June 24, 2025
When a Canadian company faces insolvency or bankruptcy, employees can face sudden job loss, uncertainty about owed wages, and confusion about their legal rights. This post discusses the laws governing employee rights during corporate insolvency or bankruptcy in Canada, and the protections available to employees.
Legal Framework: Bankruptcy and Insolvency in Canada
Canada’s insolvency regime is governed primarily by two federal statutes:
- The Bankruptcy and Insolvency Act (BIA) – Applies to companies of all sizes that are unable to meet their financial obligations.
- The Companies’ Creditors Arrangement Act (CCAA) – Applies to larger companies seeking to restructure rather than liquidate.
Under both laws, once a company enters bankruptcy or CCAA protection, a court-appointed Licensed Insolvency Trustee takes control of the company’s assets. These assets are then sold or distributed to benefit creditors in a specific order of priority.
What Happens to Employees?
In most bankruptcy cases, employment is terminated immediately. Employees are not entitled to advance notice or pay in lieu of notice unless the company continues operations under CCAA protection. Even then, employment is often precarious and subject to court approval.
Employees become unsecured creditors for any unpaid wages, vacation pay, severance, or termination pay; with some limited exceptions. This places them behind secured creditors (such as banks with collateral) in the order of repayment for the majority of what is owed. As a result, employees often recover only a fraction of what they are owed—if anything at all.
Corporate directors can be held personally liable for certain unpaid employee wages when a company becomes insolvent or bankrupt. Under federal and provincial laws—including the Canada Business Corporations Act (CBCA), BIA, and various provincial employment standards and corporate organization laws, directors may be required to personally pay up to six months of unpaid wages and twelve months of vacation pay if the company fails to meet its obligations to make those payments. This liability typically arises only after employees have attempted to recover the wages from the corporation and have been unsuccessful, such as in cases of bankruptcy or receivership. Directors are not usually liable for severance, bonuses, or commissions unless these qualify as “wages” under applicable legislation.
To enforce against directors personally, employees must act within a limited time frame, sometimes within six months of termination. This personal exposure underlines the importance of directors maintaining detailed oversight of payroll obligations.
Wage Earner Protection Program (WEPP)
To mitigate the impacts of bankruptcy on workers, the federal government offers the Wage Earner Protection Program (WEPP). This program provides limited compensation to employees who lose their jobs due to employer bankruptcy or receivership.
Key Features of WEPP (as of 2025):
- Covers unpaid wages, vacation pay, severance, and termination pay.
- Maximum payout is $8,844.22 per employee.
- Employees must file a claim within 56 days of the bankruptcy or termination notice.
- Payments are made directly by the federal government, not the employer.
In addition to WEPP, employees may qualify to receive Employment Insurance following a termination of employment resulting from a bankruptcy or insolvency.
Limitations and Challenges
When a company is under CCAA protection, a stay of proceedings is issued. This means employees can’t sue the employer for unpaid wages or severance during the restructuring process. Legal action can only resume once the stay is lifted; generally after the majority of assets have been distributed and often too late to recover meaningful compensation.
Employees may also lose access to employer-sponsored pension plans and health benefits. In some cases, pension contributions made by employees are protected, but employer contributions may be lost if the plan is underfunded.
Unionized employees may have additional protections through collective agreements. However, these agreements can be overridden or renegotiated during insolvency proceedings. Non-unionized employees must rely solely on statutory protections and government programs.
If Your Employer is Facing Insolvency or Bankruptcy:
- Act Quickly – File a WEPP claim as soon as possible.
- Gather Documentation – Keep records of pay stubs, contracts, and termination notices.
- Consult a Lawyer – Carbert Waite’s Employment Lawyers can help navigate the claims process and assist in pursuing additional compensation.
- Monitor Proceedings – Stay informed about court filings and trustee updates.
Understanding your rights and acting quickly can make a critical difference in securing employee compensation.
Author
Dylan Snowdon
Partner
T: 403.705.3632
E: [email protected]