Employer Goes Bankrupt, Severance

What Happens if My Employer Files for Bankruptcy

Are you Entitled to Severance if your Employer Goes Bankrupt?


As companies all across Ontario and the rest of Canada feel the continued impacts of the COVID-19 pandemic, supply-chain issues, and the oncoming recession, there are some businesses who are facing the possibility of bankruptcy. As an employer or an employee, you may have questions about what will happen if your business does reach that point. What happens next? Do employees need to be given severance packages? It is important to keep track of what might happen if this becomes the reality for your business. This article will outline possibilities, give you important definitions, and let you know what you can expect.

 

Bankruptcy Versus Insolvency

 

In some cases, a workplace may run out of money, but they may not be bankrupt in the legal sense of the word. Insolvency is defined as being the state at which a business doesn’t have enough money to pay off their debts. A business may bring in a financial specialist to help them attempt to save the business by restructuring, consolidating debt, or using other methods to pay off what they owe.

 

If a business cannot restructure in a way where they can pay off their debts, they may also file for bankruptcy, which is a legal procedure. Bankruptcy and insolvency are both governed by the federal Bankruptcy and Insolvency Act (“BIA”). The BIA outlines expectations and the rights of employees and other stakeholders in the case of a business declaring bankruptcy. 

 

What Happens if My Workplace Goes Bankrupt?

 

If a business files for bankruptcy, that will usually mean that employees will be let go from the business, since they cannot afford to pay anyone. At that point, the business will usually appoint a Trustee in Bankruptcy. The Trustee essentially steps into the shoes of the former employer, and provides employees and other stakeholders with information regarding the bankruptcy, and for employees help them claim any unearned wages from the estate of the bankrupt company.

 

The Trustee will take control of the company’s assets and try to decide how to use them to best meet the needs of all the stakeholders and creditors. There will be a hierarchy of creditors, and unfortunately employees are not at or near the top of the list. “Secured” creditors take top priority – these are creditors who have already ensured that their loans to a company will be secured by collateral. Secured creditors take priority over unsecured creditors, and employees fall into this category. Thus, even if there is some money left in the company assets, that does not mean that it will go directly to the employees. 

 

Employees will typically be notified by the Trustee to let them know what they are owed by the company by filing a Proof of Claim, which is something that outlines an employee’s relationship to the company and helps that employee calculate how much they are owed. 

 

What Can Employees Receive?

 

Employees who are let go after their business files for bankruptcy can claim a number of different things, including:

  • Unpaid wages. This includes any wages that have not been paid, including vacation pay, bonuses, shift premiums, gratuities, and reimbursements. 
  • Pension payments and insurance premiums. If an employer was paying money toward insurance or pension payments for their employees, but those amounts have also been unpaid, the employee may claim that amount through their proof of claim.
  • Termination or severance pay, as well as wrongful dismissal damages. Employees can claim termination or severance pay, and wrongful dismissal damages, if they were wrongfully dismissed. If an employee was fired before the business filed for bankruptcy, they may have more luck claiming these amounts. If an employee was fired as a result of the bankruptcy, they will be much more difficult to recover. 
  • Human Rights Damages. If an employee has been harassed or had their rights violated in the workplace, they can file a claim for damages under human rights legislation the same way they would if they were claiming for unpaid wages. In some cases, an employee may choose to bring this claim in front of a bankruptcy judge rather than the trustee.

 

Wage Earner Protection Program

 

Additionally, the federal Wage Earner Protection Program (“WEPP”) helps employees claim their owed wages and termination pay if the business cannot pay for it themselves. Through WEPP, employees could earn a one-time payment to a maximum amount of $8,117.34, as of January 2022. After an employee has submitted their proof of claim, the Trustee has an obligation to help them find out if they are eligible for WEPP and to help them figure out the process. 

 

Do I Have Options Outside of the Bankruptcy Process?

 

Unfortunately, options outside of the bankruptcy process and WEPP are fairly limited for employees. Once a business has gone bankrupt, direct negotiations will not be possible, and litigation is generally not allowed. Employees should make the most of the bankruptcy process while it is happening. 

 

Conclusion

 

Employees have several protections when their employer files for bankruptcy, which are governed by the BIA and the WEPP. Employees should make sure to keep an eye out for communications from the Trustee and file a claim as soon as possible.

 

Employees with concerns or questions about what they should be claiming should make sure to reach out to a lawyer as soon as possible. The talented team of workplace lawyers at Achkar Law can help you get the best possible outcome.

 

Contact Us

 

If you are an employee who is concerned about your rights if your company goes bankrupt, our team of experienced workplace lawyers at Achkar Law can help. Contact us by phone toll-free at 1 (800) 771-7882 or email us at [email protected], and we will be happy to assist. 

 

If you are a small or medium-sized company looking for full-service support with a same-day response, visit our Chief Legal Officer Program page for our strategic solutions.