Canada: Quick Fixes: How To Avoid Prosecution Under The Employment Standards Act, 2000

Most of the time it only takes a couple of tweaks to ensure your company avoids getting fined for violating the Employment Standards Act, 2000 ("ESA").

What gets employers in trouble most often? According to the Ministry of Labour ("MOL"), most complaints and violations of the ESA relate to overtime pay, vacation time/vacation pay, deductions from wages, and payments due on termination. Between 2007-2013, the MOL investigated over 100,000 complaints and launched over 11,000 targeted inspections relating to these and other common violations.

If convicted of an offence under the ESA or its regulations, fines can range from a few hundred dollars to thousands and even hundreds of thousands of dollars. How can you make sure your company is compliant? Here are some quick tips and insight for some of the most common problems.

Overtime Pay

1. Salaried employees are entitled to overtime.

Two of the most common misconceptions regarding overtime pay are that salaried employees are not entitled to overtime pay and an employer can pay an employee a salary that is "inclusive of overtime". Both are false. Providing an employee with a "fixed salary" as opposed to an hourly wage does not eliminate the obligation to pay overtime for hours worked. More confusing to employers is that, even if an employee agrees in writing to a salary inclusive of overtime, the MOL will not allow it. An employee cannot contract out of his or her entitlement to overtime.

Notably, not all employees are entitled to overtime pay. Certain categories of employees are exempt. To avoid paying overtime unnecessarily, and more importantly, to avoid fines for the failure to pay it when owing, familiarization with the ESA is essential.

2. Most Employees are entitled to overtime pay after working 44 hours in one week.

While there are a few exceptions to this general entitlement under the ESA, the vast majority of employees in Ontario are entitled to overtime pay after 44 hours worked in one week.

A requirement or expectation to work more than 48 hours in a work week requires the employee's written consent and approval from the MOL. Regardless of such approval, all hours over 44 must be compensated at 1 ½ times the employee's regular rate of pay.

3. There are two useful tools for employers to manage overtime costs.

The first is to enter into written agreements with employees to allow for paid time off instead of overtime pay. Such agreements allow employees to receive 1½ hours of paid time off for each hour of overtime worked.

The second is averaging agreements. With the consent of the MOL, an employer and an employee can agree in writing to average the employee's hours of work over a specified period of two or more weeks for the purposes of calculating overtime pay. Under such an agreement, an employee would only qualify for overtime pay if the average hours worked per week during the averaging period exceeded 44 hours.

Vacation Time/Vacation Pay

Vacation time and vacation pay are two separate considerations and should be treated as such.

1. Vacation Time.

Vacation time is commonly understood as the obligation to provide employees with at least 2 weeks' paid time off after each 12 month period of employment, generally calculated from the first day of employment, and referred to as the vacation entitlement year.

Some employers establish an alternative vacation entitlement year, which does not start on the first day of employment. This is an acceptable practice. For example, an employee might be hired on July 1, but the employer has set up the entitlement year to begin each year on September 1. The interim period between July 1 and August 31, is referred to as the "stub period". If this is the case employers must ensure that employees are provided with:

(a) a minimum of 2 weeks' vacation time after each alternative vacation year; and

(b)  a pro-rated amount of vacation time for the stub period as prescribed by the ESA.

2. Vacation Pay.

Vacation pay is where many employers tend to make mistakes.

Vacation pay must be at least 4% of an employee's gross wages earned in the vacation entitlement year or stub period for which vacation is being given. Vacation pay is earned as an employee earns wages. Therefore, even if an employee does not complete his or her vacation entitlement year and therefore does not qualify for vacation time, the employee is entitled to vacation pay.

How does the ESA define "wages"?

Broadly. Under the ESA, the definition of wages includes, among other things, commissions, bonuses, and overtime pay. A common problem we see is the failure to include vacation pay on wages, aside from the employee's regular wages. The failure to provide vacation pay on all wages can render your organization vulnerable to conviction upon a complaint or an investigation.

To avoid this problem, employment agreements, bonus and commission plans must be carefully drafted so as not to defeat the intentions of the ESA. For example, language can be added to employment agreements to the effect that all bonus or commission and overtime payments are inclusive of vacation pay at the rate prescribed by the ESA.

Of course, in respect of both vacation time and vacation pay, the requirements noted here are the minimums established by the ESA and an employer can, and many do, provide more by agreement.

Deductions

What can an employer do if an employee has damaged its property or is suspected of theft?

Many employers ask us whether it is legal to withhold money from an employee's wages for damage to property or shortage in a cash at the end of the day. While this may seem reasonable or be common, it is offside the ESA in most instances.

The ESA only allows an employer to make deductions from employee wages where the employer: (i) is required by statute or court order to make the deductions; or (ii) has obtained the employee's written consent. The written consent must refer to a specific amount of money to be deducted or must provide for a mechanism by which that amount will be determined. An agreement to deduct money from wages cannot be open-ended or uncertain. It must be clearly drafted.

Even with written consent, restrictions remain. The ESA prohibits deductions or withholdings for faulty work, cash shortages or stolen property where a person other than the employee had access to the cash or property.

Loss of property or shortages should be addressed more proactively, by investigating the issue and getting to the root of the problem. If the amount of damages warrant it, an employer always has the option of pursuing the matter through the courts.

Termination Pay and Severance Pay

To avoid some common traps with respect to termination and severance pay, employers should be familiar with how to determine when each is due and how much is owed. Severance pay is not the same as termination pay. It is a separate entitlement.

1. Termination Pay.

The ESA entitles an employee to statutory notice of termination or termination pay in lieu of notice where the employee has been continuously employed for at least 3 months. The ESA provides for prescribed notice periods in accordance with length of service.  

An employee does not have to be actively working to accumulate service for the purpose of calculating the notice period. Meaning, a person is still considered to be employed during leaves of absences.

What are an employee's rights during the statutory notice period?

An employee is entitled to all of his or her entitlements during the statutory notice period. This includes the employee's regular wage, vacation pay and the continuation of benefits. Vacation pay must therefore be calculated on the wages earned during the statutory notice period, not just up to the date of termination.

Are all employees entitled to statutory notice of termination or termination pay in lieu?

No. Certain categories of employees are specifically excluded under the ESA (e.g. "construction employees"). However, employers must take great care to understand the regulations under the ESA and the specific legal definitions used to determine possible exemptions. The fact that an employer operates a general construction company, does not necessarily mean it employs "construction employees" within the meaning of the ESA. Legal advice is often necessary when such decisions are being made or contemplated.

The ESA also provides that employees who engage in wilful misconduct or wilful neglect of duty can be terminated from their employment without notice or pay. Again, the law takes a strict interpretation of the meaning of these terms. It may seem easy for an employer to determine when an employee has neglected his or her duty, however, the MOL does not look kindly on any decisions made in haste which deprive an employee of his or her entitlements under the ESA.

Any decision to terminate an employee requires careful thought and analysis. Failure to do so, will likely result in a complaint, and possibly, a conviction.

2. Severance Pay

A dismissed employee may also be entitled to severance pay if his or her employment has been severed as contemplated by the ESA.

When does an employee qualify for severance pay?

An employee qualifies where his or her employment has been severed and: (i) the employee has worked for the employer for 5 years or more; and (ii) the employer has a payroll in Ontario of at least $2.5 million1 or the employer has severed the employment of 50 or more employees in a six month period because all or part of the business closed. There is a prescribed way to calculate severance pay owed, which essentially amounts to one week per year.

It should be noted that only statutory entitlements on termination are being addressed here and not notice at common law which is a separate issue. For the purposes of this article, we will only say that careful drafting of termination provisions in employment agreements is required to minimize costs associated with the termination of an employee's employment. Employers should review their employment agreements to ensure termination provisions refer to all statutory entitlements as outlined. Failure to do so could result in hefty termination pay-outs to employees on the basis of their common law entitlements.

The best advice we can offer to employers attempting to avoid these and other ESA pitfalls is to be proactive. Review your policies and your agreements and seek the assistance of experts where necessary. Doing so will ensure that upon inspection by the MOL or a complaint triggered by an employee, your company can successfully avoid conviction or other penalty.

Footnotes

1 There is a recent decision from the Ontario Superior Court of Justice,  Paquette c. Quadraspec Inc., which indicates that an employer's payroll outside of the province of Ontario should be taken into account when determining whether an employer has a payroll of at least 2.5 million. The decision has led to considerable debate and has not yet been appealed. While the prevailing view in Ontario remains that only the company's payroll in the province should be taken into account, employers need to be aware that this view may be shifting. As a result of the Quadraspec decision, there is some risk of a challenge from employees or the MOL regarding the manner in which an employer determines its severance pay obligation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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