Since 2019, there have been five proposed class actions against insurance companies and banks for failure to pay proper vacation pay to employees, both past and present. The total amount claimed in the aggregate of these five actions is around $1.2 billion. Royal Bank of Canada is a named party in three of the five actions; in one, it is facing a proposed $800-million class-action lawsuit involving thousands of advisors. Bank of Montreal and Allstate Insurance are also named in these class actions. A significant aspect of the allegations against these employers revolves around the calculation of their employees’ vacation pay. The issue is that for many of these employees, the majority of their compensation is and was made up of commissions and bonuses. Their vacation pay, however, was and continues to be based solely on their much lower base salaries.
The Ontario Employment Standards Act, 2000 requires employers to calculate vacation pay based on an employee’s wages. What exactly does the term “wages” mean? The ESA defines wages and provides examples of what is included and excluded from the definition. For instance, wages include commissions and bonuses related to hours of work, production or the efficiency of the employee, but not tips or discretionary bonuses.
Most provincial legislation in Canada features a similar definition of “wages”.
The above class actions have arisen on the heels of recent court decisions in which employees have been awarded outstanding vacation pay.
In Bain v UBS (2018), the Ontario Court of Appeal confirmed that an investment banker was entitled to, in addition to other significant wrongful dismissal damages, $87,472 in vacation pay because UBS had not based Bain’s vacation pay on his overall compensation, including bonus, as it ought to have.
In Kinch v Dufferin Communications Inc. c.o.b. as Evanov Radio Group (2015), involving a federally-regulated employer, the court upheld a commissioned sales representative’s entitlement to $35,396.02 in unpaid vacation pay. The employer had included the employee’s vacation pay as part of the commission she earned. The Court, however, was not onside with this approach of baking the vacation pay into other compensation amounts in this manner. It held that any employer who wishes to do this must, at a minimum, show that the employee is aware of their vacation pay entitlements under the Canada Labour Code, and that by agreeing to such an arrangement, the employee is receiving a benefit greater than or equal to those entitlements. The employer in this case failed to meet these minimum requirements.
In drafting vacation provisions in employment agreements for employees who receive purely discretionary bonuses, the following contract language may suffice: “Vacation pay will be calculated and paid to you on the basis of base salary alone, except as otherwise required by the ESA”. Where bonuses are a non-discretionary, integral part of an employee’s compensation, however, these bonuses will be considered to be part of the employee’s wages, and this type of contract language is likely to violate the ESA.
In light of the Ontario Court of Appeal’s decision in Waksdale v Swegon North America, would a contract provision that expressly states that these types of bonuses are not considered to be part of an employee’s “wages” be valid? The answer is unclear at this point; it is entirely possible that such a provision would be struck by a court because it violates the ESA, and the employee would be awarded vacation pay on their overall compensation. This issue may be addressed by courts in the future given the upward trend of litigation involving vacation pay claims.
Proper payment of vacation pay is often an after-thought or even misunderstood by many employees and employers. This can be blamed partially on the irregular payment of bonuses and commissions to employees who are paid in this manner, and the added administrative steps to track vacation pay on these amounts. It is important to keep in mind that vacation pay is calculated as a percentage of all wages, and that these amounts must be recorded separately and identifiable as vacation pay.
The proposed class actions above serve as important reminders to both employers and employees to keep an eye on the legal requirements around the payment of and recording of vacation pay.
If you have questions about vacation pay on bonuses and commissions, please get in touch for a consultation.