Monday, March 09, 2009

If Your Company Goes Belly Up, Will You Get Paid?

A friend of mine, Mary, works for the Citigroup. She was talking about the fear that their stock was down to less then $1, and she wondered if the place went belly up what would happen to her unpaid salary, and vacation pay.

This is a very difficult question to answer, as it could get very technical. However there are a few basic rules that I will explain. It is important to state that every situation is different, and this is a general representation. I will explain a very basic Canadian and US perspective.

In Canada bankruptcy's are governed by the Bankruptcy and Insolvency Act. If you go to work and see a note saying company is closed, do you get all your wages?

The answer is it depends.

Wages are protected by the Wage Earner Protection Program Act. This is called WEPP by Service Canada. If you have been terminated as a direct result of bankruptcy then you can make a claim for wages to a maximum of either $3000, or 4 weeks of insurable (EI) earnings, which is about $3250, minus deductions.

There are a few exceptions, such as if you had been an officer, controller, or senior manager that was effectively in control of the company. Additionally if you don't apply withing 56 days of the bankruptcy your claim will be rejected.

The WEPP will NOT cover severance or other contractual agreement. This only covers wages and unpaid vacation to the maximum as shown above.

Effectively the government guarantees payment of up to the maximum. To make a claim I suggest you go to the Service Canada website for WEPP. You can actually make your claim online.

For the U.S. I had a Bankruptcy Lawyer friend of mine explain the US position. His name is Dustin Owens and he is a practicing Lawyer in Northern California. is his site. He can be contacted via email at dustin[@] For his spam safety I added the square brackets in his email address. Just remove them before you email

Paraphrasing Dustin: Companies will either file for Chapter 11 (restructuring to keep the creditors at bay) or Chapter 7 (complete liquidation). When they file for Chapter 11, they have an obligation to pay their ongoing expenses. This includes wages, benefits, commissions, vacation, sick pay, retirement contributions, etc. for work done after the filing. If they don't pay them, they may be found in violation of the bankruptcy laws and be forced into liquidation.
In other words, failing to pay wages when in a Chapter 11 protection could force the company to be wound up and sold.

If there are wages owed prior to the company asking for Bankruptcy protection (this is called filing a petition), employees have priority for those wages up to almost $11,000. Priority means that they will be paid before almost any other creditors. Anything over the $11,000 would not have priority and may or may not be paid. Like the Canadian position, officers, directors, and people who are in charge of the company, and therefor deemed responsible for the financial mess, do not benefit from this.

Bankruptcy is a complex beast, and while employees are not going to walk away risk free, there are some basic protections available. I strongly suggest that you invest in $15 or $30 and talk to a lawyer at the link provided, if your company is going "under". An ounce of protection is worth a pound of cure.

If you do have bankruptcy or employment legal question, and need to speak to a lawyer, click HERE. Lawyers are online, and can answer your question within minutes for as little as $15.

Copyright © 2009 Peter MacSweeney.
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  1. Good advice. FYI, The Wage Earner Protection Program Act is undergoing some amendments in the new Federal Budget to include severance and termination pay subject to the current maximum. at pg 99 of the pdf.

    Also interesting is that the Wage Earner Protection Act is not actually in force (though people can still make claims under the program, it appears that the government cannot subrogate their claims against the bankrupt entity unless it declares the Act in force).

    Also of note is that Directors of a company may be personally liable for employees wages in certain circumstances - see the OBCA or CBCA as an example, or see the following website for an executive summary:

    Hope Mary is doing well, love the blog.

  2. Great points! Certainly will be worth a follow up if the budget gets passed. I am glad you like the blog.

    Best Regards




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