Business insolvencies rose by 41.4 percent last year
Insolvencies are a “huge issue” for employees, says Chantel Goldsmith, a partner at Samfiru Tumarkin LLP who practises employment law. That is because when companies file for bankruptcy, or for creditor protection under the Companies' Creditors Arrangement Act (CCAA), a company’s workers are unsecured creditors, and secured creditors get paid first.
“They have to fall in line with all the rest of them. If there's something left for them at the end of the day, there is. But if not, then they're not entitled to anything further.”
“An employee is entitled to severance package, if they lose their job when the employee declares bankruptcy. However, they may only get a fraction of what would be owed to them because they would be considered an unsecured creditor.”
Insolvencies typically result in employment disputes, especially if there are long-term employees involved, she says.
Over the last couple of years, Canada has experienced a significant rise in insolvencies.
According to the Office of the Superintendent of Bankruptcy, there were 41.4 percent more business insolvencies in 2023 than 2022. The hardest hit industries were accommodation, food services, retail trade, and construction. A total of 4,810 businesses filed for insolvency in Canada last year.
Employees impacted by their employer’s insolvency have access to the federal government’s Wage Earners Protection Program. But Goldsmith says the program provides a “minimal” amount. It is good for short-term employees because they can recover unpaid wages, vacation pay, and severance. But for long-term employees, the amount they can access under the program is “just a fraction” of what they would be entitled to under common law.
In 2017, during the bankruptcy of SEARS, Samfiru Tumarkin and its co-managing partner Lior Samfiru championed the Sears Act, legislation that would amend Canada’s bankruptcy laws to classify employees as secured creditors. However, the bill was never passed into law.
“We were trying to champion that because we're seeing this happen a lot where companies are going under, and I think we're going to see it more and more in the next few years,” says Goldsmith.
Bankruptcy proceedings also halt any litigation in which the company is engaged. So, bankruptcy stymies employees suing their employer for wrongdoing.
If a company undergoes a restructuring under the CCAA, the employee’s rights may be altered, she says. There may be salary or benefit reductions, as the company attempts to shed costs in the restructuring.
In a restructuring, says Goldsmith, while the employee may then be able to argue that they are being constructively dismissed, it will be difficult to proceed against the company if they are already under creditor protection.
“It stops us as lawyers to do much for our clients when the employer files for bankruptcy. That's an unfortunate reality,” she says. “Usually, this means that employees are getting a fraction of what their actual true entitlements would be under the common law.”
