Employment Standards Ruling Undermines Incentive Pay

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The Horse and Handler statue at the U.S. Department Of Labor, in Washington.

When company and worker part ways, financial bonuses could pose new liabilities for B.C. employers.

This summer, an Employment Standards Branch adjudicator ruled that a former employee of Mr. Lube Canada was entitled to an award equalling 4 per cent of the bonuses paid him while he was employed. The decision, while perhaps a logical interpretation of the Employment Standards Act, will surprise employers and, in my view, discourage the use of performance-based pay.

The Mr. Lube decision revolves around a manager who received nearly $70,000 in long-term incentive pay. After his employment ended, he filed a claim for vacation pay on top of that incentive payment, and was awarded more than $2,800 in extra vacation pay. Mr. Lube was also ordered to pay a penalty for failure to pay all wages owed.

Employment standards legislation is in place in all provinces and territories in Canada, and protects employee rights like minimum wage, maximum hours of work, right to vacation and leave, and minimum notice of termination or pay in lieu of notice. As additional protection to employees, any employment contract terms that do not meet these minimum standards are deemed void.

One of the legislation’s goals is to ensure that all earned wages are paid at the end of the employment relationship. In B.C., the Employment Standards Branch and Tribunal handles employee claims for unpaid wages.

The past few years have seen a number of decisions on claims for unpaid bonuses by ex-employees. Most have dealt with whether the bonuses fall within the definition of wages (1), and, if they do, whether such ‘wages’ were earned at the time of termination. In the Mr. Lube decision, the bonuses had already been paid in full, but the ex-employee relied on the vacation pay section of the Act (s. 58) to claim an additional four per cent vacation pay on those bonuses.

The issue of vacation pay never arises for salaried employees unless at the time they quit or are fired, they have unused vacation time. The employee in this case had used or was paid for all his regular vacation. The significance of the Mr. Lube decision (which is being followed in other claims), is this: employers who paid out performance based bonuses now are liable for an additional amount of 4 per cent or 6 per cent (depending on years of service) vacation pay calculated on the bonuses, even though there may be no agreement or expectation that employees were entitled to such additional payment.

Employment standards legislation, with its minimum standards and penalties for breach, protects employee rights and ensures unscrupulous employers do not take advantage of vulnerable employees. Those that enacted this legislation, though, could not have anticipated the consequences of the Mr. Lube decision for employers who have established generous bonus plans to reward employees for exceeding standard levels of productivity or efficiency. If, to mitigate these unanticipated costs and mandatory penalties, employers eliminate incentive bonuses tied to production or efficiency businesses and employees both will suffer.

(1) “wages” includes money that is paid or payable by an employer as an incentive and relates to hours of work, production or efficiency, but does not include money that is paid at the discretion of the employer and is not related to hours of work, production or efficiency.

This blog is written by Nicole Byres of Clark Wilson LLP and made available by BCBusiness to provide general information on employment law, and is not a substitute for competent legal advice from a lawyer licensed to practice in your jurisdiction. Neither the reading of this blog, nor the sending of unsolicited comments or emails creates a lawyer-client relationship with the writer or Clark Wilson LLP.