Employers and employees are often enticed into entering into what are commonly known as "under the table" payment schemes. The reasons for this are fairly obvious. Employees are often enticed into these schemes by getting paid for work without paying the corresponding taxes. For the employer, the enticing benefits are often seen as avoiding the costs of complying with the Employment Standards Act, 2000 ("ESA"); Workplace Safety and Insurance Act ("WSIA"); and other relevant legislation.
However, the vast majority of these cases turn into textbook examples of the old adage "short term gain for long term pain" and this is equally true for both employers and employees.
As most everyone knows, these arrangements are illegal. These schemes are often entered into hastily without the participants being aware of, or simply not thinking about, some of the consequences.
Consequences for Employees
All employees are presumptively entitled to reasonable notice of their termination in accordance with the common law subject to their duty to mitigate their damages. This does not change as a result of the employee being paid under the table. Though that presumptive entitlement can be reduced or altered through a contract of employment that provides otherwise, most under the table employment arrangements will not have contemplated termination entitlements. Therefore, most under the table employees will be entitled to reasonable notice of their termination or pay-in-lieu thereof.
That being said, there is a significant catch here. Pursuing common law entitlements often means filing a statement of claim and pursuing the matters through the court system, where the proceedings will be a matter of public record. As it stands, the employee will already be leaving an inculpatory paper trail. However, it gets worse, as the parties in the Ontario court case of Fedorowicz v. Pace Marathon Motor Lines Inc. (Fedorowicz) found out.
Though the judge in Fedorowicz found in favour of the employee and awarded her reasonable notice of her termination, he also did something else. In his written reasons for judgment, it was quite clear that some, though not all, of the employee's compensation was paid to her under the table. In light of the fact that the parties were using a taxpayer-funded system to resolve their employment dispute, the Judge found that a copy of his written reasons for judgment should be sent to the Canada Customs and Revenue Agency, as it was then known, for its consideration. Therefore, while the employee did receive severance, it was likely a fool's victory.
Furthermore, employees who enter into these types of arrangements are also putting themselves at a significant risk of disentitling themselves to the majority of government programs meant to protect them; including, WSIA insurance, employment insurance ('EI'), and many of the protections and perks provided by the ESA.
These types of arrangements tend to look very enticing at first; however, once something happens to complicate the relationship, as is so often the case, employees are often extremely limited in terms of places to turn for help.
If you are concerned that some or all of your employment income is being paid under the table, you should consult with an experienced Ontario employment lawyer.
Consequences for Employers
The liability and subsequent consequences to an employer from an under the table payment scheme are far more significant than they are for an employee. In addition to liability for backed tax withholdings, interest, and penalties to the Canada Revenue Agency, employers should also be concerned with the following.
The WSIA provides a scheme whereby certain employers, listed in Schedules 1 and 2 to the Act must participate in an insurance scheme to protect employees who become injured in certain circumstances. As with any insurance scheme, there are premiums to be paid. However, as most under-the-table employers are not keen to leave paper trails of their under-the-table employees, they will neglect to register for the insurance plan or pay the associated premiums.
An employer who does this exposes themselves to significant liability including interest, an additional percentage increase on unpaid premiums and, likely more significantly, potentially devastating fines. If the employer is an individual, that fine will be a maximum of $25,000.00. If the employer is not an individual, the fine can be as high as $500,000.00. Particularly in the non-individual context, these types of fines can ruin a lot of Ontario employers.
In addition to violations of the WSIA, there are also consequences for Ontario employers who do not comply with the ESA. These can come in the form of orders to pay accrued vacation, overtime, statutory holiday pay, minimum wage, penalties, and the like. These can be levied by the Ontario Ministry of Labour who proactively enforce the ESA and Occupational Health and Safety Act.
In the event that a former employee takes legal action against an employer for severance, or the like, it is very easy, as was the case in Fedorowicz, above, for any compliance issues to be reduced to writing and sent to the appropriate enforcing authorities.
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.