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Preventing Overtime Liabilities

Do you believe in letting your employees do their work on their own, without monitoring exactly when they do it or how long they take to do it? If so, then you may want to reconsider your laissez-faire approach, in light of the grave financial risks to which such an approach now gives rise.

Alan Riddell
This is because your encouragement, or even passive toleration, of overtime work can trigger very significant financial liabilities for you, unless proper precautions are taken. This was recently discovered by two of Canada’s major banks when they found themselves slapped with multi-million dollar class action suits for unpaid overtime owing to many of their employees.

The first of those two cases concluded in 2016 with the employer – the Bank of Nova Scotia – having to pay 2,200 of its employees a whopping $38.7 million in accumulated overtime claims, representing an average of more than $17,500 in overtime pay per employee! This was on top of $12.5 million in legal fees which the bank was forced to pay to unsuccessfully defend against those employee claims, thereby bringing the total overall cost to the bank of rectifying the problem to over $50 million! In the second and potentially even more expensive case, the CIBC is now being sued by its employees for alleged unpaid overtime work totalling more than $500 million.

Kyle Van Schie
There is probably no aspect of employment law which is as widely misunderstood or as repeatedly breached by employers, HR professionals and their legal counsel, than the law governing overtime work. It has recently been estimated that between 70% and 90% of private sector employers in Ontario operate in constant, but unconscious, contravention of the mandatory overtime provisions in the Employment Standards Act (ESA). By unwittingly operating in this way, these employers are exposing themselves to the future risk of having to pay huge overtime claims and administrative penalties.

The vast majority of companies which regularly contravene Ontario’s overtime laws do so out of ignorance of the law. However, as the adage goes, ‘ignorance of the law is no excuse’, particularly in employment law. Accordingly, if you want to avoid costly future overtime claims for your company, it is essential that you understand, and then completely discard, some of the following dangerous legal myths to which many owners and HR managers frequently, but inadvertently, subscribe in the management of their firm’s human resources.

Dangerous myth # 1:
Overtime pay must be authorized by the employer, otherwise the employee is not entitled by law to claim overtime pay.

This is false. Overtime pay must be paid to all employees who work overtime (unless they fall within an exempt category), regardless of whether or not that overtime work was ever actually authorized. This means that even an employee who works overtime after being explicitly forbidden to do so by his employer is nonetheless legally entitled to receive overtime pay! Under Ontario law, the employer is liable for, and must pay that employee, overtime pay for all hours worked in excess of the Ontario overtime threshold of 44 hours per week, even if that work was expressly forbidden by the employer.

As recently observed in the case of Thunder Bay Regional Health Sciences Centre v Ontario Nurses Association, Ontario courts have repeatedly held that “the lack of authorization to perform [overtime] work [is] not... an impediment to the employee’s claim to be paid for those hours of work.”

In practical terms, this means that the responsibility for ensuring that an employee does not work overtime, and thus does not get paid overtime, rests squarely on the employer. If you do not want your employees to work overtime, you must not only order them to stop, but must see to it that they actually do stop their work. Otherwise, all of those employees whose work spills over into overtime are automatically entitled, by law, to receive overtime pay from you for all of the overtime hours that they have actually worked.

Dangerous myth # 2:
Employees who earn a salary rather than an hourly wage cannot claim overtime pay.

This too is false. In Ontario, all eligible employees who work in excess of 44 hours per week are entitled to overtime pay, regardless of whether they are remunerated on an hourly basis or by a fixed annual salary. When it comes to overtime pay, there is absolutely no difference between a salaried employee and an hourly wage employee. In order to calculate a salaried employee’s overtime pay divide the employee’s weekly salary by 44 to determine the hourly wage. That hourly wage is then multiplied by 1.5 for each hour worked in excess of the 44 hour overtime threshold.

Dangerous myth # 3:
Managers and supervisors are not eligible to receive overtime pay.

This is only partly true. Generally speaking, managers and supervisors are not eligible to receive overtime pay. However, many employees with the work title of “Manager” or “Supervisor” are exempted from this rule, and are therefore entitled to claim overtime pay for hours worked in excess of 44 hours per week. For managers or supervisors to be denied the right to claim overtime pay, they must actually manage other employees and must devote the greater part of their day to doing so. Under the ESA, managers or supervisors enjoy the right to claim overtime unless (1) the majority of their work is supervisory or managerial and (2) they execute those tasks on a regular basis. Accordingly, if your managers’ jobs include both managerial and non-managerial tasks, it is important that you ensure that the majority of their tasks are truly managerial/supervisory in nature and that they conduct those tasks on a regular and constant basis. Otherwise, you may find yourself facing costly, and legally watertight, claims for overtime pay from your managers, legitimately seeking indemnification for the hundreds of overtime hours which they worked last year.

Dangerous myth # 4:
Employees can agree to contract out of working overtime and claiming overtime pay.

This is untrue. It is illegal for an employee to contract out of his right to be paid overtime pay for hours worked in excess of 44 hours per week. This means that any agreement between an employer and employee not to claim overtime pay for overtime hours worked is legally invalid and totally unenforceable! Such an agreement is prohibited under subsection 5(1) of the ESA, which governs employment relations between all employees and provincially regulated employers in Ontario. Pursuant to subsection 5(1) and 22(1) of the ESA, employees cannot agree to work overtime hours at a rate lower than 1 ½ regular rate (which is the rate for overtime pay in Ontario) and any contractual agreement to do so is void. Nor can employees agree to reduce their regular rate for those hours worked in excess of the applicable overtime threshold. Ontario law makes any such agreement void and legally unenforceable.

Dangerous myth # 5:
An employee cannot agree to have paid time off instead of overtime pay
This too is untrue. The ESA explicitly stipulates that if the employer and the employee agree in writing, an employee can receive paid time off instead of overtime pay. This is at times referred to as “banked” time or “time off in lieu”. If the employee has previously agreed to bank overtime hours, he or she must be given 1 ½ hours of paid time off work for each hour of overtime worked. Paid time off must be taken within 3 months of the pay week in which it was earned or, if the employee agrees in writing, within 12 months.

Dangerous myth #6:
Employers must always pay overtime for each overtime hour an employee works.

This is not always true. Employers can avoid paying overtime for each overtime hour that an employee works by entering into a written agreement, referred to in Ontario as an “averaging agreement”, and by obtaining the approval of the Director of Employment Standards. If signed by the employees and approved by the Ministry, an averaging agreement provides the employer with a temporary break from its obligation to pay time and a half for each hour of overtime worked.

Pursuant to the averaging agreement, an employee's hours of work may be averaged over separate, non-overlapping, contiguous periods of two or more consecutive weeks, at the end of which the employer can average the employee’s hours of work and only pay the average of the overtime hours worked during those weeks. As described by the Ministry in its Interpretation Manual:

“The employee and employer agree in writing to average the employee’s hours of work over four-week periods. The employee works 48 hours the first week, 44 hours the second week, 40 hours the third week and 50 hours the fourth week. The employee’s overtime hours will be determined by finding the average number of 45.5 hours per week ((48 + 44 + 40 + 50) divided by 4).

Accordingly, the employee would be entitled to overtime pay in respect of 1.5 hours of overtime work per week within the four-week period. In the absence of an averaging agreement, the employee would have been entitled to four hours of overtime pay in the first week and six hours of overtime pay in the fourth week.1”

However, before the averaging agreement can be legally valid, there are a number of statutory conditions which the employer must meet, which are outlined in the ESA.

In 2016, the risk to your organization of being sued for unpaid overtime pay is far greater than in the past. Due to recent amendments made to the ESA in 2015, employees can now file claims to recover unpaid overtime going back for a period of two years. As a result, any employee who resigns or is terminated from your organization can insist that you pay him for all extra hours that he may have worked, but for which he was never paid, during the final two years of his employment. Because of these recent amendments to the law, the retroactive overtime claim of a single dismissed employee can easily end up costing your organization tens of thousands of dollars, if not more, in the same way as happened earlier this year to the Bank of Nova Scotia.

To ensure that your organization is not amongst the many thousands of Ontario employers who have recently fallen victim to one of these six dangerous and potentially costly myths, and is not unwittingly breaching the overtime provisions of the ESA, you may find it wise to consult with a lawyer specializing in employment law to ensure that your overtime policies and practices fully comply with Ontario law.
1. Ontario, Employment Practices Branch, Employment Standards Act 2000: Policy and Interpretation Manual, vo.1 (Toronto: Thomson Carswell, 2007) at 12-30.

Alan Riddell and Kyle Van Schie are Ottawa lawyers who specialize in labour and employment law and who work at the law firm of Soloway Wright LLP.

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Preventing Overtime Liabilities

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