Sears Act: What you need to know

What is the Sears Act?

The Sears Act is legislation that, if enacted, would amend Canada’s bankruptcy laws to identify employees as secured creditors, entitling them to more generous severance pay when their employer goes out of business.

This legislation, as proposed by Canadian employment lawyer Lior Samfiru, co-founding partner at Samfiru Tumarkin LLP, recommends the following changes to the Companies’ Creditors Arrangement Act:

• Make employees secured creditors: This would put employees at the “front of the line,” alongside other secured creditors like banks, when their employer enters bankruptcy proceedings. A company would need to include severance package amounts and pension entitlements when negotiating compensation with its creditors.
• Make officers and directors of a company personally liable for employees’ severance pay: Currently, officers and directors are only personally liable for unpaid wages of employees, but not for severance pay.

What is the Companies’ Creditors Arrangement Act?

The Companies’ Creditors Arrangement Act (CCAA) is federal law in Canada that gives a company protection from creditors for a period of time (typically 30 days) when it:

• Is unable to pay its debts.
• Owes more than $5 million to creditors.

A company makes an “initial application” to the Court for protection under the CCAA. If the application is accepted, the Court issues an “initial order” that gives the business protection from its creditors and debt collectors for 30 days, through a “stay of proceedings.”

There is no legal requirement for a company to tell its creditors, employees or stakeholders that it will seek protection through the CCAA.

Impact on severance pay

When a company receives protection through the CCAA, its employees become unsecured creditors. These workers are effectively last in line to receive compensation from the employer once debts with secured creditors have been satisfied.

An employer in this situation is not required to provide employees with the full severance pay they are entitled to when a business closes or they lose their job. A complete severance package takes into account various factors, including age, position and length of service, and can be as much as 24 months’ pay.

The difference between what an employee with decades of tenure at a company is normally entitled to versus what will likely get if their employer files for CCAA can be tens of thousands of dollars.

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• Severance Pay Calculator

Why was the Sears Act proposed?

Samfiru proposed the Sears Act in an effort to provide employees with more appropriate severance packages and financial support when their employer declares bankruptcy.

The Sears Act was directly inspired by the controversy surrounding the collapse and bankruptcy of Sears Canada in 2017, which resulted in the closure of hundreds of stores that put over 16,000 employees out of work.

Samfiru developed the legislation following reports that senior executives who chose to stay with the retailer while it wound down operations would share a $7.6-million retention bonus fund. While management would still earn bonuses, thousands of workers would receive little or no severance pay and reduced pension contributions.

Following public outcry, Sears Canada created a $500,000 ‘hardship fund’ from the money earmarked for retention bonuses, though this fund fell well below the amount of severance each employee would be owed had bankruptcy not been a factor.

Has the Sears Act been passed?

No, the Sears Act has not been officially introduced or passed in the House of Commons.

Following Sears Canada’s insolvency, Samfiru Tumarkin LLP contacted Canada’s 338 members of Parliament in an effort to gain support for the legislation. The firm issues reminders to the country’s MPs whenever a new company is added to the list of bankruptcies in Canada.

Response from the federal government

In 2017 Samfiru Tumarkin LLP corresponded with MP Navdeep Bains, urging the then-Minister of Innovation, Science and Economic Development Canada to adopt the Sears Act for the benefit of Canadians across the nation.

The Ministry responded on Jul. 21, 2017 with the following:

“As the Sears Canada Inc. (SCI) proceedings are now before the courts, it would not be appropriate to comment on specific aspects of the case. Please be assured that the Government of Canada understands the importance of economic security, and also acknowledges the difficult circumstances that SCI employees, retirees and their families may face as a result of the insolvency.

As Minister of ISED, Minister Bains’ mandate includes responsibility for some of Canada’s marketplace framework legislation. Framework laws like the CBCA, BIA and CCAA are intended to enhance the efficiency and competitiveness of the Canadian marketplace, provide clarity for businesses and their stakeholders, foster competition, support innovation, and attract investment, creating the market conditions that will contribute to prosperity and jobs for Canadians.

The CCAA court has appointed legal counsel to protect that interests of SCI employees and retirees at company expense in the proceedings. The court has also authorized a transition period whereby SCI will continue its pension and post-retirement benefit plans and special payments to its pension plan until October 1, 2017. These payments are intended to contribute to the financial sustainability of the pension fund. I would also note that the court has approved a sales and marketing process for SCI’s assets with the objective of maximizing returns to all creditors and stakeholders, including SCI employees and retirees, and of preserving employment.“

How you can help

Sears Canada is one of the country’s most prolific bankruptcies to date, but it won’t be the last company to declare insolvency and seek creditor protection through the CCAA – especially as we continue to navigate a changing world and challenging economy.

You can help bring the Sears Act closer to reality by contacting your local MP and urging them to introduce the legislation in the House of Commons. Direct them to this resource, and remind your representative in government that they have a responsibility to advocate for and protect the interests of their constituents.