Company Bankruptcy in Canada: Employee Rights & Severance Pay

If your employer goes bankrupt in Canada, recovering your full severance pay is usually extremely difficult. Even when you’re legally owed compensation, there may be little or no money left to pay you.

The federal Wage Earner Protection Program (WEPP) can provide limited financial support. However, a company threatening bankruptcy is not the same as actually entering bankruptcy or formal insolvency proceedings. If your employer hasn’t entered such proceedings, you may still have substantial severance rights.

On This Page:

• 1. What Bankruptcy Means
• 2. Severance Pay & Bankruptcy
• 3. WEPP Compensation
• 4. CCAA Protection & Chapter 11
• 5. Who Gets Paid First?
• 6. Company Closures Without Bankruptcy
• 7. What Employees Should Do

What Happens When a Company Goes Bankrupt in Canada?

Bankruptcy is a formal legal process used when a company can’t pay its debts. A licensed insolvency trustee oversees the bankruptcy and deals with the company’s assets and creditors.

For employees, bankruptcy can mean:

• Losing their jobs with little or no notice
• Unpaid wages, vacation pay or severance
• Losing workplace benefits
• Having to make a claim through the insolvency process

However, bankruptcy is different from restructuring, temporary financial difficulties or a company simply announcing that it may close.

An announcement that a business is struggling does not mean it has legally declared bankruptcy.

Do Employees Get Severance Pay if Their Company Goes Bankrupt?

Employees can still be legally owed severance when their employer goes bankrupt, but recovering the full amount is usually very unlikely.

Outside insolvency, a non-unionized employee’s severance pay in Canada can reach 24 months’ pay, depending on their age, position, length of service and other factors.

Bankruptcy changes the situation. Employees may have valid severance claims, but the employer may have insufficient assets to pay them.

In these circumstances, WEPP may provide limited compensation. Certain amounts might also be recovered through the insolvency process, but employees should not expect to receive their full severance packages.

What If You’ve Worked for the Company for 20 Years?

Long-serving employees can be owed significant severance when terminated. Unfortunately, decades of service do not guarantee payment if the employer is insolvent.

This is why it’s important to distinguish between what you’re legally owed and what can actually be recovered.

What About Sears Canada Employees?

The collapse of Sears Canada demonstrated how devastating bankruptcy can be for long-serving employees who lose their jobs, severance and pension security.

Samfiru Tumarkin LLP partner David Vaughan discussed employees’ rights following Sears Canada’s bankruptcy in this Global News interview.

What Is the Wage Earner Protection Program (WEPP)?

The Wage Earner Protection Program is a federal program that provides limited compensation to eligible employees whose employer enters bankruptcy, receivership or another qualifying insolvency proceeding.

WEPP can cover eligible:

• Unpaid wages
• Vacation pay
• Termination pay
• Severance pay

WEPP does not replace a full severance package. An employee owed many months of compensation may receive only a fraction of that amount through the program.

How Do You Apply for WEPP?

1. Confirm the insolvency proceeding. Find out whether a trustee, receiver or other insolvency professional has been appointed.
2. Submit your claim. Provide the required information about unpaid compensation to the trustee or receiver.
3. Apply through Service Canada. Follow WEPP’s application instructions and deadlines.

Eligibility depends on the circumstances. Some employees, including certain directors and managers with financial decision-making authority, may be excluded.

Official government resource: Wage Earner Protection Program – Eligibility, Payments & Applications.

What Happens to Employees Under CCAA Protection?

CCAA protection is not the same as bankruptcy. The Companies’ Creditors Arrangement Act allows qualifying financially distressed businesses to seek court protection while they attempt to restructure their debts or operations.

During CCAA proceedings:

• The company may continue operating
• Some employees may keep working while others are laid off
• A court-ordered stay may restrict lawsuits and debt collection
• Employees may need to submit claims through the restructuring process

The company may eventually restructure successfully, sell its business or enter liquidation. Employees’ rights and their ability to recover compensation depend on what happens.

Certain CCAA proceedings can also qualify terminated employees for WEPP.

Is CCAA the Same as Chapter 11 Bankruptcy?

No. Chapter 11 is a United States bankruptcy restructuring process. Canada’s CCAA provides a comparable restructuring framework, but the laws are different.

If your employer announces Chapter 11 protection in the U.S., don’t assume its Canadian employees have automatically lost their rights. The company’s Canadian operations and any Canadian insolvency proceedings must be considered separately.

Who Gets Paid First When a Company Goes Bankrupt?

Employees are not automatically first in line to receive their full severance pay.

Canadian insolvency laws give different payment rights and priorities to different creditors.

Certain unpaid wages and pension-related amounts receive special statutory protections. Secured creditors also have rights against particular assets.

However, most claims for full common-law severance do not receive the same protection as secured debts. If the company has few assets left, employees may recover little or nothing beyond available government support.

Samfiru Tumarkin LLP’s Sears Act Proposal

Following Sears Canada’s collapse, Samfiru Tumarkin LLP advocated for stronger bankruptcy protections through its proposed Sears Act.

The proposal seeks to give employees stronger creditor protections for unpaid severance and pension entitlements when employers become insolvent.

The Sears Act is an advocacy proposal, not an existing law giving every employee priority over secured creditors.

What If Your Company Closes Without Declaring Bankruptcy?

If your employer closes, announces layoffs or threatens bankruptcy without actually entering formal insolvency proceedings, you may still be owed substantial severance pay.

An employer can’t automatically avoid its termination obligations simply by claiming that business is bad or money is running out.

For example:

• Your company closes a location and eliminates your job
• Management says bankruptcy is coming but never files
• Your employer announces restructuring and terminates staff
• The business shuts down but hasn’t entered a qualifying insolvency proceeding

In these situations, employees may still be entitled to severance pay, potentially reaching 24 months’ compensation, depending on their circumstances.

However, even when severance is legally owed, collecting it can be difficult if the company has no money or assets.

Ottawa employment lawyer Alex Lucifero discussed severance rights when a company closes in this CTV News interview.

What Should You Do If Your Employer Is Facing Bankruptcy?

1. Confirm the company’s status. Find out whether it has formally entered bankruptcy, receivership or CCAA proceedings.
2. Keep your employment documents. Save your contract, pay records, termination letter and severance offer.
3. Check WEPP eligibility. If the company is in a qualifying insolvency proceeding, review the federal program and application requirements.
4. Don’t sign away your rights. If the company hasn’t formally entered insolvency proceedings, have your severance reviewed.
5. Get advice when needed. Determine whether you have a realistic claim for compensation and how it can be pursued.

Has Your Employer Actually Gone Bankrupt?

If your employer has only threatened bankruptcy, announced layoffs or closed without formally entering insolvency proceedings, don’t assume you’ve lost your severance rights.

Samfiru Tumarkin LLP helps non-unionized employees in Ontario, Alberta and British Columbia determine whether they’re entitled to compensation and pursue recoverable severance claims.

If your employer has already entered bankruptcy or formal insolvency proceedings, WEPP is likely your most realistic source of compensation. If your employer hasn’t declared bankruptcy, our employment lawyers can help you understand whether there is a legitimate claim worth pursuing.

Before you sign, always check first.

Unionized employees should contact their union about termination and compensation disputes. Samfiru Tumarkin LLP’s employment law team represents non-unionized employees.