The complex intersection of employment and bankruptcy law has come into sharp focus as Canada witnesses a significant rise in business insolvencies, with a 41.4% increase in 2023 compared to the previous year. This surge has propelled the issue of employee rights into the limelight, particularly affecting employees when companies file for bankruptcy or seek creditor protection under the Companies’ Creditors Arrangement Act (CCAA). The precarious position of employees in these scenarios cannot be overstated, as they often find themselves classified as unsecured creditors in bankruptcy proceedings. This classification frequently results in employees receiving only a fraction of their owed severance pay and benefits, if anything at all, after secured creditors have been paid.
Employee Vulnerability in Bankruptcy Proceedings
One of the most critical aspects of this issue is the considerable disadvantage faced by employees classified as unsecured creditors. When a company files for bankruptcy, the assets are typically liquidated to pay off creditors. Secured creditors, such as banks or financiers with collateral, are prioritized, while employees, despite their contributions, find themselves at the bottom of the payout hierarchy. Chantel Goldsmith, a partner at Samfiru Tumarkin LLP, emphasizes that such insolvencies lead to substantial employment disputes, especially with long-term employees who stand to lose the most. These employees often have vested rights in accrued severance pay and benefits that are jeopardized in bankruptcy scenarios.
In an attempt to mitigate this, the federal government offers the Wage Earners Protection Program, providing minimal relief by covering unpaid wages, vacation pay, and severance. However, this program falls short for long-term employees, who are entitled to much more under common law. The failed attempt to pass the Sears Act, which sought to prioritize employees as secured creditors, highlights a pivotal yet unrealized effort to address this significant gap. The program’s limitations leave long-term employees especially vulnerable, as the compensation offered does not adequately reflect their tenure or contributions to the company.
Legal Hurdles and Stalled Litigation for Employees
Employees face additional legal barriers once a company declares bankruptcy. Typically, bankruptcy proceedings halt any ongoing litigation against the employer, creating significant obstacles for employees trying to seek remedies through the courts. In cases where companies opt for restructuring under the CCAA, employees might experience reductions in their salaries and benefits. While these reductions could technically constitute constructive dismissal, pursuing such claims becomes notably challenging when the company is under creditor protection. This creates a legal impasse where employees are unable to seek justice effectively.
The overarching consensus is that employees are significantly disadvantaged in bankruptcy scenarios, receiving only a fraction of their entitlements. The combination of stalled litigation and minimal government protection programs exacerbates their plight, making it exceedingly difficult for employees to achieve fair compensation. Moreover, the trend toward increasing insolvencies in sectors such as accommodation, food services, retail trade, and construction poses continuous risks to employees. As these sectors struggle, the number of affected employees grows, magnifying the urgency for systemic legal reforms to better protect employee rights in such vulnerable situations.
Calls for Legal Reforms to Protect Employee Rights
The intricate intersection of employment and bankruptcy law has become increasingly relevant as Canada sees a notable rise in business insolvencies, showing a 41.4% increase in 2023 compared to the previous year. This surge has propelled employee rights into the spotlight, particularly when companies declare bankruptcy or seek creditor protection under the Companies’ Creditors Arrangement Act (CCAA). Employees find themselves in a precarious situation, often classified as unsecured creditors in these legal proceedings. This classification usually means that employees receive only a portion of their owed severance pay and benefits—if they receive anything at all—after secured creditors have been paid. The issue underscores the need for a reexamination of bankruptcy laws to better protect employees who, through no fault of their own, can lose significant financial security when businesses fail. Additionally, unions and labor advocates are increasingly calling for legislative reforms to ensure fair treatment and financial protection for employees caught in the crossfire of corporate insolvency.
