Why does vacation pay still challenge employers?

Despite being in the news more often, Canadian firms are still struggling when it comes to properly paying vacation or holiday pay to employees.

That’s apparent in a class-action lawsuit — proposed, not certified — facing TD Bank. The lawsuit claims that, for years, TD failed to pay or properly pay more than 1,000 mobile mortgage specialists’ vacation or public holiday pay on their commissions, volume bonuses and other variable (non-salary) payments.

It’s a common issue, though not necessarily at this scale, says Brandin O’Connor, partner at Shields O’Donnell MacKillop in Toronto.

“There's a number of different pitfalls that employers can fall into when it comes to common mistakes in holiday pay and vacation pay calculation. And so you're seeing a number of class actions,” he says.

“But you can also have individual employees, within a piece of wrongful dismissal litigation, claim for unpaid vacation pay amounts on commissions, bonuses, and overtime.”

And there can also be administrative complaints related to employment standards around the country, says O’Connor.

“Those can lead to awards against employers or, if there's multiple or serious breaches, they can lead to fines.”

Vacation pay rules by jurisdiction

So, what are the rules that HR and employers should be aware of?

Of course, in Canada, the employment law varies between federal and provincial or territorial legislation, meaning different calculations, rules, and definitions, says Guy-Etienne (Guy) Richard, associate at Cassels in Toronto.

“You should really review the law of your specific jurisdiction to make sure that the law applies to that jurisdiction.”

In Ontario, for example, vacation pay is a percentage based on the vacation time. Employees must receive a minimum of either four per cent or six per cent of the gross wages they earned for the 12-month vacation entitlement year or stub period.

If they have less than five years’ employment, their vacation pay is four per cent of all the wages; if they have more than five years’ employment, their vacation pay is six per cent of all the wages.

“And, of course, there are sometimes contractual agreements that provide even more vacation pay or vacation than that,” says Richard.

Under the federal Canada Labour Code, employees governed by that statute – including employees paid in part or whole by commission and bonuses – are entitled to vacation pay of four to eight per cent (depending on their length of employment) of their gross or total wages. So it’s four per cent of wages if they're entitled to two weeks’ vacation; six per cent if they're entitled to three weeks; and eight per cent if they're entitled to four weeks.

Discretionary bonuses and vacation pay

In addition, the different provinces have some variation in the types of exceptions, says O’Connor. For example, the Canada Labour Code wages include all forms of remuneration, including bonuses, but don’t include tips.

And Ontario, B.C. and Alberta all have similar discretionary bonus exclusion language in the Employment Standards. So a discretionary bonus is not based on hours, production or efficiency, and it's not wages, he says.

“That's a common exception that employers try to fit under in Ontario, B.C. and Alberta is they say, ‘Well, it's a discretionary bonus.’ However, the big pitfall there is that the courts have interpreted that exclusion very narrowly.

“They think if the contract says, ‘This is a discretionary bonus,’ you're safe – it's not wages, you don't have to pay vacation pay on it. The problem there is the courts have repeatedly said, ‘Just because you use the word discretionary, doesn't mean it fits you within the exemption.’ Because oftentimes, you get a bonus if, in some way, you perform, and in that way, courts will try and tie the bonus to hours, production or efficiency.”

How vacation pay should be doled out

Another challenging area involves commission pay being « all-inclusive » of vacation pay. It's technically possible, says O’Connor, and the courts in Ontario and BC have said it may be possible for an employer to have a contract with an employee that says a commission rate is inclusive of vacation pay, whether it's under the Canada Labour Code or another act.

But the courts have said that requires very specific contractual language, he says.

“In order to say that the commission includes vacation pay, you have to do a couple of things: it has to be made fairly clear to the employee how that's calculated — so how it is exactly your commission rate includes vacation pay — and the employer has to keep good records of it, which is often a big problem when you try to say vacation pay is part of the commission payments.”

As for when to give payouts, normally under the ESA, vacation pay is given just before a vacation, says Richard.

“Oftentimes, an employee can also agree in writing to receive a vacation pay with a certain pay so they could agree in writing to receive the vacation pay at the same time that they receive the commission.”

The type of payout will vary primarily based on the employment contract, or collective agreement and the terms that you actually agree to, says O’Connor.

“Many jurisdictions permit you to agree on how it is that vacation is paid. So that's, that's more of an issue to be negotiated.”

But it needs to be clear and it needs to be applied consistently, he says.

“Remember, at the end of the day, no matter what approach you take, all of the acts typically will require you to keep records of how you pay vacation pay. That can be a big problem if this subsequently results in litigation, because if you, the employer, have a statutory obligation to keep these records and you don't have them, and the employee is saying, ‘I was never paid this,’ you're in trouble — you've got to have the proof.”

Holiday pay considerations

Of course, TD is also accused of failing to pay or properly pay public holiday pay on commissions, volume bonuses and other variable (non-salary) payments.

And the holiday pay calculation is slightly different because it’s based on previous weeks, says Richard.

“The ESA guidelines say that holiday pay is calculated by looking at the wages earned by the employee in the four weeks before the work week in which the public holiday occurs, plus the amount of vacation paid payable to the employee with respect to the four weeks before the workweek in which public holiday occurs.

“And then you take the total amount of those two and divide them by the sum of 20 and that gives you the your holiday pay. So if a commission payment were to fall in the lookback period of the holiday pay calculation, then it would impact also the holiday pay.”

However, it's normally more of a minor amount, he says, “so it's less of an issue as we see compared to vacation pay.”

The issue of holiday pay is a common pitfall as well, says O’Connor.

“It’s very important to look at the specific statute that applies, because, for example, holiday pay may be calculated on a slightly different basis than vacation pay. And it typically is.

“For example, it can be calculated on the basis of ‘regular wages,’ which may exclude certain types of pay; for example, overtime pay or premium pay, depending on the jurisdiction.”

Oversight and due diligence needed

So, how should HR respond if it discovers its organization is not in compliance with the rules? That raises a couple of issues, says O’Connor.

“How do you explain if you're going to bring the company into compliance? How do you explain that to employees? And then… if you know that solves the problem going forward, how far do you have to go back?”

For example, in the Medcan case,  they tried to go back and fix things but it still didn't prevent a claim because the company only tried to go back for the limitation period and the employees claimed back further than that, he says.

Overall, these payroll issues requires oversight — especially with large claims catching the attention not only of HR professionals and lawyers, but boards of directors, says O’Connor, “because under various business corporation legislation across Canada, these amounts, if they’re wages, corporate directors may be liable for amounts. So you're getting people at the highest levels of governance and oversight of employers really asking the types of questions [of] ‘What systems do we have in place to ensure we don't incur these liabilities?’ Particularly because legislatures have deemed those liabilities so critical as to potentially make directors liable for them.”