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Canadian corporate directors may be liable for unpaid wages

accountingpaycycleA recent arbitration decision out of the province of Quebec (available in French only) involving the director of a bankrupt corporation serves as a reminder that directors can be personally liable for unpaid employee wages, notice of termination, and vacation pay.

Facts

The employer, Exeltech Canada Inc., was under Canada’s federal employment laws. It had over 570 employees, in the business of aircraft mechanical certification and maintenance. Exeltech went bankrupt. An investigation was subsequently begun under Part III of the Canada Labour Code in order to establish amounts owed but unpaid to employees.

Section 251.18 of the Code says that the directors of a corporation are jointly and severally liable for up to six months of wages and other employee entitlements under the Code (i.e., vacation pay, notice of termination, severance) where the recovery of the amounts from the corporation is impossible or unlikely.

The investigation established that $1,742,380.69 was owed to employees. Since no amounts were recovered under the bankruptcy proceedings, an order to pay this amount was issued against the director personally. The director appealed.

On appeal, the amount was reduced by more than half, to $642,370.69. Indeed, the arbitrator held that amounts paid to employees under the Wage Earner Protection Program (WEPP) needed to be subtracted from the payment order against the director.

The WEPP is a federal program that allows employees of an employer that declared bankruptcy or became subject to a receivership under the Bankruptcy and Insolvency Act to be reimbursed for up to four weeks of insurable earnings, for amounts owed by their employer.

In this matter, $1,078,054 had been paid to employees under the WEPP. This amount was consequently deducted from the order of payment against the director.

Although to a certain extent this may appear to be good news for directors, the federal government has a subrogated claim against the directors and may institute separate proceedings to recover amounts it paid under the WEPP.

Lessons for employers

Most, if not all, jurisdictions in Canada provide by statute that the directors of a corporation may be personally liable for unpaid wages and other amounts in case of the corporation’s bankruptcy or receivership.

Although employees can obtain payment under programs such as the WEPP for unpaid wages and other amounts owed (up to the maximum allowable amount), this does not absolve the directors from personal liability.

Directors of a corporation are well advised to ensure that their director liability insurance coverage is sufficient to cover potential claims. They should also seek legal counsel should the circumstances warrant.

by Louise Bechamp

This article was reprinted with permission from Northern Exposure, a blog written by lawyers in the Labour, Employment and Human Rights Group at the law firm of Fasken Martineau and produced in conjunction with HRHero.com. You can read more Northern Exposure blog posts at http://blogs.hrhero.com/northernexposure. You can also find Fasken’s weekly bulletin, “The H R Space” at http://www.fasken.com/en/the-hr-space. Fasken Martineau is one of the world’s leading international business law and litigation firms.

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