Are employees entitled to termination and severance pay from a bankrupt employer?
The Supreme Court holds that employees of a bankrupt employer are entitled to employment standards benefits
In Rizzo & Rizzo Shoes Ltd., the Supreme Court of Canada decided that employees whose employment is terminated as a result of bankruptcy are entitled to termination and severance pay under the Employment Standards Act.
When Rizzo & Rizzo Shoes went bankrupt, the Ontario Ministry of Labour tried to obtain termination and severance pay for the employees. However, the trustee in bankruptcy refused to pay. The trustee said that the bankruptcy of an employer did not constitute dismissal from employment, and therefore, employees had no right to severance, termination or vacation pay under the Employment Standards Act (ESA).
The Ministry successfully appealed the trustee’s decision in the Ontario Court (General Division). However, the Ontario Court of Appeal disagreed and restored the trustee’s decision. The Ministry filed an application for leave to appeal to the Supreme Court of Canada, but then abandoned the case.
Five former employees of the company retained our firm as pro bono counsel, and we obtained leave to appeal to the Supreme Court and represented them on the appeal.
The Supreme Court’s decision
The Supreme Court granted the employees’ appeal. It held that they were entitled to the ESA payments.
The Court held that, while the plain language of the ESA seemed to suggest that termination and severance pay were payable only when an employer terminates employment, the language in the statute must be read in its entire context and in their grammatical and ordinary sense harmoniously with the scheme of the statute, the object of the statute, and the intention of the legislature.
The Supreme Court concluded that the Court of Appeal had failed to read the language of the ESA in this broad manner. It noted that the purpose of the termination and severance pay provisions were to protect employees, to recognize their service and investment in the employer’s enterprise, and to cushion them against the adverse effects of economic dislocation. To hold that (more junior) employees terminated prior to bankruptcy would be entitled to termination and severance pay while (more senior) employees terminated upon bankruptcy would not would be absurd:
The trial judge properly noted that, if the ESA termination and severance pay provisions do not apply in circumstances of bankruptcy, those employees “fortunate” enough to have been dismissed the day before a bankruptcy would be entitled to such payments, but those terminated on the day the bankruptcy becomes final would not be so entitled. In my view, the absurdity of this consequence is particularly evident in a unionized workplace where seniority is a factor in determining the order of lay-off. The more senior the employee, the larger the investment he or she has made in the employer and the greater the entitlement to termination and severance pay. However, it is the more senior personnel who are likely to be employed up until the time of the bankruptcy and who would thereby lose their entitlements to these payments.
The Supreme Court also held that the legislative history of the termination and severance pay provisions and the other provisions in the ESA supported an interpretation that benefits were payable to employees who lose their employment as a result of the employer’s bankruptcy.
Finally, the Court ordered the Ministry of Labour to pay the employees’ costs. The Ministry failed to show that it had made any effort to notify or secure the consent of the Rizzo employees before it discontinued its application for leave to appeal to the Court.
This decision is a leading case on statutory interpretation.