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What’s wrong with this picture? Settlement excludes amount of vacation pay owing

The following wrongful dismissal settlement recently came across my desk. It identified the following payments owing on a termination without just cause:

  • $2,000 in regular wages, owing to the last day worked
  • $6,000 wages in lieu of notice
  • $6,000 in statutory severance
  • $15,000 in damages for pain and suffering

What’s wrong with this picture—specifically for employees subject to the Ontario employment standards? The problem is that the settlement has not specified the amount of vacation pay owing. What is the right amount of vacation pay owing in the situation above?

In Ontario, employers owe vacation pay on employee wages (section 35.2 of the Employment Standards Act, 2000). Wages are defined in section 1 of the Act to include “any payment required to be made by an employer to an employee.” Here is where it gets tricky. In Ontario, the employment standards may require two separate types of payments to an employee who is terminated without cause. One, wages in lieu of notice, which the Ontario legislation describes as “termination pay,” in section 61. Two, what the Ontario legislation describes as “severance pay,” in sections 64 and 65. Here we will use the term “statutory severance” to separate this from any common-law requirement to provide severance in the form of a retiring allowance.

Simply put, vacation pay is calculated on wages, which includes both wages in lieu of notice and statutory severance. Hence, vacation pay is owing on any wages in lieu of notice or statutory severance paid in Ontario. This means the vacationable earnings above total $14,000. Damages, or any retiring allowance, is not a vacationable earning as it does not fall within the definition of wages under the Employment Standards Act. Assuming the employee was owed vacation pay at four percent, based on the settlement terms above, the employee is owed an additional $560 in vacation pay. In practical terms, had this settlement been structured properly, the additional vacation pay would likely have been carved out of the damages and listed separately. In other words, the total paid to the employee in this situation would probably not have changed, just the allocation of amounts between what is T4 income and what is a retiring allowance.

However, it seems that some people would disagree with the above. For example, this Ontario Ministry of Labour web page, and section 15.7.1 of the ministry’s Policy and Interpretation Manual, both describe vacationable earnings as including wages in lieu of notice, but excluding severance. Although it’s not clear, the assumption is that this latter term refers to “statutory severance” owing under sections 64 and 65 of the Act. The Policy and Interpretation Manual cites a 1984 Ontario Divisional Court case as the basis for this policy (Inco Lt. vs. U.S.W.A 1984). This case was a request for judicial review of a referee’s decision under the Employment Standards Act.

With all due respect, the case cited above and the referee decision on which it is based do not support the Ministry of Labour view that statutory severance is not a vacationable earnings.

First, this was a case about vacation pay owing on wages in lieu of notice. That vacation pay is also owing on statutory severance pay was not a factor in this case. In fact, the term severance is found in neither the court case nor the referee decision. The logic of the referee decision turned on whether wages in lieu of notice are attributable to a period of employment. The referee’s decision, supported by the court, is that there is a strong enough relation between the period of employment and the wages in lieu of notice paid, for the latter to be included in the wages from a period of employment, on which vacation pay must be paid.

Second, the annotation in the Divisional Court case, provided by Carswell, also states that “appropriate vacation pay is also payable upon the minimum statutory severance” under the Ontario legislation as it stood at the time. Although much has changed between the early 1980s and now, nothing in these changes affects the validity of those annotation remarks. In other words, both wages in lieu of notice and statutory severance are vacationable earnings.

Third, the case cited above is a Divisional Court case from the early 1980s. The case itself was never appealed to a higher court. It does not appear to have been cited in other court decisions since. Even if the case meant what the Ministry of Labour suggests, it would be hard to believe that such a case would have sufficient standing to replace the plain meaning of the employment standards legislation then and now.

Alan McEwen & Associates
armcewen@cogeco.ca

905-401-4052

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Alan McEwen

Payroll consultant at Alan McEwen & Associates
Alan R. McEwen‘s involvement in payroll spans over 20 years. As a practitioner, he has implemented and managed outsourced payroll operations for both large and small employers. As a consultant, he has worked with many organizations, public and private, on HR/payroll process re-engineering, strategic systems decisions and forensic payroll audits. Read more
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