Navigating the storm: Employee rights in the context of employer bankruptcy
When a company goes bankrupt, it can feel like a sudden storm, leaving employees adrift and uncertain about their future. In Ontario, understanding your rights during this turbulent time is essential to weathering the financial upheaval. Whether it's unpaid wages or severance pay, knowing what you're entitled to can help you take the necessary steps to protect your livelihood. This blog will guide you through the crucial rights employees have when their employer declares bankruptcy, ensuring you're not left in the dark when the winds of change start to blow.
Understanding the essentials of bankruptcy
To better understand the scope of your rights as an employee, it's important to understand the basic concepts that apply to business bankruptcy. First of all, there are two laws in Ontario that apply to employees whose employer is bankrupt: the Bankruptcy and Insolvency Act (BIA) and the Wage Earner Protection Program Act (WEPPA ).1 Under the BIA, when a company goes bankrupt, all its assets and liquidities are transferred to a trustee in bankruptcy, who will distribute the money and assets according to an order of priority among the creditors.2 As soon as bankruptcy is declared, all recourse is immediately suspended, i.e. no action may be brought against the bankrupt while he is bankrupt, including any action brought by an employee for wrongful dismissal and unpaid wages and benefits.3 All claims must be addressed to the trustee in bankruptcy. To address the trustee in bankruptcy, any creditor must be able to provide him with a provable claim, i.e., a duly completed form with proof of the amounts owed to him.4
Understanding your priority in the hierarchy of bankruptcy creditors
As mentioned in the previous paragraph, the trustee in bankruptcy is responsible for distributing the bankrupt's remaining assets among his many creditors. There is a list of people who are paid first. Here is a brief summary:
- Secured creditors: holders of mortgages or liens on property.
- Preferred creditors: named in section 136(1) of the BIA, including funeral expenses, trustee fees, municipal taxes, etc.
- Ordinary creditors: Any other creditor not mentioned in the previous two categories.
- Deferred creditors: Friends and family who have lent money, financial backers and officers or directors of the company.
- Bankrupt : if there is any money left over at the end, it goes to the bankrupt.
So where does the employee fit into this list?
Employees are in a special position, between groups 1 and 2, and sometimes in group 2. The BIA has the effect of converting part of the debt owed to employees into a secured claim and the balance into a preferred claim. Indeed, the BIA offers unpaid employees the sum of two thousand ($2,000.00) dollars as salary, commission or other remuneration for services rendered, for the six-month period ending on the date of bankruptcy.5 An amount of one thousand ($1,000.00) dollars is also available for unpaid travel expenses.6 The BIA allows the trustee to use immediately available cash from the bankruptcy to pay these amounts. If the employer owes more than the prescribed amounts, the balance will be paid to the employee as a preferred claim.7
Although the employee is not a secured creditor, he can still receive payments promptly. However, if the secured creditors exhaust all liquid assets, the preferred creditors will not be paid, and the employee will only be able to recover $2,000 in salary and $1,000 in travel expenses.
Exploring benefits under the Wage Earner Protection Program Act
The WEPPA, meanwhile, allows employees to claim up to $8,507.66 for unpaid wages, vacation leave and severance pay as of the date of this writing - equivalent to seven times the maximum weekly insurable earnings under the Employment Insurance Act.8 To access this, employees must submit a provable claim to Service Canada. The good news is that this amount is guaranteed by the Ministry, which means there's no need to worry about being limited to a lower amount under the BIA. What's more, the process is much quicker, as there's no need to deal with the trustee in bankruptcy, offering more immediate financial security in difficult times.
Choosing between the WEPPA and the BIA: Maximizing your recovery as an unpaid employee
In a nutshell, an unpaid employee cannot receive both the $8,507.66 from the WEPPA and the $2,000 from the BIA, as they cannot be doubly compensated. In this case, the choice between the two depends on the employee's situation. If unpaid wages and severance pay exceed $2,000, it is generally preferable to choose the WEPPA, which offers a higher sum and is guaranteed by the Ministry. This option allows for more substantial and faster compensation, without having to deal with the trustee in bankruptcy. On the other hand, if the employee has only small claims and wants a simpler procedure, the BIA amount could be considered, albeit less financially advantageous. In short, to maximize recovery, choosing the WEPPA is often the best option. It is also important to note that the BIA is not applicable to managers, whereas the WEPPA may be if the manager is not making financial decisions or dealing with the payment of wages from his former employer.9
Conclusion
In conclusion, dealing with the challenges of employer bankruptcy can be complex and stressful. The assistance of a lawyer is essential to ensure that you fully understand and exercise your rights as an employee. At Sicotte Guilbault, we're here to answer all your questions and guide you through the process. Don't hesitate to contact us for advice and support tailored to your situation.
