In March 2023, it was announced that Nordstrom Inc., an American-based luxury retailer, is closing 13 department stores and laying off 2,500 employees in Canada. Nordstrom had filed for creditor protection. And in February 2023, Bed Bath & Beyond, an American-based home goods retailer, also announced that it was going to close 65 locations and lay off 1,500 workers in Canada. Bed, Bath & Beyond had also filed for creditor protection.

So, what happens to reasonable notice or severance if bankruptcy is declared by the company?

It is not good news for employees. Generally speaking, bankruptcy laws allow a company’s assets to be liquidated and then these proceeds are paid out in an orderly fashion to the company’s creditors. The Bankruptcy and Insolvency Act is the legislation in Ontario that sets out how companies are to act and what steps they are to take when the company is deemed to be bankrupt.

Under the Act, creditors are divided into two types – the secured creditor and the unsecured creditor. Secured creditors are paid first out of the funds generated from the company’s liquidation of assets. An example of a secured creditor would be a bank. Then, if there are any funds left over, unsecured creditors will be paid.

Employees are generally unsecured creditors. As such, employees are normally paid last after funds are paid to secured creditors. So, employees with a claim for wrongful dismissal following their layoff and termination may have a very difficult time getting any money from a bankrupt company to pay for these damages subject to some minimal wage programs.

It may also be possible to sue a director of a bankrupt company directly under certain conditions. However, the process to do so is rather complex. Given the complexity of the process, it is best to approach an employment lawyer directly in order so that the lawyer may assist any employee who may have questions about bringing a claim against a director of a bankrupt company.

Regardless of the above, it is very import to approach an employment lawyer to determine your rights and what next steps the employee should take. Indeed, some such steps may even involve a referral to a bankruptcy lawyer. It may be that the company is in a grey area and not a total bankrupt. This can happen when the company may be insolvent in the imminent future and as a cost saving measure has attempted to “lay off” staff. In this case, the employee should be owed termination pay and severance.