Recouping used but unearned vacation time (Toughest HR Question)

Allowing workers to use vacation before it’s earned can lead to complications at dismissal
By Brian Johnston
|Canadian HR Reporter|Last Updated: 09/09/2013

Question: What can an employer do if an employee quits or is fired and has used more vacation days than she has earned to that point in the year? Can the value of the excess days be recouped?

Answer: The answer turns on whether there is an agreement between the parties for recovery of vacation days taken but not yet earned. Absent such an agreement, there is little an employer can do to recover used but unearned vacation days, at both unionized and non-unionized workplaces.

If there is an agreement providing for recovery on termination, the employer will be able to deduct accordingly.

Most employment standards legislation in Canada prohibits deductions that are not lawful deductions (such as Canada Pension Plan and employment insurance) without the employee’s consent.

Some jurisdictions, however, have distinguished “recovery of overpayment” from deductions. For example, both the Ontario Labour Relations Board and Nova Scotia Labour Board have had cases where they have distinguished recovery of overpayment from other sources of deductions.

The Ontario Labour Relations Board in Brown Bear Day Care v. Hollander in 2010 set out the test an employer must meet to demonstrate proof of overpayment and knowledge on the part of the employee. The board decided the employer had communicated a clear expectation there would be an annual reconciliation of vacation days taken and vacation days earned.

When an employee took more vacation days than earned, the deduction from the employee’s final paycheque was permissible, determined the board. The expectations set by the employer are critical to validly withholding funds as a method of overpayment recovery, it said.

However, if the employer had lulled the employee into thinking the overpayment would not be recovered, it would be a factor weighing against the employer’s ability to recover those funds.

“On the evidence before me, Hollander (and all other employees) were made aware well before Hollander’s employment ended that there would be an annual reconciliation of vacation days taken and vacation days earned,” said the board.

In Nova Scotia, the board allowed for a deduction consistent with overpayment of vacation in Mossman v. Romney & Romney, a 1989 decision of the former Labour Standards Tribunal, when the employer provided uncontradicted evidence of the overpayment.

But that decision appears to be an anomaly, with no other tribunal or board decisions considering the issue since.

The uncertainty and level of proof involved in having a matter go before a board or arbitrator on this issue should cause employers to take further steps to protect themselves if they want to deduct overpayments on termination.

Employers can gain protection by entering into a written agreement with the employee providing for deduction on final pay of any amounts determined to be an overpayment by the employer.

Of course, such an agreement would require compliance with any other employment standard obligation (Nova Scotia does not allow a deduction that results in the employee receiving less than minimum wage for hours worked during the pay period).

A typical agreement would expressly say the employee understands excess vacation is refundable by payroll deduction of any overpayment.

For more information see:

Brown Bear Day Care v. Hollander, 2010 CarswellOnt 11089 (Ont. Lab. Rel. Bd.).

Mossman v. Romney & Romney (Aug. 2, 1989), Decision #685 (N.S. Labour Standards Trib.).

Brian Johnston is a partner at Stewart McKelvey in Halifax. He can be reached at (902) 420-3374 or bjohnston@smss.com.

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