recent arbitration decision (PDF - available in French only) involving the director of a bankrupt corporation serves as a reminder that directors of a corporation can be personally liable for unpaid wages, notice of termination and vacation pay owed to employees.

The Facts

The employer, Exeltech Canada Inc. ("Exeltech"), was federally regulated and employed over 570 employees in the business of aircraft mechanical certification and maintenance. Exeltech went bankrupt. An investigation was subsequently commenced under Part III of the Canada Labour Code ("Code") in order to establish amounts owed but unpaid to employees in accordance with Section 251.18 of the Code. That Section provides that the directors of a corporation are jointly and severally liable for up to six months of wages and other amounts to which employees are entitled under the Code (i.e. vacation pay, notice of termination, severance) where the recovery of the amounts from the corporation is impossible or unlikely.

The investigation established that $ 1,742,380.69 was owed to employees. Since no amounts were recovered under the bankruptcy proceedings, an order to pay this amount was issued against the director personally. The director appealed.

On appeal, the amount was reduced by more than half, to $ 642,370.69. Indeed the arbitrator held that amounts paid to employees under the Wage Earner Protection Program ("WEPP") needed to be subtracted from the payment order against the director.

The WEPP is a federal program that allows employees of an employer who declared bankruptcy or became subject to a receivership under the Bankruptcy and Insolvency Act, to be reimbursed for up to 4 weeks of insurable earnings, for amounts owed by their employer.

In this matter, $ 1,078,054 had been paid to employees under the WEPP. This amount was consequently deducted from the order of payment against the director.

Although to a certain extent this may appear to be good news for directors, the federal government has a subrogated claim against the directors and may institute separate proceedings to recover amounts it paid under the WEPP.

Lessons For Employers

Most, if not all, jurisdictions in Canada provide by statute that the directors of a corporation may be personally liable for unpaid wages and other amounts in case of the corporation's bankruptcy or receivership.

Although employees can obtain payment under programs such as the WEPP for unpaid wages and other amounts owed (up to the maximum allowable amount), this does not absolve the directors from personal liability.

Directors of a corporation are well advised to ensure that their director liability insurance coverage is sufficient to cover potential claims. They should also seek legal counsel should the circumstances warrant.