Bankruptcy in Canada: Guide for Employees

Bankruptcy in Canada Guide for EmployeesNavigating the complexities of bankruptcy can be daunting, especially for employees whose livelihoods are directly impacted. In Canada, when a business faces financial turmoil and declares bankruptcy, it sets in motion a series of legal processes that significantly affect the company’s workforce. As an employee, understanding your rights and the implications of bankruptcy is crucial. This comprehensive guide will explore the intricacies of bankruptcy in Canada, its impact on current employees, and the steps you can take to protect your interests.

What is Bankruptcy in Canada?

Bankruptcy in Canada is a legal process that allows a financially troubled business to resolve its debts. When a company is unable to repay its outstanding obligations, it may choose to surrender its assets to a licensed insolvency trustee. This trustee is responsible for liquidating the company’s assets and distributing the proceeds to creditors, with the goal of providing a fresh start for the struggling organization.

The bankruptcy process in Canada is governed by two primary pieces of legislation: the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA). Smaller companies typically file for bankruptcy under the BIA, leading to the liquidation of their assets. In contrast, larger companies with debts exceeding $5 million may opt for restructuring under the CCAA, allowing them to continue operations while reorganizing their financial obligations.

Can a Company Close After Declaring Bankruptcy?

Yes, a company can indeed close permanently after declaring bankruptcy in Canada. The decision to close a business is typically based on the extent of the company’s debts, its ability to continue operations, and the outcome of the bankruptcy proceedings. If the financial situation is deemed unsustainable and the company cannot be restructured or revived, closure may be the inevitable outcome.

It’s important to note that employees have additional rights if their employer closes the business without filing for bankruptcy through the BIA or CCAA. In such cases, employees may be entitled to full severance pay, which can be significantly higher than the compensation they would receive in a bankruptcy scenario.

How Does Bankruptcy Affect Current Employees?

When a company declares bankruptcy in Canada, it can have a profound impact on its current employees. Employees may face job insecurity, as bankruptcies often lead to restructuring and layoffs. Additionally, the terms of employment, including salaries and benefits, may be subject to change.

The specific effects on employees depend on whether the company is shutting down permanently or restructuring to continue operations. In the case of a permanent closure, employees may lose their jobs entirely, while in a restructuring scenario, the company may attempt to retain a portion of its workforce.

Does an Employee Get Severance if Their Employer Files for Bankruptcy?

Yes, employees are entitled to a severance package if they lose their job when their employer declares bankruptcy in Canada. However, the amount they receive may be significantly less than what they would be entitled to in a regular job loss situation.

This is because, in bankruptcy proceedings, employees are classified as “unsecured creditors,” meaning they are at the back of the line behind both secured creditors (such as banks and the government) and other unsecured creditors. As a result, employees may only end up getting a fraction of the severance they would typically be owed.

Under normal circumstances, terminated employees can receive up to 24 months’ pay through the assistance of an employment lawyer. In a bankruptcy scenario, the financial gap between regular job loss compensation and bankruptcy-related job loss can be substantial, often reaching thousands of dollars.

The Wage Earner Protection Program (WEPP)

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

Under the WEPP, eligible employees can receive a one-time payment capped at an amount equal to seven times the highest weekly earnings covered by Employment Insurance (EI). The WEPP may also cover a small amount of severance pay owed to employees who were formally terminated. However, it’s essential for employees to act swiftly, as there are specific deadlines for applying to the WEPP.

Pension and Benefits in Employer Bankruptcy

Employer bankruptcy in Canada can also affect an employee’s pension and benefits, but the extent of the impact varies.

Pension plans 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 benefits, on the other hand, may cease with the company’s closure.

Employees in a bankrupt company should carefully review the status of their pension plan and understand their rights regarding pension and benefits. Seeking guidance from an employment lawyer can help ensure that employees’ retirement and health-related entitlements are protected to the fullest extent possible.

The Sears Act: Protecting Employees in Bankruptcy

The Sears Act, championed by the legal firm Samfiru Tumarkin LLP, aims to better protect employees during a company’s bankruptcy. This proposed legislation seeks to ensure that employees are treated as secured creditors, allowing them to be paid their severance and unpaid wages first, ahead of unsecured creditors.

The Sears Act was conceived after the fall of Sears Canada in 2017, which had a significant financial impact on thousands of Canadians. Samfiru Tumarkin LLP is dedicated to this cause, advocating for fair compensation for employees even in the most challenging situations.

When to Seek Legal Assistance

If your employer permanently closes the company and either does not file for bankruptcy or claims they will file but fails to do so, you should contact the employment lawyers at Samfiru Tumarkin LLP. In these scenarios, non-unionized employees are still legally entitled to a full severance package, which can be as much as 24 months’ pay.

An employment lawyer can be invaluable in helping you understand your rights and navigate the legal process to maximize your compensation. Attempting to handle these unique situations on your own can be daunting, so it’s crucial to seek expert guidance and support.

Bankruptcy and Restructuring: Notable Canadian Employers

Over the years, several notable employers and businesses in Canada have undergone restructuring or filed for bankruptcy. Some examples include:

  • Bad Boys Furniture
  • David’s Bridal
  • Field Gate Organics
  • Instant Brands
  • Jenny Craig
  • Mastermind Toys
  • Metroland Media
  • Nordstrom
  • Payless Shoes
  • Pier 1
  • RenoRun
  • Sears Canada

These cases serve as a reminder of the far-reaching implications of corporate financial distress and the importance of understanding employee rights in such situations.

Protecting Your Interests: Key Takeaways

When facing the uncertainty of an employer’s bankruptcy, it’s crucial for Canadian employees to be proactive and informed. Remember the following key points:

  1. Understand the bankruptcy process and how it may affect your employment, including potential job loss, changes in compensation, and the impact on your pension and benefits.
  2. Be aware of your rights as an employee, including your entitlement to severance pay, even in a bankruptcy scenario.
  3. Familiarize yourself with the Wage Earner Protection Program (WEPP) and the deadlines for applying to receive limited financial assistance.
  4. Consult with an experienced employment lawyer, such as those at Samfiru Tumarkin LLP, to ensure you receive the full compensation and support you deserve.
  5. Stay vigilant and act quickly if your employer claims they will file for bankruptcy but fails to do so, as you may still be entitled to a full severance package.

By understanding the complexities of bankruptcy in Canada and taking proactive steps to protect your interests, you can navigate this challenging situation with confidence and secure the best possible outcome for your financial future.

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