What Happens to Employees When a Company Goes Bankrupt in Canada

When a company goes bankrupt in Canada, employees are often among the last to find out and among the least protected financially. Understanding what happens to your wages, termination pay, and benefits when your employer files for bankruptcy, and what steps to take to protect yourself, can make a significant difference to what you recover.

Short answer

When your employer goes bankrupt, your employment will likely end and you will need to file a claim to recover what you are owed.

A Trustee in Bankruptcy takes control of the company's assets. Employees can claim unpaid wages, vacation pay, termination pay, and other amounts through the bankruptcy process and through the federal Wage Earner Protection Program. Act quickly delays can affect what you recover.

Has your employer filed for bankruptcy or are you concerned they are about to?

Time matters significantly in a bankruptcy situation. The earlier you get legal advice, the better your position in the claims process. Get advice before the deadlines pass.

Call: 1-800-771-7882 Speak With an Employment Lawyer

Bankruptcy vs. insolvency: what is the difference?

Insolvency

The company cannot pay its debts as they come due
Not necessarily a legal filing
A financial specialist may attempt to restructure or consolidate debt
Employment may continue while restructuring is attempted
Governed by the federal Bankruptcy and Insolvency Act

Bankruptcy

A formal legal process under the Bankruptcy and Insolvency Act
A Trustee in Bankruptcy is appointed to manage assets
Employment typically ends when the company files
Creditors including employees file claims to recover what they are owed
Assets are distributed according to a legal priority hierarchy

Where employees sit in the creditor priority order

When a company goes bankrupt, its remaining assets are distributed to creditors in a strict legal priority order. Understanding where employees sit in this hierarchy explains why full recovery of everything owed is not always possible.

First priority

Secured creditors

Second priority

Preferred creditors (including some employee wages)

Third priority

Unsecured creditors

Last priority

Shareholders

Secured creditors, typically banks and lenders who hold collateral against their loans, are paid first. Employees are partially protected as preferred creditors for certain wage amounts under the Bankruptcy and Insolvency Act, but full recovery of termination pay and severance is much less certain once secured creditors have been paid.

What employees can claim through the bankruptcy process

Unpaid wages

Any wages not yet paid at the time of bankruptcy, including regular pay, overtime, shift premiums, gratuities, and reimbursements you are owed.

Vacation pay

Accrued vacation pay that has not been paid out. This is treated as unpaid wages under the Bankruptcy and Insolvency Act and forms part of your proof of claim.

Termination and severance pay

You can claim termination or severance pay through the bankruptcy process. Claims are stronger where employment ended before the bankruptcy filing. Recovery where employment ends as a direct result of the bankruptcy is more difficult.

Pension and insurance premiums

Where your employer was deducting amounts for pension or insurance contributions but not remitting them, you may claim those unpaid amounts through your proof of claim.

Human rights damages

If your rights were violated during employment, you can file a claim for human rights damages through the bankruptcy process. In some cases this claim may be brought before a bankruptcy judge rather than the Trustee.

Wrongful dismissal damages

If you were dismissed before the bankruptcy in circumstances that constitute wrongful dismissal, you may claim those damages through your proof of claim. These claims are harder to pursue where employment ends as a direct result of the bankruptcy itself.

The Wage Earner Protection Program

Federal Wage Earner Protection Program (WEPP)

Up to $8,117.34

The WEPP is a federal program that provides a one-time payment to employees who are owed wages and termination pay by a bankrupt employer who cannot pay. The maximum payment amount is periodically adjusted. After you file your proof of claim, the Trustee must help you assess whether you qualify for WEPP and assist you with the application process.

Has your employer recently gone bankrupt or are you navigating a proof of claim?

Deadlines apply in the bankruptcy claims process and delays can affect what you recover. Our team advises employees in Ontario and BC on their rights when an employer becomes insolvent or bankrupt. Get advice as early as possible.

Get Legal Advice Or call us: 1-800-771-7882

What to do if your employer goes bankrupt

Watch for communications from the Trustee

Once a company files for bankruptcy, a Trustee in Bankruptcy is appointed. The Trustee will contact employees with information about the process, deadlines, and how to file a proof of claim. Do not ignore these communications.

File your proof of claim promptly

A proof of claim is the document that establishes what you are owed and your relationship to the company. File it as soon as possible. Missing deadlines can significantly affect your recovery. Include all amounts owed including unpaid wages, vacation pay, and termination pay.

Ask the Trustee about WEPP eligibility

The Trustee has an obligation to inform you about the Wage Earner Protection Program and assist you with the application if you qualify. Do not assume you are not eligible without checking.

Apply for Employment Insurance

Where your employment has ended due to bankruptcy, you may be eligible for Employment Insurance benefits. Apply as soon as your employment ends delays in applying can affect the start date of your benefits.

Get legal advice early

An employment lawyer can help you assess what you are owed, ensure your proof of claim captures everything you are entitled to, advise on WEPP eligibility, and pursue any wrongful dismissal or human rights claims that predate the bankruptcy filing. The earlier you get advice, the more options you have.

Frequently asked questions about employer bankruptcy and employee rights

Am I entitled to severance if my employer goes bankrupt?

You may be entitled to claim termination and severance pay through the bankruptcy process, but recovery depends on what assets remain after secured creditors are paid and whether your employment ended before or as a result of the bankruptcy. The federal Wage Earner Protection Program can also provide a payment toward owed wages and termination pay up to the program maximum where the employer cannot pay. Get legal advice to assess your specific situation.

What is a proof of claim and do I need to file one?

A proof of claim is the document you file with the Trustee in Bankruptcy to establish what the company owes you. It covers unpaid wages, vacation pay, termination pay, and other amounts. You must file a proof of claim to participate in the distribution of the company's assets. The Trustee will provide you with the form and process. File as soon as possible after receiving notice of the bankruptcy.

What is the Wage Earner Protection Program?

The Wage Earner Protection Program is a federal program that provides a one-time payment to employees who are owed wages and termination pay by a bankrupt employer who cannot pay. The maximum payment is periodically adjusted and was $8,117.34 as of early 2022. After you file your proof of claim, the Trustee must help you determine whether you qualify and assist you with the application.

What is a Trustee in Bankruptcy?

A Trustee in Bankruptcy is a licensed professional appointed to manage the assets of a bankrupt company and oversee the claims process. The Trustee steps into the role of the employer for purposes of the bankruptcy, notifies employees and other creditors, receives proof of claim filings, and distributes available assets according to the legal priority order. Employees should direct their claims and questions to the Trustee.

Can I sue my employer for wrongful dismissal if they go bankrupt?

Direct litigation against a bankrupt employer is generally not permitted once the bankruptcy has been filed. Wrongful dismissal claims arising from termination before the bankruptcy filing may be pursued as part of the proof of claim process. Claims arising from terminations that occur as a direct result of the bankruptcy are more difficult to pursue and recovery is less certain. Get legal advice as early as possible if you believe you have a wrongful dismissal claim.

Does employer bankruptcy affect my Employment Insurance claim?

No. You can apply for Employment Insurance where your employment has ended due to your employer's bankruptcy. Apply as soon as your employment ends. You will need a Record of Employment, which the Trustee should assist in obtaining if your employer has not issued one. Do not delay your EI application while waiting for the bankruptcy process to resolve.

Has your employer gone bankrupt or are you concerned about what you are owed?

Our team advises employees across Ontario and BC on their rights when an employer becomes insolvent or bankrupt, including proof of claim preparation, WEPP eligibility, and wrongful dismissal claims that predate the bankruptcy. Contact us for a confidential consultation.

If you are in Ontario visit our Ontario employees page or in BC visit our BC employees page for province-specific guidance.

Call us at 1-800-771-7882 or fill out the form below and we will be in touch.

The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Achkar Law Professional Corporation and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Achkar Law Professional Corporation. ©

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