver is basically liquidating assets to satisfy the govenment’s priority. Thus, in some cases, this $2,000 super priority may be a hallow victory which looks great on paper but does not match business reality.
The other catch is that trustees and receivers administer the program and have a duty to not only account for any unpaid wages to an employee but to also deduct source deductions if and when the unpaid wages are paid. In other words, trustees and receivers are co-opted tax collectors.
More information on the Wage Earner Protection Program can be found here. Just remember that employment matters falls under provincial jurisdiction except when the business is bankrupt which is when the Federal government asserts jurisdiction. Thus, questions as to employee rights outside of bankruptcy should be directed to the province or to a qualified lawyer.
For American readers, the following is a quick and dirty article on employee rights during bankruptcy in the U.S. (bankruptcy and employment benefits are also a federal matters in the U.S.) and a fact sheet from the U.S. Department of Labor on employee benefits during bankruptcy (especially important for those with 401K).
Best of luck.
Special thanks to my regular columnist, Mom2KG, for research support (the errors are my own).