Recent OLRB decision looks at whether commissions are wages under the ESA, and overtime considerations
Exclusive to Canadian HR Reporter from Rudner Law.
For employers, calculating an employee’s entitlements can become more complicated when employees receive commissions or other forms of variable compensation. One issue that can easily be overlooked is the difference between wages being earned and wages being paid.
For example, an employee may earn a $5,000 commission in March, but under the employer’s compensation plan, that commission may not be paid until April. The employee was paid $5,000 in April, but the wages were earned in March.
The distinction matters because certain entitlements under the Employment Standards Act, 2000 (ESA) are based on wages earned during a particular period. Looking only at the amounts that appeared on an employee’s paycheques can therefore result in an incorrect calculation.
Decision of the Ontario Labour Relations Board
The Ontario Labour Relations Board (OLRB) decision in Hart Hentschel Inc o/a Auto House Honda v Lynn Whitesell provides a useful illustration of this issue. The employee, Lynn Whitesell, worked at an automobile dealership and received monthly commissions that were paid one month after they were earned.
The OLRB confirmed that commissions are wages under the ESA and, where applicable, must be included when determining an employee’s regular rate for overtime purposes.
The timing of the commissions also affected the calculation of public holiday and vacation pay. The employer calculated these entitlements based on wages that were paid during the relevant period. The Employment Standards Officer instead calculated them based on wages that were earned during that period. The OLRB confirmed that the latter approach was correct.
The difference mattered because Whitesell’s commissions were paid one month after they were earned. This meant that the commissions paid during a particular period reflected commissions she had earned in the previous month, rather than the commissions she had earned during that period. Because her commissions were increasing, the amounts paid during the relevant periods were lower than the amounts she had actually earned during those periods.
Importantly, using wages earned rather than wages paid does not necessarily result in a higher entitlement for an employee. It depends on the employee’s earnings and the timing of the payments. In Whitesell’s case, however, using the wages she had earned resulted in higher overtime, public holiday and vacation pay entitlements.
Calculating termination pay
The distinction between wages earned and wages paid is particularly important when calculating statutory termination pay for certain employees.
Section 60(2) of the ESA provides a specific formula for employees who do not have a regular work week or who are paid on a basis other than time. Their termination pay is based on the average amount of regular wages earned per week during the 12 weeks in which they worked immediately before notice was given.
This can create an issue for employees whose commissions are paid after they are earned.
For example, suppose a salesperson earns substantial commissions during the 12 weeks before their employment ends, but those commissions are not paid until after termination. Simply looking at the employee’s pay statements during the 12-week period could produce an inaccurate result because some of the wages earned during that period may not yet have been paid.
The reverse can also be true. A payment received during the 12-week period may relate to work performed and commissions earned substantially earlier.
The correct calculation therefore requires employers to look beyond the date on which money was deposited into the employee’s account, and instead properly account for when the amounts were earned.
Takeaways for employers and HR
The Whitesell decision is a useful reminder that calculating ESA entitlements requires employers to look at when wages were earned, not simply when they were paid. This is particularly important for employees who receive commissions or other variable compensation.
Particular care should be taken when an employee’s employment is ending. For employees who do not have a regular work week or who are paid on a basis other than time, statutory termination pay is based on regular wages earned during the relevant 12-week period. Reviewing payroll records without accounting for the timing of commissions and other variable compensation can therefore result in incorrect payment amounts.
The distinction between wages earned and wages paid may seem technical, but it can make a meaningful difference. Employers with commission-based or other variable compensation structures should review their payroll practices to ensure that statutory entitlements are being calculated correctly.
If you are unsure whether an employee’s compensation has been properly accounted for, or need assistance calculating statutory entitlement, speak with an employment lawyer. Getting advice before making a payment can help ensure that commissions, vacation pay, overtime, termination pay and other statutory entitlements are calculated correctly and can help avoid costly disputes later.
Alex Minkin is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].
