By: Stephanie McDonald and Baljinder (Bal) Singh Tiwana
When an employer goes bankrupt, employees often face immediate uncertainty about unpaid wages, severance, and their legal rights. Canadian bankruptcy law provides important protections for workers, but employees must act quickly and understand how the system works. Understanding how claims are prioritised, the Wage Earner Protection Program (WEPP), and how Employment Insurance (EI) operate, can make a meaningful difference.
What Bankruptcy Means for Employees
Bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act (BIA). When a company can no longer pay its debts, it may assign itself into bankruptcy. A Licensed Insolvency Trustee (LIT), an officer of the court, then takes control of the company’s assets and distributes them according to the BIA’s priority rules.
The trustee does not represent employees or the employer. Instead, the trustee must act impartially and follow the law for distributing funds.
How Employee Claims Rank in Bankruptcy
In most bankruptcies, employees rank as unsecured creditors because their wage and benefit claims are not secured by collateral. As a result, employees often recover little—or nothing—through the bankruptcy estate.
However, the BIA gives employees a limited advantage. The Act treats certain unpaid wages and vacation pay as preferred claims, up to a capped amount. Trustees must pay these preferred claims before paying other unsecured creditors. Any amount above the BIA limit becomes an ordinary unsecured claim.
Wage Earner Protection Program (WEPP)
The WEPP provides critical financial support when a bankrupt employer cannot pay employee wages. Administered by Service Canada, WEPP compensates (one-time payment) eligible employees for unpaid wages, vacation pay, termination pay, and severance, up to a capped amount.
In practice, WEPP often provides the most meaningful recovery for employees when bankruptcy estate assets are insufficient. Employees should apply as soon as possible, as strict timelines apply.
Filing a Proof of Claim
Employees must file a Proof of Claim (Form 31) with the LIT to participate in any distribution from the bankruptcy estate. The form requires employees to state how much the employer owes and to explain the basis of the claim.
The trustee reviews the claim and determines its validity. Employees who fail to file a proof of claim, risk losing any entitlement to a distribution, even if funds become available. Timely filing is there essential.
Receiving EI and WEPP at the Same Time
Employees may receive both Employment Insurance (EI) benefits and WEPP payments, provided they meet eligibility requirements. Employees must report any WEPP funds to Service Canada, as these payments may affect EI benefit calculations.
Conclusion
An employer’s bankruptcy can create significant financial stress, but the law offers important protections. Priority wage claims, WEPP payments, and EI benefits can help bridge the gap after losing a job. Employees who understand their rights and act quickly place themselves in the best position to recover what the law permits.
If you have questions about employee rights in bankruptcy or need assistance navigating a claim, Workplace Sage Legal can help ensure your interests are protected. Book a consultation today.
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While reasonable efforts have been made to ensure the accuracy of the content provided, it does not constitute legal advice. Prior to relying on any aspect of this article, you should consult with a suitably qualified legal professional promptly in your relevant jurisdiction, to obtain advice tailored to your individual circumstances
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