On December 14, 2007, Bill C-12 was given Royal Assent. The Bill involves a comprehensive reform of Canada’s insolvency system. A key component of these reforms was the creation of the Wage Earner Protection Program (WEPP). The WEPP provides statutory wage protection for workers when a) their employer becomes bankrupt or subject to a receivership, and b) their employment is terminated as a result.

Prior to the WEPP, such workers would have been considered preferred unsecured creditors and were at risk of losing wages earned in the weeks prior to the declaration of bankruptcy or receivership. Industry Canada asserts that under the previous insolvency regime, only 21% of the workers affected by a corporate bankruptcy or receivership received payment of their wage claims, and that those employees received, on average, a recovery of only 13 cents on the dollar. Others have questioned these statistics, as secured lenders often voluntarily agree to the payment of many wage claims.

The WEPP provides those workers with statutory assurance that, upon application to the Federal Government, they will receive unpaid wages and earned vacation pay for a maximum period equal to four (4) weeks of insurable earnings under the Employment Insurance Act (approximately $3,000). The Federal Government, which is the payor under the WEPP, then assumes the worker’s position as a preferred unsecured creditor and continues with the bankruptcy or receivership proceedings in their stead, leaving the worker free to pursue new employment without the burden of a fight for earned, unpaid wages.

From the perspective of an employer, the WEPP provides the comfort of having their employees taken care of, but also adds an additional dynamic to their bankruptcy or receivership proceedings in that the Federal Government becomes a subrogated unsecured creditor.

Who Qualifies for the WEPP?

The WEPP aims to provide increased protection to employees who are rendered unemployed by bankruptcy or receivership of their employer and who have unpaid wages and compensation at the time the bankruptcy or receivership is declared.

Not all individuals will qualify for payment through the WEPP. The following groups are not eligible to receive payment through the WEPP:

  1. individuals who were hired within the three-month period immediately prior to the bankruptcy or receivership;
  2. individuals who were officers or directors of the insolvent employer;
  3. individuals who had a controlling interest in the business of the insolvent employer;
  4. individuals who occupied a managerial position with the insolvent employer; or
  5. individuals who were not dealing at arms-length with the individuals listed in paragraphs b) through d) above.

It would also appear that the WEPP does not assist employees where a company is insolvent but there is no appointment of a receiver or trustee in bankruptcy. Two common examples where this would appear to be the case would be (i) where a business simply shuts down in the absence of such appointment, and (ii) where there are wage claims in the course of proceedings under the Companies’ Creditors Arrangement Act.

When Will the WEPP Begin?

The WEPP only applies in respect of bankruptcies or receiverships on or after the date on which the WEPP comes into force. As of January 16, 2008, no coming-into-force date had been announced. It is likely that the WEPP will not be in force for several months in order to allow the Federal Ministry of Human Resources and Social Development adequate time to set it up.

How does the WEPP Work?

Prior to the WEPP, many secured creditors voluntarily agreed to allow the debtor employer to satisfy outstanding wage claims ahead of their superior priority claims. In other instances, however, employees who found themselves out of pocket in the wake of a corporate bankruptcy or receivership were on their own to determine how much they were owed and how they should go about recouping their losses. There was no positive obligation on the employer, the trustee in bankruptcy, receiver, or any other involved insolvency professional in such cases to assist them in that regard. The WEPP has addressed these practical concerns in the following ways.

Under the WEPP, the employee may apply to the Federal Government for arrears of wages and compensation earned within the six-month period immediately prior to the bankruptcy or receivership. The claim can be for up to $3,000 or four (4) weeks of insurable earnings under the Employment Insurance Act, net of taxes. The definition of "wages" for the purposes of the WEPP includes salaries, commissions, compensation for services rendered, vacation pay and any other amounts prescribed by regulation, but does not include severance or termination pay.

The employee assigns their claim to the Federal Government to pursue as against the insolvent employer.

The WEPP also requires that the trustee in bankruptcy or receiver proactively assist the employee by attempting to determine the value of their wage and/or compensation entitlement, and by informing them of their rights and entitlements under the WEPP. Specifically, the legislation requires that the trustee in bankruptcy or receiver exercise due diligence to do the following:

  1. identify all employees who are owed wages and compensation within six months of the declaration of bankruptcy or receivership;
  2. determine the amount of wages and compensation owing to each individual in respect of those six months;
  3. inform each affected employee about the WEPP and the conditions under which payments may be made;
  4. provide the designated Minister with information about which employees are affected and the amount of wages and compensation they are each owed under the WEPP; and
  5. inform the designated Minister once they have been discharged from their duties as trustee or receiver.

Impact of the WEPP

The substantial shift in the amount and kind of information provided to employees, paired with the relative speed with which employees should be able to obtain reimbursement through the WEPP, could have a significant impact on the number of wage and/or compensation based claims facing a trustee in bankruptcy or a receiver. However, the WEPP may compel many participants in the insolvency process to avoid bankruptcy or receivership proceedings because of the new administrative obligations imposed on trustees in bankruptcy and receivers.