Benefits

The next class action?

By Kathleen Chevalier and Alex Lemoine

Historically, class actions have proven to be a challenge in employment law. Employees are thought to be a poor target for class action lawyers as they are notoriously difficult to access and organize, and individual claims tend to be of relatively low value. Most problematic, however, is that the claims tend to lack the required “common issues” between employees to permit a court to certify a class action. By their nature, the claims advanced are often inherently

individual and tend not to be amenable to common proof. As a result, proceeding as a class action tends not to avoid the duplication of fact-finding or legal analysis that class proceedings are designed to avoid.

However, several recent certifications of employee overtime-related class actions have shown that the challenge is not insurmountable. In fact, in recent years, Ontario courts have shown a greater willingness to stretch boundaries and find common issues on the understanding that certain losses can arise from systemic causes. Contemporaneously, there has been an increased strain on the resources of enforcement agencies and pressure towards greater judicial economy.

Although they have avoided the crosshairs in Canada so far, statutory vacation entitlements may prove to be the subject of future class action proceedings.

Overview of vacation entitlements

Vacation entitlements are governed by provincial or federal employment standards legislation. As a result, the rules and entitlements will vary between provinces. In Ontario, for example, statutory “vacation” is divided into the following two parts:

“Vacation Time” – Employees are entitled to at least two weeks of vacation time after each 12-month vacation entitlement year (pro-rated for any stub period); and

“Vacation Pay” – Employees are entitled to at least 4 per cent of wages (excluding any vacation pay) earned in the 12-month vacation entitlement year (or stub period, if applicable).

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Note that recently, Ontario put forward Bill 148, which, if passed, will increase an employee’s entitlement to three weeks of time and 6 per cent of wages after five years of continuous employment.

Further, an employee’s contract of employment (express or implied) can provide for a greater right or benefit with respect to vacation time or pay. For example, an employer can provide four weeks of vacation time and 8 per cent of wages as vacation pay.

Common employer mistakes

The entitlements outlined above appear uncomplicated. However, this perceived simplicity results in employers often falling prey to unforeseen errors, including improperly calculating vacation pay, inappropriate forfeitures, incorrect assumptions of exemption and deficient recordkeeping.

Improperly calculating vacation pay

Based on the model from the United States, vacation tends to be viewed by employers as a period away from work during which an employee will continue to receive his or her base salary. However, simply continuing an employee’s base salary during periods of absence may not be compliant with employment standards legislation.

Under Ontario’s legislation, while the term “wages” includes regular earnings, the meaning of the term is actually much more expansive. In fact, the term “wages” includes, among other things, overtime pay, public holiday pay, termination pay, bonuses and gifts that are non-discretionary or that are related to hours of work, production or efficiency. In contrast, “wages” does not include items such as severance pay, tips and gratuities, vacation pay and discretionary bonuses and gifts that are unrelated to hours of work, production or efficiency (e.g., a holiday bonus that is unrelated to performance).

As an example, if an employee worked overtime during a vacation entitlement year or received a bonus related to production, the continuation of the employee’s base salary during a period of vacation would not, by itself, be compliant.

Improper forfeiture

Many employers require that vacation be used or it will be forfeited. Generally, employers are permitted to enforce the forfeiture of vacation entitlements that are in excess of the statutory minimums. However, an employee can only forfeit some or all of his or her statutory vacation time with the employer’s written agreement and the approval of the Ministry of Labour’s Director of Employment Standards and an employee cannot forfeit the right to vacation pay, even if agreed to in writing.

Non-existent exemptions

The exemptions to Ontario’s vacation entitlement provisions are extremely limited. For example, unlike the overtime exemption, there is no general exemption for managerial or supervisory employees.

Vacation records

Under Ontario’s legislation, employers have very specific record-keeping requirements related to vacation entitlements, including records relating to the balance of vacation time remaining at the end of the vacation entitlement year, the vacation pay paid during the vacation entitlement year and the amount of wages on which the vacation pay was calculated. A failure to adequately keep appropriate records could result in the employer being unable to defend a claim for unpaid vacation pay.

Why haven’t there been any yet?

Although courts in Ontario have shown a willingness to certify classes of employees, vacation pay class actions have not yet arisen in Canada. Presumptively, these may be some of the reasons why:

The rules for vacation pay and time are complicated and nuanced. Even if an employer is calculating vacation pay incorrectly, employees do not often take notice.

The amounts at issue tend to be relatively minimal for average employees. The costs associated with class action proceedings can be substantial. When compared with the costs, there may not be much of an incentive. However, vacation pay class actions could be bundled with other claims (e.g., unpaid overtime and vacation pay).

There exist statutory mechanisms for simple and cost-effective enforcement. In Ontario, employees can register a complaint through the Ministry of Labour at no cost.

Preventative measures for employers

The certifications of the overtime-related class actions have highlighted the need for employers to be vigilant and diligent with their practices. To reduce the likelihood that an employer ends up defending a vacation pay class action, employers should:

Review their methods of calculating vacation pay to ensure that all elements are included and that the appropriate vacation entitlement year is referenced;

Review their existing vacation policies to ensure that “use it or lose it” does not apply to statutory minimum entitlements;

Ensure that appropriate records of vacation time and pay are being kept, including a tracking mechanism, to defend against claims of improper forfeiture or failure to pay vacation pay; and

Obtain legal counsel if unsure as to whether or not vacation entitlements are being properly provided.

Kathleen Chevalier and Alex Lemoine are associates practicing in the Employment and Labour Group at Stikeman Elliott.