When a company files for bankruptcy, employees are faced with uncertainty on a number of issues. Everything from outstanding wages to benefit entitlements are suddenly at risk. Further, when a company becomes insolvent, employees are often laid off in circumstances that fail to satisfy statutory or common law notice period entitlements. However, under the Bankruptcy and Insolvency Act (“BIA”), employees are often barred from fully recovering what they are owed.

Under the BIA, secured claims get paid first, followed by preferred claims, and finally unsecured claims will be paid once secured and preferred claims have been satisfied. Under this scheme, unpaid wages earned during the six months prior to the date of the employer’s bankruptcy are considered secured claims up to a maximum of $2000 per employee. These “wages” include vacation pay and commissions but severance, where applicable, and termination pay, are expressly excluded. If unpaid wages cannot be satisfied by the current assets of the company, the employee can rely on a preferred claim under the BIA. It is only within the final category, unsecured claims, that employees can claim severance or termination pay along with any unpaid wages in excess of $2000 and any unpaid wages earned more than six months prior to the date of the bankruptcy. In this category, employees must file a proof of their claim as an unsecured category. Critically, the claim will only be satisfied after all the secured and preferred claims are paid out.

Outside of this scheme, the Workers Earner Protection Program (“WEPP”) enables eligible employees to claim severance or termination pay, in combination with any outstanding unpaid wages earned during the six months prior to the bankruptcy, up to the greater of $3000 or an amount equal to four times the maximum weekly insurable earnings under the Employment Insurance Act. The WEPP was established to pay employees of employers who have entered bankruptcy or insolvency proceedings but who are unable to pay certain outstanding wages. Importantly, an employee cannot recover under the BIA and the WEPP if the same amounts are covered. Further, once the employee has been paid under the WEPP, the employee cannot claim the amount from the employer.

Written with the assistance of Andrew Nichol, articling student.

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