By Marc-André Morin, Partner and Éliane Dupéré-Tremblay, Associate, Fasken

Overview:

Recent court decisions in Québec have provided clarity on the application of the Wage Earner Protection Program Act (“WEPPA”) to former employees of companies undergoing restructuring under the Companies’ Creditors Arrangement Act (“CCAA”). The central issue was whether WEPPA applies to employees who were terminated as a result of a reverse vesting order (“RVO”).

These rulings clearly establish that the wage earner protection program can be invoked to provide relief for employees who are terminated as part of a transaction, irrespective of the structure of the transaction (traditional asset sale or RVO). Prior to these decisions, there was a great deal of uncertainty as to whether employees who were terminated as part of an RVO transaction in a CCAA proceeding could benefit from the WEPPA.

The result of the decisions from the Superior Court of Québec and the Court of Appeal is clear: the Court has jurisdiction, pursuant to the WEPPA, to determine that the RVO entity was a “former employer” to whom the WEPPA applies. This ruling is in line with the remedial purpose of the CCAA and the WEPPA, and produces a fair result for employees affected by a restructuring.

Factual Background

The Juste Pour Rire (Just For Laughs) group of companies (the “JPR Group”) was a major player in the province of Québec in the production of comedy festivals and media content. On March 5, 2024, six JPR Group entities filed a Notice of Intention under the Bankruptcy and Insolvency Act, which proceedings were later converted to CCAA proceedings for the entire group.

Following a short Sale and Investment Solicitation Process (SISP) in May 2024, a substantial asset sale was finalized where three entities sold their assets to a purchaser, ComediHa! 24 Inc. (ComediHa), and ceased their operations. One of these, Former Gestion Inc., terminated all its employees before the transaction. In addition, twelve other entities (the “RVO Entities”) transferred shares and certain liabilities to a newly incorporated entity, ResidualCo, under a reverse vesting order. Five of these RVO Entities terminated their employees, with the remaining employment liabilities transferred to ResidualCo.

Approximately 100 employees were terminated prior to the transaction, with 45 employed by Former Gestion Inc. and 55 by the RVO Entities. While all salary and vacation pay had been provided, these employees were not paid the indemnity for prior notice of termination (the indemnité de préavis).

The JPR Group applied to the Court for an order approving the sale and for a declaration that their former employees were covered by WEPPA. The JPR Group then raised concerns that Employment and Social Development Canada (“ESDC”), which administers WEPPA, may refuse to pay outstanding wages to the former employees of the RVO Entities.

Seeking to ensure equitable treatment of all former employees, the JPR Group sought a declaration that, at the time of the termination of the former employees of the JPR Group, their respective employer was a former employer meeting the criteria set out in section 3.2 of the WEPP Regulations. The JPR also requested that the Court exercises its discretion under Section 11 of the CCAA to declare that, for the purposes of the WEPPA, all former JPR employees were employed by Former Gestion Inc. at the time of their termination.

The Attorney General of Canada, representing ESDC (hereafter “AGC”), opposed the application, arguing that the request for retroactive relief was unwarranted, that the court could not interfere with the Minister's authority to determine eligibility under WEPPA, and that since the RVO Entities had not wound down their operations, the WEPPA did not apply to their former employees.

Decision in First Instance: Arrangement relatif à Former Gestion Inc., 2024 QCCS 3645

The Superior Court held that WEPPA applies to the former employees of the RVO Entities, and that the point in time at which this determination must be made is when the employees are terminated. The Court did not consider it necessary to rule on the request to have Former Gestion Inc. retroactively declared the employer of the employees.

In coming to this conclusion, the Court confirmed that WEPPA is designed to provide timely compensation to employees who lose their jobs due to insolvency or restructuring. Therefore, the statute should be construed broadly to achieve its purpose.

The court reasoned that Section 3.2 of the WEPP Regulations does not require that an employer be in the process of liquidating its business in order for its former employees to be eligible for WEPPA. The provision is permissive and allows terminated employees to seek back wages, regardless of whether some individuals may still be involved in winding down the employer's operations.

The Court emphasized that WEPPA's protective intent should not be undermined by the specifics of how an employer's assets and liabilities are transferred. The critical factor is whether employees are terminated due to insolvency or restructuring. The Court held that it would be contrary to the objective of the WEPPA to deny compensation to a terminated employee simply because the transaction occurred via a reverse vesting order, as opposed to a traditional vesting order.

Application for Leave to Appeal: Attorney General of Canada c. Former Gestion Inc., 2024 QCCA 1441

ESDC sought leave to appeal from the first instance decision, which was dismissed by the Québec Court of Appeal.

On appeal, the AGC argued that the Court in first instance erred (i) in ruling on employees’ “eligibility” to the wage earner protection program, a matter which fell under the exclusive jurisdiction of the Minister, and, subsidiarily, (ii) by determining that the relevant time to determine the eligibility of an employee was at the moment of termination.

JPR Group argued that, contrary to AGC’s assertion, the first instance decision did not declare eligibility of any employees, but only the applicability of WEPPA. Furthermore, the first instance decision was in line with the remedial nature of the WEPPA, whose aim was to provide terminated employees with some financial relief regardless of the structure of the potential transaction.

When considering whether leave to appeal should be granted, the Québec Court of Appeal considered the four-part criteria applied by appellate courts across the country, and held that the AGC’s appeal was not prima facie meritorious.

Firstly, the Court was of the view that the Court in first instance had not, directly or indirectly, declared the employee’s eligibility to WEPPA. The only declaratory conclusion was to the effect that Former Gestion Inc. and the other RVO entities were former employers who met the criteria prescribed by section 3.2 of the WEPP Regulations. This decision was well within the boundaries of the first instance judge’s powers. Secondly, The Court of Appeal added that there was “nothing wrong” with the judge justifying his decision by using a time reference that is relevant to the specific realities of the case and pertinent for purposes of determining whether the requirements of section 3.2 of the WEPP Regulations applied.

Conclusion:

These rulings reinforce the remedial purpose of WEPPA and ensure that former employees affected by insolvency or restructuring will not be denied compensation simply because their employer’s liabilities were transferred to another entity pursuant to a reverse vesting order. The decision is significant for both employees and employers navigating the complexities of a corporate restructuring.