Law Protects Workers’ Wages When Employer Is Insolvent

by Kate McNeill of McCarthy Tetrault
and Brian P. Smeenk formerly with McCarthy Tetrault

Canada’s federal parliament has passed a law to protect workers when their employers become insolvent

A key component of Bill C-12, passed December 14, 2007, is the creation of the Wage Earner Protection Program (WEPP). The WEPP provides statutory wage protection for workers when their employer becomes bankrupt or subject to a receivership and their employment is terminated as a result.

Prior to the WEPP, such workers were at risk of losing wages earned in the weeks before the declaration of bankruptcy or receivership because they were unsecured creditors.

Industry Canada asserts that previously only 21% of the workers affected by a corporate bankruptcy or receivership received payment of their wage claims and that those employees received, on average, a recovery of only 13 cents on the dollar. Others have questioned these statistics since secured lenders often voluntarily agree to the payment of many wage claims.

The WEPP provides those workers with government assurance that upon application to the federal government, they will receive unpaid wages and earned vacation pay for a maximum period equal to four weeks of insurable earnings under the Employment Insurance Act (approximately $3,000).

The federal government, which is the payer under the WEPP, then assumes the worker’s position as a preferred unsecured creditor and continues with the bankruptcy or receivership proceedings in the worker’s stead, leaving the worker free to pursue new employment without the burden of a fight for earned, unpaid wages.

From the perspective of an employer, the WEPP provides the comfort of having its employees taken care of, but it also adds an additional dynamic to the bankruptcy or receivership proceedings in that the federal government becomes a substitute unsecured creditor.

Who qualifies for the WEPP?
The WEPP aims to provide increased protection to employees who are rendered unemployed by the bankruptcy or receivership of their employer and who have unpaid wages and compensation at the time the bankruptcy or receivership is declared.

Not all individuals will qualify for payment through the WEPP. The following groups are not eligible to receive payment through the WEPP:

• individuals who were officers or directors of the insolvent employer;
• individuals who had a controlling interest in the business of the insolvent employer;
• individuals who occupied a managerial position with the insolvent employer; or
• individuals who were not dealing at arm’s length with the individuals listed above.

It would also appear that the WEPP doesn’t assist employees where a company is insolvent but there is no appointment of a receiver or trustee in bankruptcy. Two common examples where this would appear to be the case would be (1) where a business simply shuts down in the absence of such appointment, and (2) where there are wage claims in the course of proceedings under the Companies’ Creditors Arrangement Act.

When will the WEPP begin?
The WEPP only applies to bankruptcies or receiverships on or after the date on which the WEPP comes into force. It’s likely that the WEPP will not be in force for several months in order to allow the Federal Ministry of Human Resources and Social Development adequate time to set it up.

How does the WEPP work?
Prior to the WEPP, many secured creditors voluntarily agreed to allow the debtor employer to satisfy outstanding wage claims ahead of their superior priority claims.
In other instances, however, employees who found themselves out of pocket in the wake of a corporate bankruptcy or receivership were on their own to determine how much they were owed and how they should go about recouping their losses.

There was no positive obligation on the employer, the trustee in bankruptcy, receiver, or any other involved insolvency professional to assist employees in that regard. The WEPP has addressed these practical concerns in the following ways.

Under the WEPP, the employee may apply to the federal government for arrears of wages and compensation earned within the six-month period immediately prior to the bankruptcy or receivership. The employee assigns his or her claim to the federal government to pursue with the insolvent employer.

The WEPP also requires that the trustee in bankruptcy or the receiver proactively assist employees by attempting to determine the value of their wage and/or compensation entitlements and by informing them of their rights and entitlements under the WEPP. Specifically, the legislation requires that the trustee in bankruptcy or the receiver exercise due diligence to:

• identify all employees who are owed wages and compensation within six months of the declaration of bankruptcy or receivership;
• determine the amount of wages and compensation owed to each individual in respect to those six months;
• inform each affected employee about the WEPP and the conditions under which payments may be made;
• provide the federal government with information about what is owed to each employee; and
• inform the government once the trustee or receiver has been discharged from its duties.

Impact of the WEPP
The substantial shift in the amount and kind of information provided to employees, paired with the relative speed with which employees should be able to obtain reimbursement through the WEPP, could have a significant impact on the number of wage- and/or compensation-based claims facing a bankruptcy trustee or receiver.

However, the WEPP may compel many participants in the insolvency process to avoid bankruptcy or receivership proceedings because of the new administrative obligations imposed on bankruptcy trustees and receivers.

For further advice concerning insolvency issues, contact Kevin McElcheran of our Bankruptcy & Restructuring Group and/or Brian Smeenk or Kate McNeill of our Labour & Employment Group.