What exactly are 'wages' when it comes to vacation pay?
Exclusive to Canadian HR Reporter from Rudner Law.
HR professionals are well aware that employees must receive vacation pay. However, some are surprised to learn that vacation pay applies not only to base salary, but also may be applicable to bonuses, commissions and other forms of compensation.
In Ontario, vacation pay is payable on all “wages” earned by an employee. Employees are entitled to 4% of wages if their period of employment is less than five years, or 6% of wages if their employment is five years or more.
Where it gets tricky is what is meant by “wages”. The term is defined in the Employment Standards Act, 2000 (ESA) to include:
- monetary remuneration payable by an employer to an employee under the terms of an employment contract, oral or written, express or implied
- any payment required to be made by an employer to an employee under the ESA
- any allowances for room or board.
Wage exceptions in Ontario
The ESA also provides for exceptions, which state that the term “wages” does not include:
- tips or other gratuities
- any sums paid as gifts or bonuses that are dependent on the discretion of the employer and that are not related to hours, production or efficiency
- expenses and travelling allowances
- subject to certain criteria, benefit plan payments and employer contributions to the benefit plan.
This means, for example, that commission payments constitute “wages” under the ESA, and therefore, vacation pay must be provided on commissions earned by an employee, at either 4% or 6% (or at a higher rate, if the employment contract provides for it).
An annual performance bonus would also meet this definition of “wages” and be subject to vacation pay.
From the above list, item gifts or bonuses are the most misunderstood exception, which applies to purely discretionary bonuses. If a bonus is entirely unrelated to hours, production or efficiency, then it will not count as “wages” and will therefore not be subject to vacation pay.
However, if the bonus is based at least in part on hours, production or efficiency, then the exception will not apply.
Bain v. UBS Securities Canada Inc.
In the decision of Bain v. UBS Securities Canada Inc., the Court of Appeal considered an employee’s entitlement to vacation pay on a discretionary bonus. Although the bonus was labeled as “discretionary”, the evidence at trial demonstrated that the bonus was “based in part on how an employee produced and how diligent he or she was in their work”.
Furthermore, while there were no specific numerical targets that determined eligibility for the bonus, the trial judge found that “there were definite factors on which it was based, including performance.”
As a result, both the trial judge and the Court of Appeal determined that the exception did not apply to the bonus, and as a result it constituted “wages” and was subject to vacation pay.
Subsequent Court decisions on bonuses
The Court of Appeal’s ruling in Bain was more recently followed in the decision of Ramcharan v. Wesdome Gold Mines Ltd. In that case, the employee had received a bonus that the employer considered “discretionary”. However, the bonus was based on achievement of both corporate and personal objectives.
The Court applied the Bain decision and found that the bonus, despite being labeled as “discretionary”, was in fact based on hours, production or efficiency, and therefore did not fall into the exception for purely discretionary bonuses.
As a result, the employer was required to pay vacation pay on the bonus amounts paid to the employee.
Employee’s payroll entitlements
Like many exceptions contained in the ESA, the exception for purely discretionary bonuses is not nearly as broad as many people believe. Discretionary bonuses that are based at least somewhat on the employee’s performance will not fall into the exemption, and as a result, the employer will be required to provide vacation pay on these amounts.
Similarly, commissions and other compensation constitute “wages” and are subject to vacation pay, despite a fairly widespread belief that only base salary requires vacation pay.
We recommend speaking with a lawyer if you are unclear about an employee’s entitlements.
Alex Minkin is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].
