In turbulent and uncertain financial times, employers and employees more often than ever find themselves immersed in and affected by insolvency proceedings. Particularly for employees, there is often misunderstanding and misinformation respecting the nature of the proceedings and employees’ rights thereunder. In this article, after a brief description of the most common forms of insolvency proceedings in Canada, the rights and entitlements of employees under these proceedings will be discussed.
Under the Bankruptcy and Insolvency Act (BIA), a trustee in bankruptcy is appointed over the insolvent company. The trustee is a licensed accounting firm that is not the auditor of the bankrupt. Generally, the trustee’s duty is to liquidate the debtor’s estate for the benefit of the creditors. Steps are also taken to identify and protect all the bankrupt’s assets and notify all its creditors. The trustee has the authority to continue to operate the bankrupt corporation but usually will immediately take steps to terminate all employees and most contracts with third parties. Various key employees may be retained or re-hired as consultants to safeguard all assets and maintain essential contracts or services.
In reviewing creditor claims, including claims of employees, the trustee can dispute the entitlement, security or amount claimed. Any disputes between creditors and a trustee can be resolved by the court through bankruptcy proceedings and applications that are generally much more expeditious than typical civil proceedings.
A receiver and manager, most often simply termed a "receiver," may be appointed either through court process or privately. A receiver is entitled to take control of the debtor’s assets and arrange for their sale or, alternatively, carry on the debtor’s business indefinitely pending a sale of the assets either as a going concern or on a piecemeal basis.
The receiver has an obligation to be fair to all creditors, including the employees of the company.
Companies’ Creditors Arrangement Act
If the employer has filed for protection under the Companies’ Creditors Arrangement Act (CCAA), some different considerations arise. By filing for protection under the CCAA, the company is attempting to restructure its debts in order to survive and avoid bankruptcy. The courts will often provide applicant debtors a great deal of latitude in an attempt to preserve the debtor company as an ongoing business concern. The CCAA requires that a monitor be appointed for the debtor seeking protection, who acts as an officer of the court in monitoring and reporting on the debtor’s affairs. An important and unique aspect of CCAA proceedings is that the debtor company remains in possession and control of its operations pending its attempt to restructure. As such, the employee will in most cases continue to deal directly with the company.
The federally legislated CCAA governs how a company deals may restructure its affairs, and how monies owing are paid out to its creditors.
Employees’ rights bankruptcies and receiverships
If the employer has gone bankrupt, and the employee has a wage claim, the federally legislated BIA dictates how the debts are paid out to its creditors. The unpaid employee is a creditor. The next step for the employee depends on whether he or she is represented by a union. If there is a union, the union becomes involved with assisting the employee in obtaining the monies that are owed. If there is no union, the employee should be dealing directly with the trustee or the company’s receiver.
The Wage Earner Protection Program (WEPP) applies to receiverships as well as bankruptcies of an employer that took place after July 7, 2008. This program has been established under the Wage Earner Protection Program Act (WEPPA) and is administered by Service Canada. The WEPP reimburses eligible employees for unpaid wages, vacation pay, severance pay and termination pay that are owed after an employer becomes bankrupt or is subject to a receivership under the BIA. The employee must file a claim with Service Canada within 56 days of the date of bankruptcy or receivership.
The maximum payment for an eligible employee is equivalent to four weeks of insurable Employment Insurance earnings, less amounts prescribed by regulations. Payments under WEPP will be made directly by Service Canada and not by the receiver or trustee in bankruptcy. If a payment is made to an employee by Service Canada, then Service Canada will be entitled to any dividend payments made by the receiver or trustee in bankruptcy to the employee, up to the amount paid out by Service Canada.
In Ted Leroy Trucking Ltd. (Re),1 the BC Supreme Court in 2012 summarized the application of WEPPA and the operation of the WEPP. The court stated as follows:
"The WEPPA is a federal program by which wage earners may be compensated for unpaid wages, to a limit of $3,000 by the federal government. If a payment is made to a wage earner under the WEPPA, Canada is subrogated to the rights of the wage earner against the bankrupt (s 36(1)). The WEPPA does not address the priority of the subrogated claim; the subrogated claim is granted priority and becomes a secured claim by s 81.3 of the BIA."
How wages are defined
The courts have on many occasions considered what would constitute "wages" within the WEPPA and s 81.3 of the BIA. In a 2009 decision from the Ted Leroy Trucking Ltd. (Re) proceedings,2 the issue before the court was how the term wages should be interpreted. As a starting point, WEPPA defines wages to include salaries, commission, compensation for services rendered, vacation pay, severance pay, termination pay and other amounts prescribed by regulation.
The court ordered that a number of forms of compensation (contributions on behalf of employees to the company’s long-term disability plan, premiums on behalf of employees for extended health care and dental coverage, union dues and other contributions to various funds) were included in the wages that were in issue.
This decision was ultimately upheld on appeal.
The court conclusively determined that benefits are wages within ss 81.3 and 81.4 of the BIA, finding that the benefits were for the benefit of the employee and were part of the employee's compensation. The fact that benefits were not cited expressly in the definition of wages did not exclude them as part of the compensation package.
The Ted Leroy Trucking (Re) decisions will likely continue to be relied upon across Canada for their employee-friendly approach to the definition of wages whenever bankruptcy laws and WEPPA are engaged in future distressed employer scenarios and employee claims are in issue.
1 2012 BCSC 178.
2 2009 BCSC 41.
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