Retention of key employees is a primary concern of any company that is seeking to survive a restructuring process as a viable operating business. The question is how to ensure that employee retention payments fairly balance the goal of retaining employees who are key to the restructuring against the financial impact on other stakeholders of the implementation of such a program. Beyond that, in the case of a cross-border restructuring, one must be aware of the difference between Canadian and US law on the issue of employee retention.
In the US, legislative provisions have been enacted specifically to restrict the use of Key Employee Retention Payments (“KERPs”) for “insiders” of the debtor. Insiders include directors, officers or persons in control of the debtor corporation, or any relatives of such persons. These US provisions were enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and were established in an effort to remedy perceived overuse of KERPs in such high-profile bankruptcies as Enron, WorldCom, K Mart Corporation and Global Crossing.
Like other corporate responsibility legislation that is the product of the Enron era, the US KERP legislation has created a highly impractical and onerous burden for employers seeking to implement KERPs for insiders, even for bona fide reasons. Employers are generally forced to resort to incentive-based retention plans (“key employee incentive plans” or “KEIPS”) for insiders in the US. As an example, US KERPs are only valid for insiders if the payments made thereunder are essential to the retention of an employee who has a bona fide higher-paying job offer. It is so unlikely that a key employee would meet the above criterion without actually leaving the current employer for such a bona fide higher-paying job that the US KERP legislation amounts in practice to a prohibition on KERPs.
Existing Canadian case law is clear that the restrictions on KERPs in the US are not applicable in Canada, where courts are willing to accept more flexible retention programs as long as they are focused on truly key employees (see Textron Financial Canada Ltd. v. Beta Ltée/Beta Brands Ltd.,  O.J. No. 3422 (Ont. S.C.J.)). Abuse is policed, among other means, through the involvement of the court-appointed monitor in all restructuring proceedings.
Debtors who have key employees in both the US and Canada must face the reality of extremely limited availability of KERPs in the US, coupled with availability as merited in Canada, but must also balance that against the reaction of their employees, who generally look at the bottom line rather than the requirements of the law. There is therefore a great incentive for creditors, when faced with the potential imposition of a KERP for insiders in Canada, to agree to a harmonized system of employee compensation for Canada and the US based on a KEIP model. The outcome can be mutually beneficial, as employees will be treated equally on both sides of the border and debtors will be able to reduce opposition to proposed programs.