Employees' rights when employer is bankrupt

In the last few months I have been receiving more and more calls from employees inquiring as to what their rights are when their employer goes bankrupt or into receivership. Unfortunately, these are very frustrating discussions because almost all the news I have to give them is bad.
The sad reality is that there are no laws giving any special protection to employees looking for a severance package as a result of losing their jobs when the company fails.
I recently talked to an employee who had been happily working away for over 23 years when the staff was suddenly gathered together one afternoon and told to go home, they were out of work forever. There is some protection for employees for outstanding wages and vacation pay up to the date they are sent home. The reason that the companies always make sure those monies are paid out in a bankruptcy is because the directors of the company are personally liable for unpaid wages and vacation pay. For that reason, the powers that be tend to make sure that that bill, out of all the unpaid ones, is covered.
When it comes to a severance package, however, the employees stand in line behind the secured creditors. Anyone the company owes money to is a creditor. Secured creditors are usually banks or companies that have leased equipment the employer uses. They have a written agreement that if the company fails they own certain assets and accounts receivable. They can simply walk in and seize those assets and get whatever money they can out of selling them.
If there is anything left over after the secured creditors have taken care of their interests, all the other creditors share the remainder out between them. Employees have no better a claim to that leftover money than the office cleaning contractor whose bills are unpaid or the company who fixes the photocopier.
There is rarely any point in hiring a lawyer in this situation. If you have unpaid wages or vacation pay you can simply file a claim for free with the Employment Standards Branch of the Ministry of Labour. They will collect the money for no cost.
Any time a company goes bankrupt or into receivership, some sort of trustee is appointed. Employees should find out who that trustee is and get a copy of the forms that they are in charge of giving out so the employee can register their claim. The employee basically fills out a form and calculates how much pay in lieu of notice they think that they were entitled to. Always claim more than a court would give because the trustee will usually try to negotiate you down. Might as well start high. Of course, if there is no money left after the secured creditors have taken their piece of the pie, or the whole pie, whether or not you fill out these forms will make no difference.
The reality is that when companies go bankrupt, it is usually because things are bad, very bad. In most cases, there is nothing left after the secured creditors are done with the assets. Too often, employees get nothing or a small percentage of their actual entitlement.
It always strikes me as unfair that employees have to stand second in line to secured creditors. Those secured creditors are usually large, sophisticated institutions like banks who have the ability to analyze the company’s strengths and weaknesses and to monitor their profits and cash flow. Arguably, if they have ended up in a situation where they are going to lose money on a loan, it is because they didn’t do their homework.
Employees have no standing or ability to walk into the boss’s office to check on the financial stability of the company. They render their labour on credit in good faith that their interests are protected.
Unfortunately, I can rail for as long as I like against this injustice but the likelihood of things changing is remote. The best advice I can give to an employee who suspects their employer is in deep financial trouble is to polish up their resume and start looking for work. That’s not justice but it is good common sense.
 As published in the Hamilton Spectator, September 13, 2008
Ed Canning
Ed Canning
P: 905.572.5809