Termination payments upon bankruptcy: Who’s liable?

Directors and officers are on the hook for regular earned salary but severance payments may be harder for employees to get

An unfortunate reality in tough economic times is that numerous job losses and corporate bankruptcies are not uncommon. When a corporation declares bankruptcy leaving employees out of a job, it raises the question of whether directors and officers of the corporation can be held personally liable in connection with severance or termination payments owing to the company’s employees. The answer to that question is not black and white, but instead turns on the nature of the payments owing to the employees.

There are three main categories of payments owing to terminated employees, each of which will receive different treatment in respect of director liability upon bankruptcy. The categories are: all pre-termination compensation and benefits and source deductions/payroll taxes, including employment insurance premiums, Canada Pension Plan payments, income tax, employer health tax and workers' compensation premiums; the termination package itself; and accrued vacation.

Current obligations

Unless and until an employee is terminated, the corporation must stay completely current for all compensation and benefits and all source deductions and payroll taxes. All of these payments carry potential director liability through various forms of legislation. Ontario’s Employment Standards Act, 2000, and Ontario’s Business Corporations Act (OBCA), for example, each impose liability on directors for unpaid amounts owing to an employee up to the date of termination — earned wages, earned but unpaid bonuses or commissions, accrued vacation, earned overtime and statutory holiday pay. The employee has to jump through some process hoops to obtain an order to pay — he must try to collect from the company first and is subject to other conditions of collection as well.

Under the OBCA, the maximum potential liability, per director, per employee is an amount equal to six months’ wages plus 12 months’ vacation pay plus interest.

Termination notice, severance and termination package obligations

There will be no director liability for statutory notice and severance payments under employment standards legislation, contractual termination payments, or common law reasonable notice. In respect of these amounts, employees can submit a claim to the provincial Trustee in Bankruptcy for any unpaid portion of their termination entitlements and must prove the claim in the usual way. The federal Bankruptcy and Insolvency Act provides some special protections to employees, under the federal Wage Earner Protection Program (see sidebar).

Leftover vacation obligations

Any vacation owing to employees upon termination is a director liability. Vacation owing will include all unused vacation pay accrued up to the termination, plus all vacation pay that would normally have accrued owing over his statutory notice period.

In order to avoid personal liability upon the bankruptcy of a corporation, directors and officers should ensure timely payment is made of all current obligations to employees, as well as all vacation owing.

Belinda Bain is a partner in Gowlings’ Toronto office, practicing in the area of advocacy. She can be reached at (416) 369-6174 or [email protected]

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Wage earner protection program

The Wage Earner Protection Program (WEPP) was developed by the federal government to protect workers when employers become bankrupt or are subject to receivership.

Under the WEPP, employees are entitled to a payment of up to $3,253 (four weeks of maximum insurable employment insurance earnings) from the federal government for unpaid wages, vacation pay, termination pay and severance pay the employee earned or became entitled to in the last six months before a bankruptcy or receivership. Non-wage benefits are not covered.

WEPP, which came into effect on July 8, 2008, did not originally cover termination pay or severance pay.It began to cover those entitlements on March 12, 2009, retroactive to Jan. 27, 2009, where they arose no more than six months prior to the date of bankruptcy or receivership.

Source: Service Canada

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