On November 20, 2021, long-awaited changes to the Wage Earner Protection Program (“PPP“) came into force. The amendments are a welcome change to the PPS and will close some of the remaining gaps in the program designed to protect some of the most vulnerable stakeholders in an insolvency proceeding – employees.
The Wage Earner Protection Program
PPP is a federal program, enacted under the Wage Earner Protection Program ActSC 2005, c 47, as amended (“WEPPA“), aimed at protecting employee wages by making payments to employees when their employer initiates certain insolvency proceedings. While the Bankruptcy and Insolvency LawLRC 1985, c B-3as amended (the “BIA“) provides priority to employees under paragraph 136(1)(d), such priority is limited to the first $2,000 of unpaid wages only, and the priority does not apply to termination or departure provided for by law, nor to ordinary law compensation in lieu of notice.
However, in many cases, a terminated employee may find that the employer does not have enough assets to provide meaningful distributions, or none at all, due to an employee’s priority claim for unpaid wages, not to mention any severance pay, severance pay or other types of compensation. When WEPPA was introduced in 2005, the Government of Canada estimated that 10,000 to 15,000 workers per year had unpaid wage claims due to the bankruptcy of their employer.
The PPS helps protect these employees by providing a government-backed program that employees can access to receive payments, and which does not depend on the assets of the insolvent employer or the status of the insolvency proceedings (including some may take months and years before creditors receive distributions, if any). To date, WPP has paid approximately $473 million in wages to 161,000 Canadian workers. For 2021, the maximum amount an individual can claim is $7,579.
Changes are a welcome change
On November 20, 2021, certain changes made as part of Bill C-86, Budget Implementation Act, 2018, No. 2as good as Wage Earner Protection Program Act RegulationsSOR/2008-222 (the “Regulations“), entered into force (the “AmendmentsNote that Section 5 of the WEPPA, setting out the eligibility requirements of an employee, now includes circumstances where the insolvent employer is subject to proceedings under Section 1 , Part III of the BIA (Proposal Procedures) or under the Companies Creditors Arrangement Act (the “CCAA“),
AND a court essentially determines that the employer is ceasing its business activities (subsection 5(5) of the WEPPA and s. 3.2 of the Regulations).
Prior to these changes, only individuals whose employment was terminated as a result of or in bankruptcy or receivership proceedings were eligible to participate in the PPS. However, layoffs often occur in other insolvency restructuring proceedings where there is no bankruptcy or receivership, such as a BIA proposal or a CCAA proceeding (“Restructuring proceduresIn restructuring proceedings, although often seen as an effort to avoid the end of a business activity (i.e. restructuring the business so that it can continue), modern practice insolvency recognizes the value to stakeholders of enabling the use of restructuring proceedings to effect orderly liquidations and reductions of business activities in a manner that will result in better recoveries than would occur in a bankruptcy or traditional receivership.
Some of these “liquidating” restructuring procedures could take months or even years before the insolvent company is finally liquidated and filed for bankruptcy as a final administrative step. In such cases, an employee would be required to wait for the process to complete before gaining access to rights under the PPS. In some circumstances, insolvency professionals have found “workarounds” by appointing a receiver solely for the purpose of triggering requirements under WEPPA for the benefit of employees. However, “workarounds” are never ideal and are not always available.
The amendments now formally provide that any person may apply to the court in a restructuring proceeding to determine that the insolvent employer meets the criteria set out in s. 3.2 of the Rules. Currently, the criteria in the Regulations are limited to an employer “all of whose employees in Canada have been terminated, except those retained to terminate its business operations”. In other words, the availability of the PPS is limited to restructuring proceedings where there is an orderly liquidation and reduction of business activities.
The Amendments also make similar changes to allow employees to access the PPS in the event of a foreign insolvency proceeding recognized by Canadian courts. The changes also removed an offset designed to bring statutory deductions closer to payments made to eligible workers. In practice, this offset created economically inefficient administrative problems for Licensed Insolvency Trustees who administer WEPP payments and penalized employees who had already maximized their CPP and EI premiums.
More changes to come?
The amendments are welcomed by many insolvency professionals and worker protection advocates and address inconsistencies in the PPS that prevented the PPS from achieving its purpose. The PPS now aims to provide timely payments to more workers negatively impacted by insolvency proceedings, which will provide relief to those most vulnerable to sudden and unexpected interruptions in earnings.
However, the amendments do not make the PPS available to employees who have been terminated by an employer engaged in traditional restructuring proceedings and trying to avoid bankruptcy. This is likely because in a traditional restructuring proceeding the company would have to present a proposal or plan of arrangement on which all creditors and employees will have the opportunity to vote, which should provide a better form of recovery than in a bankruptcy. Explanatory Notes to Regulations Amending the Wage Earner Protection Program Regulations, SOR/2021-196 simply state that the extension of the PPS to non-liquidating restructuring proceedings has not been pursued because the PPS is designed to cover only the bankruptcy or receivership scenario, and not to cover all forms of corporate restructurings. companies.
Unfortunately, given the time that a restructuring process and the execution of a proposal or plan of arrangement can take, the unavailability of the PPS in these circumstances may deter employees from supporting a proposal or plan. restructuring in order to force a bankruptcy so that they can have faster access to funds under the PPS. Also, while there is automatic bankruptcy in the event that a Section 1 proposal is not approved by creditors, the same is not true for CCAA Plans of Arrangement. . Although unlikely, it remains possible that after the failure of a restructuring procedure under the CCAA, the company will not go bankrupt or go into receivership.
It remains to be seen whether the PPS will be extended to cover these other restructuring procedures or not. Until then, in appropriate circumstances, insolvency professionals may need to continue to resort to “workarounds”, such as appointing a receiver for WEPPA purposes.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.