Sometimes business will inevitably experience financial hardships. The employment lawyers at Zeilikman Law get frequent questions from employees about their employments rights when their employer is shutting down their business and closing the workplace. This blog seeks to answer some common employment law questions about when businesses permanently shut down.

Is the employee laid off? Are they owed any termination or severance pay?

The employee is probably not laid off as the business is permanently shut down and, as such, the employee was dismissed and owed termination and / or severance pay. If the employer simply tells the employee that they have no more work for them to do for whatever reason including financial reasons while the business remains operational, then the employee may have been “laid off.” However, absent an enforceable contractual term in the employee’s employment contract or agreement, an employer cannot simply tell an employee that there is no more work for them to do in the present and so maybe at a certain date in the future, the employee should be able to continue with their job once the employer has more work. In this situation the “layoff” is a dismissal, and as such, the employee is entitled to both statutory and potentially common law entitlements upon that dismissal. If the “layoff” is unlawful, the employee would still be entitled to termination and, possibly, severance pay regardless of their common law entitlements.

Termination Pay

Termination pay is monetary compensation paid to a dismissed employee in lieu of notice of the termination. Sometimes the employer will provide no notice to the employee or less notice than what the employee should have received from the employer. In those cases, the employer will need to pay the employee termination pay.

The Employment Standards Act, 2000 (“ESA”) sets out what an employee’s minimum notice period should be. The ESA entitlements to notice are minimum entitlements as the notice period set out under the ESA is based only on how long the employee has been working for the employer (one week of notice for every year that the employee has worked for the employer up to eight weeks). An employee may be entitled to a significantly longer notice period under the common law.

Severance Pay

Termination pay and severance pay are not the same thing, and these two terms are commonly interchanged erroneously or simply are confused with each other. An employee is only entitled to severance pay upon dismissal if they meet certain criteria that are set out in the ESA. Under the ESA, the employee must have worked for the employer for five (5) or more years and the employer must have a payroll of at least $2.5 million. An employee may also be entitled to severance pay if the employee was subjected to a mass termination in accordance with the ESA. If those criteria are not met, then the employee will not be able to obtain “severance pay.”

Notice under the Common Law

As set out above, a dismissed employee may be entitled to a significantly longer notice period under the common law. For instance, depending on the individual nature of the case, a wrongfully dismissed employee who was terminated without cause may be entitled to over 24 months of common law notice. The amount of common law notice is determined by using a variety of factors. These factors include:

• the employee’s age;
• length of service;
• character of employment (such as the employee’s job description or position); and
• the availability of similar employment, having regard to the experience, training and qualifications of the employee.

However, an employment contract or employment agreement may have a termination clause that limits a dismissed employee’s right to notice to the minimum entitlements under the ESA. It is important that a dismissed employee contact an employment lawyer so that the lawyer can review the employment contract for the employee to see what the employee is entitled to upon termination

What happens if the employer sold the business?

The implications of continuity of employment is a vital consideration when an employer sells the employer’s business to another entity. Under section 9 of Ontario’s ESA the employment of an employee is deemed not to have been terminated or severed if an employer sells a business. The employment, including the length of employment of the employee, will be deemed to be with the purchaser of the business. As such, the purchaser will owe the employee all the same (and/or equivalent) obligations the employee was originally entitled to with the seller.

However, the ESA includes exceptions to the above-noted principle including the following:

• if the day on which the purchaser hires the employee is more than 13 weeks after the earlier of his or her last day of employment with the seller and the day of the sale” (ESA section 9(2);
• if the employee was terminated prior to the close of sale of the business; and
• if the ESA does not apply to the employer and or if the sale is per federal jurisdiction to provincial jurisdiction or vice versa.

Finally, the sale of a business is treated somewhat differently under the common law depending on the nature of the sale. For instance, in a sale of the business which involves the sale of shares, the legal identity of the employer will typically remain the same. Whereas, in an asset sale, the legal identity of the employer will typically change thereby technically bringing an end to the employment relationship in the eyes of the common law. However, courts have found ways to deal with various scenarios in an effort to maximize employee entitlements in the fairest way possible.

What happens if the business goes bankrupt?

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. Canada’s Bankruptcy and Insolvency Act,1985 (“BIA”) is the legislation that sets out how companies are to act and what steps they are to take when the company is deemed to be bankrupt.

Under Canada’s BIA, 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 after the bankrupt company’s funds are first paid out to secured creditors. In consequence, employees with a claim for wrongful dismissal following their termination because the employer has shut down the company 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 for wrongful dismissal in order to try to seek out termination or severance pay by a terminated employee. 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.

How can Zeilikman Law help?

If an employee has questions because their employer is shutting down the business due to bankruptcy or because they have sold the business to another the employee should reach out to Zeilikman Law and request a confidential consultation with one of our employment lawyers. Not reaching out to an employment lawyer may result in the employee failing to obtain their full legal entitlements to things like severance or termination pay when their employer shuts down or sells the business.

For further information, please review our blogs:

• Layoffs and Bankruptcy in the Canadian Retail Industry
• Mass Layoffs and Terminations in the Tech Industry
• Buyer Beware: What are your obligations to employees when purchasing a business?

Zeilikman Law can be contacted at (905) 417-2227 or online here to schedule your own confidential consultation with one of our employment lawyers.