Miscommunications between HR and Payroll, and documentation shortcuts resulted in a $115,000.00 overpayment of separation payments. (See Kearns v. Canadian Tire Corporation, Limited (“Kearns”)). The processing of termination payments requires clear documentation and input and clear communication between HR and Payroll departments. Each department has a unique and complementary role to play in ensuring effective internal controls over separation payments.
Typically, HR ensures that separation payments comply with employment standards, employment contracts, or collective agreements. They handle the face-to-face (or socially distanced) interactions with the separated employees. An HR representative may also attend mediation and litigation proceedings, on behalf of the organization. Payroll is typically behind the scenes, responsible for processing the payout, making statutory and other deductions, depositing the net pay within the timeline required, and other processing responsibilities. Payroll, and others in the Accounting department, typically review payroll reports and investigate variances and other matters, as part of internal controls. These reviews and investigations can detect and provide early warnings of errors and frauds.
In, Kearns, a Canadian Tire employee commenced a wrongful dismissal lawsuit in October 2018.
In November 2018, Canadian Tire paid the employee just over $115,000.00 in termination payments (the “November Payment”), as one of several payments to the separated employee.
In December 2018, the parties went to mediation to try to settle their dispute and reached a settlement. The settlement agreement (“Minutes”), provided that Canadian Tire would pay the employee $150,000.00 in addition to “amounts already paid”. Its external counsel and manager of employee relations represented Canadian Tire at the mediation.
In February 2019, Canadian Tire alleged that its Payroll department had made the November Payment by mistake; the HR representative who attended the mediation was unaware of the November Payment; and the Minutes did not take this payment into account. Canadian Tire sought to recoup the $115,000.00 as an overpayment—the courts did not permit this.
The court had this to say about the alleged overpayment in its November 2020 judgement:
[40] …while the Canadian Tire representatives who attended the mediation may not have known that the November Payment had been made …, others in the company certainly knew. Although Canadian Tire adduced evidence to suggest that a clerk had dropped the ball in making the payment and a supervisor had failed to catch the blunder, the payroll records of the company clearly showed that the payment had been made….
And this to say about knowledge of the November Payment:
[47]…While the company’s payroll records and para. 5 of its mediation [documents] reflected those payments, the company’s representatives who attended the mediation deposed that they were not aware of the last payment, made on November 23, 2018.
The court further suggested procedures which might have avoided the overpayment, saying the following:
[48] I would note that this litigation could have been avoided through the simple drafting device of quantifying in the Minutes the “amounts already paid”.
Kearns illustrates the importance of effective communication between HR and Payroll. Canadian Tire’s payroll and mediation records reflected the November Payments. Somehow, there was a breakdown in communication, such that the representatives at mediation were unaware of (or perhaps, had forgotten) the amount of the total payments which the employee had received.
To compound this breakdown, the Minutes did not state the total payments already made to the employee. Had the Minutes contained more details, perhaps the entire picture would have been in black and white—total settlement amount, less amount paid to date, equals remaining payment—the overpayment would have been less likely to occur.
The error indicates that there was a communication breakdown, whether because facts were not communicated or recalled by either HR or Payroll, or for whatever reasons.
The takeaway
Ensure clear, complete and effective communication. Avoid miscommunications between HR and Payroll. Overpayments and other mistakes are evidence that somewhere, somehow, there was a breakdown in communication. Information was not transmitted or received clearly. Ensure that anyone representing the organization in mediation or litigation is clear on the financial transactions relevant to the proceedings. It helps to have a quick-reference summary of the numbers, agreed to or signed off by all the relevant departments. It may help to duplicate enough details in settlement agreements or other documentation so that financial terms agreed upon are full, clear and in black and white. Or if not, refer to and clearly understand the numbers before signing off on a settlement amount.
Policies and procedures are essential to internal controls, but the work required to create and maintain them can seem daunting. Finance and Accounting PolicyPro, co-marketed by First Reference and Chartered Professional Accountants Canada (CPA Canada) contain sample policies, procedures and other documents, plus authoritative commentary in the area of finance and accounting, to save you time and effort in establishing and updating your internal controls and policies. In particular, see Chapter 4 – Payroll and GV 4.05 – Litigation. Not a subscriber? Request a free 30-day trial of Finance and Accounting PolicyPro here.
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