By regularly reviewing company policies and practices, payroll can help ensure it is complying with the law before employment standards officers come knocking
No one likes to make errors, but for payroll departments mistakes can be costly. Fines and penalties can add up quickly if payroll professionals are not following the rules.
This does not just apply to source deductions and remittances. Errors related to paying employees can get employers in trouble with provincial/territorial employment standards board. For instance, in Ontario, the top five complaints against employers in 2014/15 were all related to employee payments: unpaid wages, vacation pay/time, termination pay, public holiday pay and overtime pay.
Employers that do not comply with employment standards rules risk the penalties that may come with complaints, inspections, audits and possible prosecutions. One way for payroll and human resources departments to help keep their employer out of trouble is to review their practices to ensure they are following the rules.
“It’s hard to answer (an Employment Standards) audit and say that you are paying people properly for overtime and hours of work if you don’t actually know,” says Tim Lawson, a partner in the labour and employment group at the law firm McCarthy Tétrault in Toronto.
He recommends that before Employment Standards auditors or inspectors ever come calling employers audit their own practices to look for problems. Lawson says employers should do this at least once every two years and whenever they are changing job classifications or policies affecting employment standards, such as rules around overtime, vacation pay, or termination pay.
Lawson adds that for employers in Ontario, these kinds of pro-active audits are particularly important now that Employment Standards officers can require employers to conduct self-audits and report the results to them. The government amended the Employment Standards Act, 2000 to add this provision as of May 20, 2015.
“The audit can cover anything that the government is interested in looking at, but typically the audit will be focused on hours of work, overtime,” he says.
If a government-mandated self-audit shows an employer has not complied with employment standards rules, the employer has to report this and provide proof it is taking steps to correct the violation, such as paying outstanding wages. While admitting an error is the right thing to do, Lawson points out it could lead to further Employment Standards investigations.
“There’s a risk that even if in your response you say that ‘We have corrected a problem and here is how we have corrected it’, the government will look into that a little bit deeper and make enquiries to ensure that you have met your obligations,” he says.
“(A mandatory self-audit) may be the first step towards a full-blown inspection by an inspector. Payroll has to be very careful about what exactly they are responding about and how to frame that response so that they are not putting their organization into unnecessary jeopardy,” Lawson adds.
“We are advising our clients to be proactive and conduct their own self-audit in advance so that they are not going to be surprised when the (government’s self-audit) letter comes to the door,” he says.
Ontario is not the only jurisdiction that may ask employers to audit their practices and report back. Lawson says some of his federally regulated clients recently received self-assessment questionnaires from the federal government asking them to report on whether they are complying with Canada Labour Code rules for wages, hours of work, statutory holidays and vacations.
“It’s the wave of the future actually because it’s an easy way for governments to get information about companies without actually having to send in auditors or inspectors,” he says.
Nova Scotia’s Labour Standards Division also sends employers self-audit questionnaires. When it first started using them in 2003, the self-audits looked at issues around employee pay. Now they focus more on employer record-keeping.
“In the last few years, we have used self-audits more to assess record-keeping requirements, not as much for issues around pay,” says Lynn Hartley, director of the Labour Standards Division. “Now, with issues of pay, we’re more likely to do a more comprehensive audit.”
“We were questioning were we getting the value out of the self-audit?” she says. “We were finding that they seemed to work quite well with the record-keeping pieces, things that are a little more straightforward. ‘Are you keeping information about the gross pay?’ ‘Are you keeping information about the deductions from pay?’ ‘Are you keeping information about whether you are paying holiday pay?’”
When it came to looking at issues of paying employees, she says the division found that even after sending out self-audits, it still needed to do its own inspections and audits to ensure employers were complying, so it shifted the focus of self-audits to record-keeping.
Hartley says the self-audits serve a dual purpose of helping the division find out if employers are complying with the province’s Labour Standards Code and educating employers about their responsibilities.
“It is meant to help them understand some of the more complicated areas,” says Hartley, citing statutory holiday pay, vacation pay and minimum wage. “It’s to help them understand the rules and to have them go through the exercise of assessing their current practice against those rules,” she adds.
“Our package also asks them to identify if there are problems. And if there are problems, to correct those problems and to confirm with us that they have corrected the problems.”
When employers return the completed questionnaire, they have to include a sampling of records so Labour Standards can do its own check. While employers are not required by law to return the questionnaire as they are in Ontario, Hartley says most employers voluntarily comply.
“Most employers will complete it because the alternative is for us to actually do an on-site visit and inspect the records, which they are required to provide to us,” Hartley says. “For some employers, (a self-audit) is a less intrusive way to interact with our office to address compliance issues.”
On average, she says the division sends out about 20 self-audits each year, although it may distribute more if it is targeting a certain industry or sector.
In Ontario, the Labour Ministry could not say how many self-audits it has ordered since they were added to the act, but it noted that in the 2014/15 fiscal year, it requested 371. (Prior to May 20, 2015, Employment Standards could request self-audits, but they were not covered under the legislation.)
A Labour Ministry spokesperson could not say whether government-mandated self-audits in Ontario will focus on certain employers or industries, although Lawson says he expects that they will.
“I anticipate that certain sectors will be more likely to receive audits than others,” he says. “The Liberal government, as part of its agenda, (wants) to address industries or sectors where ‘vulnerable’ workers or precarious workers are employed,” he says.
“I would suggest that that would mean retail, service-sector businesses or industries that predominately employ females and/or visible minorities. I think you will see the government target industries or sectors that employ part-time workers (and) workers that are not necessarily on set schedules,” he adds.
If an employer chooses to do its own self-audit to get ahead of possible problems, Lawson suggests it pay close attention to its policies for and records on deductions, statutory holiday pay, vacation pay, hours of work and overtime.
“Overtime is one of the big ones,” Lawson says. “We see a number of (overtime) class-action suits.” Overtime problems can arise from not paying the overtime rate for overtime hours worked or from excluding certain employees from overtime pay rules.
“You will see companies being a little too aggressive on who is a manager or a supervisor and not pay them overtime because they believe that because somebody is a salaried employee they are not eligible for overtime, which is not true in many cases.”
When doing a voluntary self-audit, employers can let the payroll or HR department handle it or hire a law firm. Lawson says there are advantages to using a lawyer.
“(D)oing an internal self-audit involving a law firm can offer some legal privilege potentially to that audit,” he says.
“If, for example, something is uncovered which may lead to the view that there is a lot of retroactive liability, let’s say for improper payment of overtime or non-payment of overtime, that can be addressed in advance and corrected through a self-audit, which does not necessarily have to be revealed later on because it will be cloaked under solicitor-client privilege.”
If employers wait until the government requires them to do a self-audit, they could be in trouble if they have compliance issues, Lawson adds.
“By the time the audit request comes, it’s too late for that (pro-active audit) because the company will have to reveal to the government that they have an issue and, at the same time, will have to demonstrate that they have taken steps immediately to correct it.”
Hartley adds that if employers choose to do their own audits, they can always turn to labour standards offices for help.
“If they had any questions, we would be encouraging them to call us because we would be more than pleased to help them in any way we could,” she says.
Regardless of who does the self-audit, Lawson says it is important to make the first one as thorough as possible. Followup self-audits can be much simpler, he says.
“Maintenance can be done relatively easy by doing spot checks. I was talking to a company recently that only needs to periodically pull out some sample employee records — an employee that is a manager, an employee that is a non-manager, someone that is part-time — and do a spot check to see if those employees are paid their holiday pay, their vacation pay, (and) their hours of work properly and that the actual records are kept in the right way,” he adds.