On July 15, 2011, several workers showed up to work as usual at IQT Solutions, only to be told that their employer had unexpectedly shut down its Canadian operations: three call centres, one in Ontario and two in Quebec. About 1,200 IQT employees were suddenly unemployed with no final paycheque, vacation pay or notice of termination.
IQT Solutions is a United States-based call centre that offers customer support services to a variety of companies in North America and Europe.
According to news coverage that developed after the shutdown, it was revealed that the City of Nashville, Tennessee, had granted IQT a US$1.6-million incentive to build a new 60,000-square-foot call centre and headquarters there to employ 900 locally. One of the conditions of receiving the grant was for IQT to explain to Nashville officials its business strategy in Canada. I guess instead of explaining their strategy to ensure the award of the grant they just decided to get rid of the “obstacle”. In addition to the abrupt shutdown of their Canadian operations, IQT Canada said they filed bankruptcy papers. However, a records search by government officials revealed no official filing of bankruptcy.
Due to the media coverage and social media attention on Facebook and Twitter, the City of Nashville has chosen to withdraw its $1.6 million promise to fund IQT Solutions’ new operation in Tennessee.
An official with the City of Nashville stated in the Nashville Post:
We are no longer in conversations with IQT regarding locating their operations here. We spoke with the company last night, and it appears unlikely IQT will move forward with its proposed operations in Nashville. We are disappointed these job opportunities won’t be available to Nashvillians, but it is important to point out that no incentive dollars were expended. We are dismayed about what happened in Canada and don’t think workers anywhere should be treated that way.
Both provincial labour ministries (Ontario and Quebec) are currently helping IQT’s former employees, investigating the circumstances and trying to recover the unpaid wages and grants paid out.
Many questions have been raised by human resources professionals and employers pertaining to the rights of IQT’s former employees, IQT's obligations toward these employees.
This is not the first time these questions have been asked, and it does raise some interesting legal, practical and ethical issues. According to statistics (2005) that were used to recently amend the Bankruptcy and Insolvency Act, every week in this country there are roughly 200 commercial bankruptcies, 1,000 bankruptcies a month, and roughly 10,000 bankruptcies per year, many of which leave behind employees who are owed back wages, benefits and pension contributions. We can only estimate the total figures, but over $1 billion per year is a number that has been used.
According to a December 2004 speech in the House of Commons by Brian Masse, the NDP MP for Windsor West at the time:
It is workers who pay the price when workplaces shut down. This is especially true when these shutdowns are triggered by bankruptcy, because not only do the employees lose their jobs and their source of income, they also often lose wages that they have not been paid, and vacation pay, termination pay and severance pay.
This statement is still true in 2011.
What are the ethical procedures and employer obligations involved in communicating to employees pre- and post-bankruptcy?
It is generally accepted that employees are vulnerable creditors. They usually lack the necessary information to assess the potential risk of their employer going bankrupt, and they have limited bargaining power to protect themselves. Currently there are no obligations in legislation that require an employer to notify employees or the trade union that the organization is in financial distress, or that it is insolvent and considering filing for protection or bankruptcy. Consequently, bankruptcy is often an unexpected event with disastrous results, because employees cannot take steps to lessen the impact when they lose their primary source of income.
However, with all the recent high profile cases of fraud and bankruptcy, several industries and the broader business world have been confronted with corporate misconduct, accounting irregularities, bankruptcies and an erosion of confidence and trust on the part of employees and investors. The tide is changing; regulators are calling for organizations to establish a reputation for maintaining the highest standards of business behaviour, conduct and corporate governance. Customers, employees, suppliers and investors must be able to rely on an organization’s integrity.
Governments are focusing on directors and companies’ business operations, including areas of risk exposure (e.g., executive compensation and related party transactions), demanding meaningful and comprehensive reporting from all directors and management levels. There is also a greater focus on directors for the company's continuous disclosure, including quarterly and annual reporting and press releases, as well as regular review of corporate governance policies, controls and procedures to ensure that they represent best practices and that organizations are complying with them. This focus aims to build a new sense of commitment to strong corporate values, improved communication and the need for leaders who demonstrate through personal action that they are dedicated to creating an internal environment grounded in trust, openness and integrity.
An organization that is insolvent or files for bankruptcy (whether for protection from creditors under the Bankruptcy and Insolvency Act or to restructure or reorganize) damages their credibility. Such an organization will have to work hard to rebuild public trust. It might start by working on communications issues surrounding damaged credibility, management transitions, bankruptcies, litigation, regulatory actions, rumour management, earnings shortfalls, restructurings and product liability situations. It should establish a crisis communication policy dealing with damage control and responses, specifically ongoing feedback and communications services designed to preserve or rebuild client/employee credibility once the actual crisis has been contained.
So what can the Ministry of Labour do?
Briefly put, under Canadian employment/labour standards, employment is terminated if the employer dismisses or stops employing someone, even when it is due to the employer's bankruptcy or insolvency. An employer that is insolvent, that fails to pay its employees or that shuts its doors, might not be bankrupt. Employees must find out for sure if their employer really is bankrupt and obtain the name of the bankruptcy trustee.
Notwithstanding the above, these terminated employees are entitled to notice of termination depending on the length of employment, all outstanding wages, accrued vacation pay and records of employment to collect employment insurance.
The Ministry of Labour cannot recover wages on behalf of an employee if the company is bankrupt. Complaints against insolvent employers (i.e., an organization that does not have enough assets to cover its debts, or is unable to pay its debts as they become due) are still handled through the Ministry of Labour.
If the company is not bankrupt, but closed its doors because it is insolvent and has not yet asked for protection from creditors under the Bankruptcy and Insolvency Act, the employee must recover unpaid wages via the Employment Standards Branch of their jurisdiction by filing a complaint. The Employment Standards Branch will then demand that the employer provide payroll records. If the records show the employee is owed money, the branch will issue a determination and try to collect money on the employee's behalf. If the company fails to comply, prosecution is possible, depending on the company’s status.
If the employer is bankrupt, the bankruptcy trustee is responsible for ensuring all creditors, including employees, receive information about the money owed to them. Under the trustee's control, a company may be reorganized, sold or its assets may be liquidated to pay creditors. In the case of employees, the Bankruptcy and Insolvency Act provides a measure of protection to wage earners. The Wage Earner Protection Program (WEPP) under the Bankruptcy and Insolvency Act provides guaranteed and timely payment of unpaid wages, vacation pay (on or after July 7, 2008), as well as unpaid severance and termination pay to eligible workers (on or after January 27, 2009) whose employers go bankrupt or are in receivership, up to an amount equalling four weeks maximum insurable earnings under the Employment Insurance (EI) Act (currently about $3,000).
In addition, under the Bankruptcy and Insolvency Act's "limited super-priority" provision, the employee's unpaid wage claim is put ahead of secured creditors over the current assets of the bankrupt employer's estate.
The limited super-priority provision supports and complements the WEPP. Individuals who apply to the program will sign over their wage claim rights to the federal government for the amount that they receive from the program. The government in turn will assume the interests of wage earners against the bankrupt employer.
An individual who does not qualify for payment from the WEPP will be able to pursue the wage claim through the limited super-priority provision and the existing preferred creditor status up to a $2,000 cap.
Employees who are covered under a collective agreement must contact their union for assistance in recovering wages. A collective agreement does not terminate on bankruptcy. The status of a collective agreement is governed by labour relations legislation of a specific province or territory, and is only terminated in specific circumstances set out in the Act. As the courts have stated, it follows that a collective agreement can bind a successor employer who takes over the business of the debtor if the labour board so declares. In addition, a collective agreement is a contract between the company and a union, and not its employees.
If an employer is bankrupt, employees in a non-unionized workplace or the union in a unionized workplace will need to file a claim with the bankruptcy trustee. There are time limits for filing, so the employee or union should do this as soon as possible. In bankruptcy cases there is no guarantee that employees will receive all or part of the wages owed to them. In any case, it usually takes up to six months before employees will see any money. As for the WEPP, the program is being delivered by Service Canada on behalf of the Labour Program. In order to file a claim, the employee must send an application to Service Canada within 56 days of the bankruptcy or receivership.
However, despite a bankruptcy, directors may still be liable for unpaid wages, unremitted payroll deductions, employment insurance, Canada Pension Plan premiums and contributions, and for dividends paid or other transactions that do not meet a financial test if the company is insolvent, among others. For all these matters, a due diligence defence is available and would normally be covered by an indemnity from the company or directors' and officers' liability insurance. Directors are only protected to the extent their actions show the exercise of their business judgment.
The keystone of protection for directors therefore remains the ability to demonstrate that each director in fact has taken reasonable steps to exercise his or her business judgment when considering corporate actions—decisions and actions that are made honestly, prudently, in good faith and on reasonable grounds.
The employees are allowed to sue the directors of the corporation to make up for any shortfall. However the process is tedious. It can take years, and not all the employees involved have a union to advocate for them.
Employees should keep all pay statements and other records that can prove they were an employee and that wages are owed to them. If they have not received a Record of Employment from their employer to apply for EI benefits, employees should be directed to contact Human Resources and Skills Development Canada, also referred to as Service Canada. If they did not receive their T4 Slip, they should contact the Canada Revenue Agency.
In conclusion, employees have limited rights in the event of employer bankruptcies.
Nonetheless, any employer that has filed for bankruptcy should support the efforts of its employees to receive the wages and benefits, including severance, owed to them. This is not only the right thing to do, it is good business sense for anyone seeking to restructure a firm successfully and preserve as much of the human capital component of the firm's going concern value.
Moreover, the significance for directors of the statutory liability for employees' wages is clear. Where an organization becomes insolvent and is unable to satisfy the claims of its employees for wages owed, the directors may be personally obligated to satisfy such claims. Therefore it is extremely important for directors to carefully review the financial statements and all other financial records and related documents of the organization on whose boards they are members.