Do I have rights as an employee when my company goes bankrupt?

Posted by on October 15, 2009 in Jobs

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).

9 Comments on Do I have rights as an employee when my company goes bankrupt?

By John D on October 18, 2009 at 4:41 pm

Do you have any comments on pension benefits for employees of Ontario-based companies that are going bankrupt(i.e. Nortel’s retirees, etc)

By admin on October 18, 2009 at 11:54 pm

Pension plans tend to be very context specific. Generally, if there is no shortfall in the plan, the employees are relatively safe even during bankruptcy. The question always arises if there is a shortfall in a defined benefit plan. At that point, no one (creditors, shareholders, government) really wants to make up the shortfall if the assets or sold.

Without speaking to any specific situation, there should be better regulator over-sight to make sure the shortfalls do not become huge during good times. Shareholders may not like that very much since it reduces earnings but it comes down to whether you believe that employees are just as important stakeholders as shareholders.

By John D on October 19, 2009 at 9:27 pm

Agreed. I was wondering if you had any comments on the legal aspects but I understand that it depends on the context of the situation.

There should be a better regulator. Nortel pensioners based in the US got a government bailout, while the government sits on their hands in Canada.

Quick comment – extra payments to the DB plans does not necessarily reduce earnings. Accounting income factors in the expected shortfall of the plan to some degree under the corridor method. Eventually the shortfall hits net income.

By Profound Questions on February 1, 2010 at 3:36 pm

I would like to know, in your opinion, if the company enters into bankruptcy, should the individual employee cash RRSP’s early to cover all debts?

This means that the debt ratio for the individual would be zero, RRSP’s cover all debt.

By admin on February 2, 2010 at 6:50 pm

If your question is whether you should withdraw from your RRSP to pay off debt, please do remember that RRSP are subject to withholding and then taxed so you will not end up on a dollar for dollar basis of what you have put in.

Please consult an accountant for more details. Good luck.

By Nancy Kosokowksy on April 12, 2010 at 12:15 pm

I am in a quandary the company I worked for went into bankruptcy on June 8 of 08, WEPP started the beginning of July. What recourse do I have for getting any of the 6,000 I am owed? Any help would be appreciated.

By erin narvaez on December 23, 2010 at 3:18 pm

my company is planning on going bankrupt and I have done 2 jobs for them since nov w/o pay. who should I contact and how should I go about getting the money. I have sent my invoices to them that the job is completed and spoken to them but get the run around. Please direct me as to what I need to do. Thankyou, ERIN

By Frequently asked severance questions - Thicken My Wallet on December 1, 2011 at 5:01 am

[...] from employees who worked at now bankrupt employers. I have previously posted on the topic of employee rights when their employers go bankrupt.  The good news is that, in Canada at least, there is some relief over and above the lenders in [...]

By Frequently asked severance questions | moneyrabbit.info on April 8, 2012 at 10:42 am

[...] from employees who worked at now bankrupt employers. I have previously posted on the topic of employee rights when their employers go bankrupt.  The good news is that, in Canada at least, there is some relief over and above the lenders in [...]

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