Is an Employee Entitled to Severance if the Employer Files for Bankruptcy?
Over the COVID-19 pandemic, many Canadian businesses were given government assistance and subsidies in an effort to support struggling businesses through those difficult times. As we see the impacts of the pandemic waning, some businesses have struggled to cope with the post-pandemic market and lessening government assistance. What does this mean for employees? Will an employee be entitled to severance if the employer files for bankruptcy?
If an employer is too far in debt to save itself or go through a receivership, it may be forced to file for bankruptcy. This can be an incredibly stressful time for employees, who have now lost their jobs and face uncertain prospects for recovering severance payments. Some employees may even be owed unpaid wages that accrued prior to the bankruptcy as well.
Bankruptcy does not excuse employers from paying severance and unpaid wages owed to employees. However, the reality may not be very pleasant for employees in these circumstances. An employee becomes an unsecured creditor to its bankrupt employer, and must get in line behind other creditors, such as taxes owed to the government and debts held by secured creditors like banks.
Secured creditors are those who have lent money against specific collateral. If the company defaults or goes bankrupt, these lenders have a legal right to seize and sell the collateral to recover their money before anyone else. Employees are considered unsecured creditors. This means they have no such security interest in the company’s assets, meaning that they are much further down the list when it comes to distributing what’s left once the secured debts have been settled.
In cases where an employer files for bankruptcy, employees are often left unsure about how to receive payment for vacation pay, termination pay, shift premiums, and other forms of compensation related to their employment. While legal entitlements do not disappear, collecting them may require filing a proof of claim and navigating complex insolvency procedures.
The federal government has put some protections in place for employees in these circumstances.
The Wage Earner Protection Program (WEPP)
The Wage Earner Protection Program (WEPP) assists employees who worked for bankrupt companies and are owed outstanding wages. WEPP will pay a limited amount of unpaid wages to the date of the bankruptcy or receivership. As of 2025, employees who qualify for WEPP could earn up to $8,844.22 for any termination and severance pay owed by the employer..
There are important timelines to remember for the WEPP payment program, so employees should be sure to speak with an employment lawyer as soon as possible to understand their rights and obligations.
What are the Rules for Severance Pay in Canada?
In Canada, severance pay rules vary by province, but under federal and provincial employment standards legislation, eligible employees may be entitled to severance based on length of service, age, role, and other factors. In addition to minimum standards, many employees may be entitled to more under common law.
In Ontario, the Employment Standards Act (ESA) entitles employees to severance pay if they have been employed for at least five years and their employer has a payroll of $2.5 million or more, or if 50 or more employees are terminated within a six-month period due to a business closure. ESA severance pay is calculated as one week of pay per year of service, up to a maximum of 26 weeks. However, employees may be entitled to significantly more under common law, depending on their specific circumstances.
How Are Employee Claims Prioritized When an Employer Files for Bankruptcy?
In a bankruptcy or insolvency situation, the order in which creditors are paid is governed by the Bankruptcy and Insolvency Act (BIA) and depends on the type of claim. Secured creditors—such as banks or lenders—hold a legal interest in specific assets, and they are first in line to be repaid through the proceeds from the sale of those assets. After secured claims are addressed, priority claims (also known as preferred claims) are next. This category includes employees owed unpaid wages for services rendered, vacation pay, and termination pay up to a statutory maximum, as well as the federal government for unpaid tax withholdings. These priority claims are protected under the law and take precedence over general unsecured debts.
Because these claims are subject to strict eligibility period timelines and procedural requirements, it’s important to speak with an employment lawyer to ensure your rights are protected and your claim is properly filed.
Do You Have to Pay Severance if You Close Your Business?
If a business closes and terminates employees, severance pay and termination pay may still be required, depending on the circumstances and applicable legislation. Even if a company is insolvent, employees may still be entitled to compensation under the ESA or Wage Earner Protection Program if the employer files for bankruptcy.
What Assets Cannot Be Seized in Bankruptcies?
In a personal or business bankruptcy, certain assets may be exempt depending on the province and type of bankruptcy. Common exemptions include basic household furnishings, tools of the trade, pensions, and in some cases, a portion of home equity. These exemptions do not apply to employee claims for owed wages or severance pay.
Can Creditors Go After Personal Assets?
Generally, creditors cannot pursue personal assets of corporate shareholders unless there’s a personal guarantee, fraud, or evidence of misconduct. Employees seeking unpaid wages or severance may be limited to what’s available through the business’s remaining assets or via WEPP, unless a court determines otherwise.
How Much Do You Pay Monthly for Bankruptcies?
Monthly payments in a bankruptcy depend on the individual’s or company’s income, debts, and arrangements with a trustee. These payments are unrelated to employee claims, which are typically handled through the estate distribution process. Employees should file a proof of claim to pursue severance or termination pay.
Defence for Your Workplace Rights
If you or someone you know is dealing with an employer’s bankruptcy, it is important to speak with an experienced employment lawyer to understand your workplace rights. The experienced employment lawyers Whitten & Lublin are happy to provide insight and advice into your specific circumstances. Bankruptcy and insolvency laws can complicate how and when you receive the severance or termination pay you may be owed by your former employer—but you are not without options.
If you are looking for employment lawyers and would like more information about what Whitten & Lublin can do for you, please contact us online or by phone at (416) 640 2667
Author: Rachel Patten