Bankruptcy in Canada: Guide for Employees

When a Canadian employer faces bankruptcy, it’s a time of uncertainty, especially for employees. Understanding your rights and the legal processes is crucial. Here’s a comprehensive guide.

What is bankruptcy?

In Canada, bankruptcy for a business refers to a legal process where a company, unable to repay its debts, surrenders its assets to a licensed insolvency trustee. The trustee liquidates these assets to pay back creditors. This process provides a way for financially troubled employers to resolve their debts under the protection of bankruptcy law, like the Bankruptcy and Insolvency Act (BIA) or Companies’ Creditors Arrangement Act (CCAA).

Once the assets are liquidated and creditors are paid as much as possible, the company is discharged from its debts, concluding the bankruptcy process.

WATCH: Toronto employment lawyer and partner David Vaughan spoke to Global News about rights for Sears Canada employees after the decades-old retailer declared bankruptcy.

Can a company close after declaring bankruptcy in Canada?

Yes, a company can close permanently after declaring bankruptcy in Canada. When a business declares bankruptcy, it undergoes a legal process to handle its debts, often involving liquidating its assets to pay creditors. If the company’s financial situation is unsustainable and it cannot be restructured or revived, it may ultimately lead to closure. The decision to close is typically based on the extent of the company’s debts, its ability to continue operations, and the outcome of the bankruptcy proceedings.

• Note: Employees have more rights (including full severance pay) if their employer closes the business, but doesn’t file for bankruptcy through the BIA or CCAA. Read our guide on employee rights when a business closes.

What does an employer do when declaring bankruptcy?

When an employer in Canada decides to declare bankruptcy, their actions depend on the size and nature of the business:

• Bankruptcy Filing: Under the BIA, smaller companies file for bankruptcy, leading to liquidation of assets.
• Restructuring Option: Larger companies with debts over $5 million may opt for restructuring under the CCAA, allowing them to continue operations while reorganizing debts.
• Appointing a Trustee or Monitor: A trustee (for BIA) or monitor (for CCAA) is appointed to oversee the process.
• Asset Management and Creditor Payment: The company’s assets are managed, sold off, or reorganized to repay creditors, starting with secured creditors (banks, the government) then unsecured creditors, including employees.

How does bankruptcy affect current employees?

When a company in Canada declares bankruptcy, it can significantly impact its current employees. Employees may face job insecurity, as bankruptcies often lead to restructuring and layoffs. Additionally, terms of employment, including salaries and benefits, could change. However, the specific effects depend on whether the company is shutting down permanently or restructuring so that it can continue to operate.

Does an employee get severance if their employer files for bankruptcy?

Yes, an employee is entitled to a severance package if they lose their job when their employer declares bankruptcy. However, they may only end up getting a fraction of what they are actually owed. That is because in bankruptcy proceedings, employees are classified as ‘unsecured creditors.’ They are at the back of the line behind both secured and other unsecured creditors.

The financial gap between regular job loss compensation and bankruptcy-related job loss can be substantial, often reaching thousands of dollars. Under normal circumstances, terminated employees can receive up to 24 months’ pay through help from an employment lawyer at Samfiru Tumarkin LLP.

To find out how much severance pay you should get when you lose your job outside of a bankruptcy situation, use the Pocket Employment Lawyer.

WATCH: Ottawa employment lawyer and partner Alex Lucifero was interviewed by CTV News about how severance work when a company closes.

Wage Earner Protection Program

The Wage Earner Protection Program (WEPP) is a crucial support for employees of bankrupt companies in Canada. It provides limited financial assistance for unpaid wages or vacation pay, including wages up to the date of bankruptcy or receivership.

• How Much: Employees are eligible for a one-time payment from the WEPP that’s capped at an amount equal to seven times the highest weekly earnings covered by Employment Insurance (EI).

WEPP may also cover a small amount of severance pay owed to employees who were formally terminated. However, there are specific deadlines for applying to WEPP, making it essential for employees to act swiftly.

Are pension and benefits affected by employer bankruptcy?

Employer bankruptcy in Canada can affect pension and benefits, but the extent varies.

• Pension Plans: They may remain intact, especially those that are fully funded and separate from the company’s assets. However, if the pension fund is underfunded, there could be shortfalls.
• Health Insurance: They may cease with the company’s closure.

Employees in a bankrupt company should review their pension plan’s status and understand their rights regarding pension and benefits.

The Sears Act

The Sears Act, championed by Samfiru Tumarkin LLP, focuses on better protecting employees during a company’s bankruptcy. It aims to make sure employees get treated as secured creditors, so they can be paid their severance and unpaid wages first, ahead of unsecured creditors.

The proposed legislation was conceived after the fall of Sears Canada in 2017, which had a massive financial impact on thousands of Canadians. We at Samfiru Tumarkin LLP are dedicated to this cause, helping employees receive fair compensation even in tough situations.

When should I contact an employment lawyer?

You should contact the employment lawyers at Samfiru Tumarkin LLP if your employer permanently closes the company and:

• Doesn’t file for bankruptcy.
• Claims they will file for bankruptcy through the BIA or CCAA, but doesn’t actually follow through.

In these scenarios, non-unionized employees are still legally entitled to a full severance package, which can be as much as 24 months’ pay. This is where an employment lawyer from Samfiru Tumarkin LLP can be invaluable. We can help you understand your rights and properly navigate the legal process to maximize your compensation.

Don’t do this alone; contact us for expert guidance and support in these unique situations. Our employment lawyers have helped tens of thousands of individuals across Ontario, Alberta and B.C. enforce their rights. If you are a non-unionized employee who needs help with an employment issue, contact us or call 1-855-821-5900 to get the advice you need, and the compensation you deserve.

Bankruptcy and Restructuring: List of Employers

The following is a list of some of the notable employers and businesses in Canada that have restructured or filed for bankruptcy: