WEPPA: Wage Protection for Employees,
Credit Constriction for Employers
Matthew Lem, CIRP
Canadian Manufacturers and Exporters 20/20
Nov - Dec 2008
When the Wage Earner Protection Program Act (WEPPA) came into force on July 7, 2008, the federal government may have achieved some short-term gains for the employees it was designed to protect – but in the end it is likely to result in long-term costs for employees and businesses in Canada.
The WEPPA is a new piece of legislation and part of a comprehensive package of insolvency reforms to the Bankruptcy and Insolvency Act (BIA) that has been in motion since 2005.
The WEPPA establishes the Wage Earner Protection Program (WEPP), which is administered by the federal government through Service Canada. This program enables employees to claim up to four times the maximum weekly insurable earnings amount under the Employment Insurance Act (approximately $3,000), less amounts prescribed by regulation, from the government for unpaid wages* in the six months prior to their employer’s bankruptcy or receivership.
Following the changes to the BIA, these wage claims are now secured against the employer’s current assets (cash, accounts receivable and inventory), enjoying priority rights over all other creditors (secured or unsecured), to a maximum of $2,000. In addition, employee claims for unremitted employer pension contributions now also receive a priority – and have no maximum limit.
These “super-priority rights” of employees could dramatically reduce the amount that secured lenders may be able to recover in bankruptcy or receivership situations, and as a consequence could significantly impact the amount of credit to which a business has access – especially in cases where an employer has a large Canadian labour force.
The recent bank and credit troubles in the US are only exacerbating the impact these legislated changes are having on the availability of credit here in Canada. Banks and other secured lenders are actively reevaluating their risk positions with the aim of limiting exposures, including those created by the WEPPA and the changes to the BIA. Businesses should prepare for the new reality that lenders will seek adjustments to the terms of lending agreements to reflect the impact of the new $2,000 per employee, super-priority claim. These adjustments could come in the form of an additional deduction in the amount of the funds available to be borrowed or as a reduced percentage for marginable value of assets. Some lenders may require additional security or investment. Others may intensify monitoring of higher risk borrowers, including additional covenants such as requiring borrowers to contract with external payroll services in order to verify that wages, pension contributions and government remittances are paid on a timely basis.
* Wages includes salaries, commissions, compensation for services rendered and vacation pay. It does not include severance and termination pay
Ultimately, many manufacturers may experience restricted access to credit. This means management should more actively monitor cash flows (actual and projected), borrowing requirements, including timing of capital intensive projects, and loan margin availability. As well, management should re-examine cash management activities (e.g. account receivable collections, credit terms to customers and from suppliers, etc.) and product costing, with the objective of improving cash flows and validating product pricing. Any business that is close to or at its borrowing limit with its lender, should seek professional advice immediately to assess options, because the impact of the new legislation could potentially put the company over its margin limit and spawn a financial crisis.
As well, manufacturers whose operations are labour intensive may wish to consider restructuring the labour force in order to mitigate the effect of the new legislation on financing arrangements. Choosing to replace full-time employees with contract workers from staffing agencies or subcontracting certain production aspects, are just two options which may serve to accomplish this goal. Beyond financing motivations, the new legislation may further encourage Canadian manufacturers to reduce their reliance on local labour markets in favour of investments in automation or the relocation of operations to other countries.
Thus, while the new legislation may provide employees with protection from lost wages in the short term, in the long term it just might mean fewer Canadian manufacturing jobs and less money for businesses to operate.
Matthew Lem, CIRP, is a vice-president of BDO Dunwoody Limited (www.bdo.ca). As one of Canada’s leading accounting firms, BDO provides accounting, tax and financial advisory services to manufacturers across Canada. You can reach Matthew in the Markham, Ontario office at (905) 946-5431 or mlem@bdo.ca.
