Employment standards mistakes can be costly for employers

Unpaid overtime, vacation and unauthorized deductions most common missteps
By Peter Eastwood
|Canadian HR Reporter|Last Updated: 06/14/2010

Employment standards are often — wrongly — considered a relatively simple area of law. But, as many employers are discovering, applying employment standards legislation to the modern workplace is far from easy.

Many of the standards were developed for very different workplaces than those that confront HR professionals today. Drafters of hours of work and overtime provisions likely never contemplated a world where the traditional boundaries between work and personal life would become so blurred — and arguably eradicated — because of technology such as email and BlackBerrys.

The past several years have emphasized the importance of understanding employment standards legislation in Canada. The previously neglected issue of overtime has become the new face of class-action lawsuits because of several high-profile claims brought against CIBC, Bank of Montreal, Scotiabank and KPMG. These follow earlier cases in the United States where many large companies, including Wal-Mart, Starbucks, Taco Bell and RadioShack, had to pay enormous overtime awards to employees.

The lesson from these examples is simple: Employment standards mistakes have the potential to be costly. Many employment standards claims stem from ignorance, often from employers not properly understanding the statutory obligations in the first place or adopting uniform, one-size-fits-all policies across the country without recognizing the significant differences in provincial legislation.

However, given the increased awareness of these statutory rights, and the relative ease with which employees can bring complaints through employee-friendly regulatory regimes, employers neglect employment standards issues at their peril.

The following are some of the most common mistakes made by employers concerning employment standards.

Overtime: Mischaracterization of exempt employees

Many overtime claims originate with the mistaken belief employees are exempt from overtime payments when they are actually entitled to them. This mischaracterization can create an enormous liability, particularly when overtime is not managed at all.

Generally, very few employees fall into the relatively narrow categories of exempt employees and these categories vary from province to province. The most commonly misunderstood category is managers. As with their counterparts in the U.S., many Canadian employers often blindly assume all employees paid a salary or given the title “manager” are exempt from overtime on this basis alone.

The reality is many managers are not in fact managers for the purposes of employment standards legislation. Usually, employment standards regulators consider managers as senior executives or employees whose primary job duties are to direct or supervise company resources or people. Relatively few employees in any given company meet this high threshold.

A further, and related, mistake is the failure to keep any records of hours worked by managers or other exempt employees. In most jurisdictions, employers are required to keep records of all hours worked by employees, regardless of whether they are entitled to be paid overtime. If the employer has failed to do this, an employee’s documentation, however informal, may be accepted by a regulator or court at face value.

Finally, it is worth noting the weekly overtime threshold varies from province to province — from between 40 and 48 hours. Many employers operating in more than one province make the mistake of only paying overtime at the higher threshold, accruing a further liability to many employees.

Insufficient vacation pay

Most employment standards legislation in Canada distinguishes between an employee’s entitlement to unpaid vacation time and vacation pay. The reality is many employers provide “paid vacation time” to salaried employees, rather than granting unpaid vacation and paying out accrued vacation pay at the time of the vacation.

Often this practice will comply nonetheless, provided an employee does not earn any additional compensation, such as overtime, commissions or incentive compensation. In these circumstances, and depending on the employer’s particular vacation policy and the applicable legislation, an employer may not have provided sufficient vacation pay on all wages.

The most common problem is employees who do not receive the required vacation pay on significant incentive compensation. In an age where employees are often provided with the equivalent of eight or 10 per cent vacation pay in excess of the legislated minimums and large bonuses, these liabilities can be significant. As with overtime, this is often an unknown liability that only becomes an issue on termination.

It is essential for employers to develop clear policies concerning the accrual, use and any permissible carry-over of vacation to prevent employees from developing enormous banks of unpaid vacation, and to keep proper records on vacations to protect against claims.

Unauthorized deductions from wages

One of the most important principles in employment standards legislation is protecting the rights of employees to be paid for their work. However, one of the most common mistakes made by employers is unauthorized deductions from wages. Most provinces prohibit employers from making deductions from an employee’s wages unless these deductions have been specifically authorized and are for an employee’s benefit. In essence, such prohibitions prevent employers from passing on business costs to employees.

When employees have been overpaid, stolen funds or caused damage to company property, it’s tempting for employers to deduct wages. But decisions from courts and arbitrators have emphasized employment standards legislation prevents employers from making deductions from wages for any reason. The employer’s only recourse is to pursue the claim against the employee in court or through other means.

Tips for employers: Avoiding the 3 mistakes

As with most mistakes, these potential problems can be easily avoided. Employers should ensure regular audits are performed on their employment standards compliance in each jurisdiction and address:

• Overtime practices, including the characterization of exempt employees, record keeping and employer expectations.

• Vacation policies, including details on how vacation is earned or accrued, when it can be taken and whether it can be carried over.

• Any blanket authorizations concerning deductions from wages, including any repayment plans or other agreements.

Complying with all applicable employment standards legislation is arguably one of the more complicated tasks for any employer. These issues are increasingly occupying a disproportionate amount of HR professionals’ time, and for good reason. Prudent employers pay attention to employment standards legislation and ensure these costly mistakes are not made.

Peter Eastwood is a partner at Borden Ladner Gervais in Vancouver, practising all aspects of labour and employment law. He can be reached at (604) 640-4046 or peastwood@blgcanada.com.

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