The recent news that Harvey Weinstein’s company is filing for bankruptcy raises the issue of what impact such an event will have upon employees’ claims. The short answer is that this is a disaster.
Once a company goes bust, a trustee is appointed to manage the assets, usually in an attempt to liquidate or sell them. An employee does have a preferred claim for unpaid wages which comes in priority to any secured claims such as a mortgage or other security given to a bank or lender. This is modest in the sum of $5,000 and again only applies to unpaid wages.
Directors of the company are also responsible for unpaid wages to a cap of 6 months. This includes unpaid vacation pay as well as unpaid earnings. This complaint can be enforced by the Ministry of Labour.
Tort Claims – Civil Wrongs
There may also be civil claims made against the directors personally but this is unusual. The party suing must generally show deliberate and intentional wrongdoing on the part of the director. The good news is that often these persons have liability insurance to fund such cases when successful.
Trustee Rehires or Sells
Occasionally the trustee will continue the business as an ongoing concern and will ask the employees to continue with it. This is considered new employment and is usually governed by a tight employment contract. Sometimes the trustee will sell the assets of the business to a new buyer who may also elect to hire certain employees. If no new contract is then signed, there will be a continuum of employment which is helpful on a later termination to determine the length of employment.
Apart from the above, the bankruptcy of the employer will extinguish all claims. This is a gross overstatement. A claim, for example, by a fired employee, even before the insolvency, will be “assessed” by the trustee to be of a certain value. If there are funds received by it over and above the secured debt, a rarity, the claim will be allowed on a prorated basis. If the claim, for example, is valued at $10,000 and there is $100,000 of total proven unpaid claims, 10% of the available surplus will be paid. There is usually no need to hold your breath for this.
As discussed in a recent post, directors may be jailed for the failure to pay wages, a term which includes vacation pay and statutory notice or severance. It is prudent to keep such payroll items current.
An employee bringing a claim against a company where there is a risk of insolvency would be wise to settle for whatever cash is available. Many companies use this threat unfairly as an incentive to settle.
If you are an employee who is owed wages or an employer seeking to determine your obligations to employees while facing a possible claim for bankruptcy, you should seek legal advice immediately to determine your next steps. Toronto employment lawyers Grosman Gale Fletcher Hopkins regularly advise employees and employers on issues in the workplace. Contact us online or by phone at 416-364-9599 to schedule a consultation.
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