The province says the chief executive officer of Bethania Group Personal Care Homes retired from his job, started collecting his pension and was rehired the very next day with a raise.
Health Minister Theresa Oswald says that broke a provincial law governing publicly funded health bodies and has ordered the company to terminate the CEO's contract.
In a written statement, Bethania's board of directors says the CEO's contract was approved before the law took effect.
It also says the change saved taxpayers $16,000 a year in pension contributions and leave allowance.
Bethania Group, which runs two Mennonite-based care homes in Winnipeg, says the practice is acceptable under the new law, as long as prior approval is obtained by the regional health authority.
"There was no prohibition against a retire-rehire situation. In fact, it was and is a practice that is not uncommon among health workers in Manitoba," the board's statement said.
"The board remains committed to finding a solution that is agreeable to all parties, and represents a responsible and transparent use of public funds. It is disappointing that the government is choosing the current course when an offer to work collaboratively to find a reasonable solution was made. This begs the question whether the province has other motivations."
The issue was uncovered by an audit the government ordered last year after financial irregularities at another personal care home.