Osgoode Labour & Employment Law Society

Introduction

Even though the Office of the Superintendent of Bankruptcy Canada claims business insolvencies are at their lowest levels since January, 1987 (466), it seems the wrath of the recession isn’t over yet:  Auto-parts manufacturer Maxtech has ceased production in Waterloo, closing all its plants, just as Progressive Mouldings did in Vaughn over a year ago.

The difference between Progressive Mouldings and Maxtech?  Maxtech’s employees can make claims for unpaid termination/severance pay under  recently-amended Wage Earner Protection Program Act.  A year ago, those workers Progressive Mouldings were SOL, so what happened?

Background on WEPPA 1.0

The Wage Earner Protection Program Act (“WEPPA“) was introduced by the Federal Government in 2005, but did not come into force until July 7, 2008.  The purpose of WEPPA is to provide employees whose employment is terminated as a result of business insolvency with a priority claim for unpaid wages.  Accordingly, the Bankruptcy and Insolvency Act was amended to allow employees with a secured claim for up to $2,000 in respect of unpaid wages.

Under WEPPA, an eligible employee is permitted to claim a maximum of $3,254 from the Wage Earners Protection Program.  An employee is eligible so long as he/she is not a manager/officer/director of the employer, and the employee is owed wages for a six month period immediately preceding the business insolvency.  In return for a payment from the Wage Earners Protection Program, the Minister of Labour is allowed to subrogate the employee’s secured claim on the employer’s assets for $2,000 in respect of unpaid wages.

Where Did WEPPA 1.0 Go Wrong?

The main problem with WEPPA 1.0, which the case of Progressive Mouldings unfortunately demonstrates, is that termination/severance pay was not included in the definition of “wages”.  Under WEPPA 1.0, “wages” was defined to include salaries, commissions, vacation pay, gratuities, and for travelling salespeople, disbursements of travel expenses – termination/severance pay was expressly excluded.

The omission/termination pay from WEPPA 1.0 was glaring.  Since corporate directors are personally liable for unpaid wages, employers typically become insolvent on the date in which the firm can no longer pay its liabilities (including employee wages).  However since termination/severance pay received no priority or security under WEPPA 1.0, in the event of insolvency employees, though paid for wages worked, were left with no recourse for their statutory entitlements.  The end result was that WEPPA 1.0 was highly ineffectual.

Enter WEPPA 2.0

WEPPA 2.0, as we’ll call it, is quite a bit more expansive than the original WEPPA 1.0 scheme.  The principal change?  Expansion of “wages” to include termination/severance pay and amounts earned by the employee for the benefit of a third party.

Termination/Severance Pay

The 2009 Federal Budget rectified WEPPA’s shortcomings by amending the Act to include payment of termination/severance pay to eligible employees.  Note however that the maximum amount was not increased and still remains at $3,254, and that this amount is not only taxable, but also reportable (and possibly deductible) from EI.

Judicial Expansion of “Wages”

WEPPA’s scope was further broadened by the BC Supreme Court in Ted Leroy Trucking Ltd., which held that “wages” not only included amounts paid directly to an employee (e.g. compensation), but also included amounts paid from the employee’s earnings to a third party for the employee’s benefit (e.g. union dues, benefit premiums).

In Ted Leroy Trucking, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Unit (“the Union”) brought an application on behalf of employees, claiming all liabilities arising out of the collective agreement between the Union and the employer ought to be covered by WEPPA.  At issue was the payment of union dues, which had been rejected by the employer’s receiver, PriceWaterhouseCoopers.

The court held that like under bankruptcy legislation, “wages” under WEPPA ought to be interpreted broadly to include all amounts earned by an employee, regardless of to whom it was ultimately directed.  This meant holiday and overtime pay, benefit premiums, and union dues were captured by “wages”, as “they are clearly returns given by an employer to or for the benefit of the employee for services given by the employee”.

Where Does Canada Rank Internationally With WEPPA 2.0?

Although WEPPA 2.0 is much more effective than WEPPA 1.0, it’s worthwhile to review what other jurisdictions have done with respect to employee entitlements in the event of employer insolvency.

United States

In the United States, employees may make claims up to $4,300 for unpaid wages (which captures wages/salaries/commissions and vacation/severance/sick pay) earned within 90 days before an employer’s bankruptcy.  These claims are given preferred status and rank third among preferred creditors.

There are two problems with this scheme:  first, preferred creditor status offers limited protection, since few assets are typically left over after secured credits have recovered.  Secondly, although US legislation covers severance pay, most states utilize ‘employment-at-will’, meaning employees already had no statutory entitlement to severance pay.

United Kingdom

Under the Employment Rights Act 1996, the UK provides a National Insurance Fund which provides payment for outstanding employee entitlements.  Similar to WEPPA, if an employer becomes insolvent, employees can claim outstanding entitlements owing at termination.  Further, like under WEPPA, in such a case the Government subrogates the employee’s rights to recover against the insolvent employer.

However unlike WEPPA, the UK’s Fund is much more expansive, covering up to eight weeks’ unpaid wages, up to six weeks’ unused annual leave time, and up to twelve weeks’ pay in lieu of notice.  As of October 1, 2009, employees’ are limited to £380 per week on outstanding entitlements.

Australia

The General Employee Entitlements Redundancy Scheme (GEERS) provides employees who have been terminated as a result of bankruptcy with the following:

• up to three months unpaid wages for the period prior to the appointment of the insolvency practitioner (a receiver);
• unpaid annual leave;
• unpaid long service leave; and
• up to a maximum of five weeks unpaid pay in lieu of notice.

Depending on annual earnings, GEERS weekly payments vary from $1,441 to $2,076 per week.

Conclusion

While WEPPA 2.0, with its inclusion of termination/severance pay and amounts owed to third parties, is much more effective than WEPPA 1.0, Canada still has a long way to go to catch up to the UK and Australia in terms of protection of employee entitlements upon employer insolvency.  While WEPPA 2.0 offers much more than what’s offered in the US (no surprise), the maximum amount offered of $3,254, which is taxable and deductible from EI, pales in comparison to other jurisdictions.  Further, some have also voiced their concerns about the cost to receivers of administering WEPPA.

This all said, as the employees of Progressive Mouldings would likely tell the employees of Maxtech, “some of something is better than a lot of nothing!”