About one in five employees in Canada works overtime, averaging about nine extra hours per week. Only about half of these employees are compensated with overtime pay. That means potentially one in ten Canadian employees are working unpaid overtime hours. This represents over C$15 billion in potential claims for unpaid overtime every year, just at straight time. At time and a half, this is more than C$22.5 billion. Relatively few individual employees make claims for unpaid overtime. With the recent proliferation of class action lawsuits for unpaid overtime, however, the risk of claims encompassing a significant proportion of that liability is growing.
Class action overtime lawsuits exploded in the United States in recent years, and the trend has migrated north, as Canadian plaintiffs follow in the footsteps of their American counterparts and plaintiff class action lawyers take unpaid overtime in their sights. In Canada, large accounting firms, banks, insurers, and retailers are all at risk of class actions for employment standards violations, with large numbers of employees working unpaid overtime in a consistent fashion. So far, four large class action lawsuits have been commenced by plaintiffs in Canada, alleging overtime hours that have not been compensated for by their employers, as required by both provincial and federal employment standards legislation.
As with many employment issues, prevention is the key. To prevent claims for unpaid overtime, employers need to know the law and the practical solutions to achieve compliance. This paper discusses the different routes employees can take to make claims against employers for violations of overtime standards. It then examines common employer practices and identifies pitfalls, noting relevant provisions of federal and Ontario legislation. It next reviews the recent class action suits made for unpaid overtime and related issues. Finally, this paper outlines some recommended approaches to reducing and eliminating such problems.
II. Employer Practices and Common Violations
For most Ontario employers, the Employment Standards Act (ESA) sets rules for overtime. Unless an employee is exempt, the employer must to pay the employee time and a half for hours worked in excess of 44 hours per week. If the employee agrees, the hours can be averaged over two weeks.
There is a widespread misconception is that salaried workers are not entitled to overtime pay. According to the Human Resources Professional Association of Ontario, 44.75% of organizations said their non-management, salaried employees are expected to work overtime without pay. Whether an employee is paid on an hourly or salary basis is not criteria for overtime entitlement. Salaried employees have the same entitlement to overtime as hourly employees. Salary versus hourly pay are merely methods by which wages are paid and affect how the entitlement to overtime is calculated, not whether it exists. The regular pay of salaried employee is determined by dividing their weekly salary by the hours in their regular work week.
Many complications regarding overtime provisions arise when dealing with exceptions to the rule. Employees in some industries, such as agriculture, are not entitled to overtime pay. Employees in other industries, such as construction workers, must work more then forty-four hours before they reach the threshold that triggers overtime pay. In addition, the ESA does not extend overtime protection to, among others, lawyers, doctors, architects, landscapers, professional engineers, information technology professionals or – the one that creates the most confusion - employees in a supervisory or managerial position.
Many employers become confused between the maximum number of hours that an employee is allowed to work in a week and employee's entitlement to overtime pay. The ESA states that employers normally cannot require or permit an employee to work more than 48 hours in week. Outside of an emergency, an employee can exceed 48 hours in a week only when the employee has signed a written agreement to do so and the employer has applied for approval to the Ministry of Labour. At that point, the limit rises to 60 hours a week. As with overtime, there are some exceptions to the rules. The hours of work limitation, however, is not related to the overtime obligation. Even if an employee agrees to work 60 hours per week and the employer obtains an approval from the Ministry, overtime pay still becomes an obligation past 44 hours per week.
Employees do not have the ability to contract out or waive minimum employment standards. They do, however, have the ability to contract for better standards. Employees often have a contractual right, express or implied, to extra pay for extra hours. For example, many employment contracts specify set hours of work, such as Monday to Friday from 9 a.m. to 5 p.m. For work done in excess of these hours, some contracts specify overtime pay or lieu time. Here, an employer can end up paying overtime well before 44 hours a week. Even if the extra pay is only at straight time rather than time and a half for hours up to 44 per week, the cost can still be very significant. Even if a contract does not indicate how extra hours will be compensated, if at all, employees may have a right to compensation for these hours, especially if overtime has been paid in the past. A contract that specifies lieu time is not going to be of help to the employer when the employment relationship ends, nor will it help if the employer is too busy to let the lieu time be taken. In both cases, a right to monetary compensation will quickly follow.
III. Areas of Concern
In relation to employer practices that violate the overtime laws, some infractions are more prevalent than others. One of the most common problems is the misclassification of employees as supervisory or managerial. No doubt, this is sometimes a conscious attempt to save money by trying to eliminate the employee's overtime entitlement. Much more often though, employers are not trying to circumvent the law, they are simply confused. Many employers classify employees as managerial to boost the employees' egos. White-collar status, or finally making 'manager' can be an important tool.
According to the Human Resources Professional Association of Ontario, 29.85% of organizations did not understand the legal definition of "manager" for overtime purposes. Determining who is a manager or supervisor is not based on the title given to a position, the fact that other employees refer to that person as a manager, the form of payment of wages (e.g.., salary, hourly wage, commission), or the responsibility to open and close the business for the day.
The simplest indication that a job is managerial in character is whether the person supervises other employees. Supervision is not the only factor though. Other managerial functions include: authority to hire, fire, promote, transfer, or discipline employees; responsibility for substantial purchases; day-to-day management of operations and administrative functions; decision-making abilities with regards to company policy and planning; financial control and budgeting ability, production planning, attendance at top level management meetings and the regular exercise of discretion and independent judgment in management affairs. All of the facts of a particular case need to be assessed to determine if an employee fits within the managerial exception, and one factor alone is conclusive.
In addition, even though managerial or supervisory elements may be present, to qualify, the employee has to engage in managerial or supervisory activities most of the time. Their other non-managerial activities have to be irregular or exceptional.
b. Form of Compensation
For the same amount of money and the same total hours, most employees would rather have a higher base salary and not earn overtime pay. This gives them the financial security of receiving the same amount of pay each week. It's also easier for the employer, because it makes record-keeping and budgeting simpler. Unfortunately, the law does not automatically presume that employees made this implicit trade-off. If employers and employees want to make this reasonable trade-off, they should consider specifying a realistic number of hours in a written employment contract. Employers who don't protect themselves in this way run the risk of paying for an employee's overtime twice; first through higher wages, and second through unpaid extra hours – at the already high wage rate.
Another problem is extra compensation for hard workers through bonuses or promotions. Neither bonuses nor promotions count as overtime pay, should an employee bring a claim for unpaid hours.
c. Keeping Track of Hours
Two other common practices that create liability for employers are poor documentation of work hours and classifying working from home as off the clock work. Many employees take work home with them. Hours worked at home count as hours worked. While an employer can sometimes argue that it didn't know the employee was taking work home, lengthy, work-related emails from an employee to her supervisor late in the evening on a regular basis are going to make that argument rather problematic. If the employer has no defined way of keeping track of employee's hours, it is going to be vulnerable. On the other hand, if the employer requires employee's to submit records of their hours every week, it will have a significant level of protection.
IV. Consequences of Overtime Violations
In addition to the class action proceeding route, employers operating in an area of provincial jurisdiction also run the risk that an overtime complaint will be filed with the Employment Standards Branch of the Ministry of Labour. A complaint of this nature will trigger an administrative procedure which typically includes an administrative officer's investigation, employer production of related documentation, a fact-finding meeting before the administrative officer and a decision by the officer to dismiss the complaint or issue an order to pay compensation.
Compensation under this regime is limited to C$10,000 for any one employee. This type of administrative complaint, however, can also lead to a further investigation. Government Employment Standards Officers looking into one employee complaint have the authority to investigate the employer to see if there are any further violations against other employees, even if no other employees have made a complaint. The orientation of Employment Standards Officers toward proactive investigation of violations on their own initiation waxes and wanes. To avoid the risk though, employers with a lot of employment standards violations will sometimes settle with the employee who filed the complaint before the Employment Standards Branch begins its investigation, to keep things quiet. Of course, the Ministry of Labour also conducts surprise workplace spot-checks, both at random and in response to anonymous tips.
In Ontario, violating the ESA can result in a provincial conviction imposing a fine of up to C$100,000 for a corporation. Corporations face fines of up to C$250,000 and C$500,000 for second and third offences. If the violation is by an individual, punishment can even include up to twelve months in jail. Certainly, the Ministry of Labour does not pursue major fines very often, let alone imprisonment. In a more realistic deterrent, however, the Ontario Ministry of Labour has a practice of issuing a press release with every conviction, naming the employer.
There is a similar, though not identical regime for employers that operate in the federal jurisdiction, regulated by the Canada Labour Code.
Outside of the statutory enforcement regimes, the class action is the main consideration. The class action proceeding has potential for serious liability with its huge plaintiff classes, higher court costs and extensive media coverage. As a result, class actions quite rightly worry a lot of employers. Plaintiff class action lawyers have figured this out before, and the current round of class actions is not the first such attempt. In the past, courts were more reluctant to certify class actions. In 1998, in Halabi v. Becker Milk Co.,the courts denied certification of a class action suit for unpaid overtime under the ESA. At that time, the court felt that since the ESA was designed to have its own faster, less costly administrative process, the employment standards complaint process was preferable to resolving the common issues through a class action. This indicated the court's reluctance to recognize disputes as actionable where there is legislation in place which provides alternate remedies, as found under both the Canada Labour Code and the Employment Standards Act.
A few years later, the court in Kumar v. Sharp Business Forms Inc. rejected the reasoning in the Halabi case and certified a class action for unpaid overtime, holiday and vacation pay. In doing so, the court pointed out that the ESA expressly allows court actions as an alternative to proceedings. The court also suggested that class proceedings serve important public policy objectives, such as access to justice, judicial economy, and behavior modification.
Kumar came in 2001. The major class actions that have made headlines recently were launched just a few years later.
V. Recent Canadian Claims
a. Dara Fresco v. Canadian Imperial Bank of Commerce (June 2007)
A C$600 million class action suit, this is the largest unpaid overtime class action in Canadian history. On June 4, 2007, the plaintiff Dara Fresco filed against CIBC on behalf of 10,000 current and former part-time and full-time non-management, non-unionized employees across Canada. The class seeks C$500 million in damages for unpaid wages for the unpaid overtime hours worked by the class and C$100 million in punitive, aggravated and exemplary damages. The claim alleges that the bank does not pay its tellers and other front-line workers for overtime in violation of Canada Labour Code.
Accordingly to the statement of claim, CIBC employees are routinely asked to work in excess of their agreed upon hours of work, including before the scheduled beginning and after the scheduled ends of their shifts and during lunch breaks to perform work and services for CIBC's benefit. The claim alleges that CIBC actively discourages employees from filing for extra pay and directs employees to prepare time records that described their hours of work as no more than their regular daily hours of work, even when they work in excess of those hours.
In addition to monetary damages, class members are seeking an interlocutory and final order declaring the bank's overtime policy unlawful and unenforceable, effective April 26, 2007. The claim alleges that CIBC's overtime policy and practices are flawed because they: (i) provide that employees will only be paid overtime if approved in advance by management, except in particular circumstances where necessary; (ii) encourage or permit employees to only record their standard hours of work, regardless of whether they work longer hours than the standard; and (iii) discourage employees from submitting claims for overtime. The claim also alleges that CIBC assigns extra duties and sets performance standards under its "Performance Management and Measurement System" in such a way that employees must work beyond their regular hours in order to meet basic job requirements.
CIBC has filed sworn statements from more than 50 employees and managers, including CIBC executives, alleging that the claim is groundless. CIBC claims that the filings confirm that its 37,000 employees are not routinely expected to work overtime in order to complete their jobs and demonstrate that employees are compensated either with extra pay or lieu time when overtime hours are worked. CIBC also claims that flexible work options are available to employees and that employees with issues regarding overtime have several internal options for lodging a complaint. This action is still pending.
b. Alison Corless v. KPMG LLP (August 2007)
This case was a class action suit against accounting giant KPMG on behalf of hundreds of non-chartered employees, alleging that they were given instructions from their managers that they were to charge more hours out to clients per week than they were permitted to work under the ESA. Ms. Corless claimed C$20 million in damages for the unpaid hours worked and C$10 million in punitive damages on behalf of KPMG employees across Canada. At the same time, the suit also alleged that KPMG had an unwritten policy that employees could only record hours that could be recovered under the budget for a client. If the employee had to work more hours on a project than KPMG could recover, the employee would receive a poor performance review based on "low recovery percentage." Accordingly, employee would "eat their time' in order to avoid poor performance reviews.
When the allegations were first made in August 2007, KPMG insisted that its overtime policies complied with the law. The firm later decided to retain a third-party independent administrator, Crawford Class Action Services (Canada), known internationally for managing redress plans. On February 19, 2007, KPMG set aside C$10 million to redress overtime claims stretching back to January 2000. KPMG maintains that the overtime redress plan does not constitute an admission of liability and that KPMG reserves all of its rights to fully respond to any motions that may be brought in the class action and to defend the class action.
This out of court settlement involved Crawford notifying current and former employees about the plan through individual letters complemented by advertisements in Canadian national newspapers. These letters informed these individuals whether they qualified for the settlement or not, how much they would receive and how the figure was determined. Those who dispute the firm's findings are entitled to arbitration paid for by KPMG. Employees are also entitled to independent legal advice subject to a maximum of C$500.
The KPMG has defined the eligibility period for the redress plan as running from January 1, 2000 to September 30, 2007. Any overtime claims made for the period since October 1, 2007 are outside the scope of the redress plan. Current employees who accept compensation under the plan may elect to take time off in lieu of overtime pay or combine overtime pay and time off in lieu of pay, subject to statutory limitations. The redress package also stipulates that any current employee who elects to take time off in lieu of pay will be required to do so by September 30, 2009. To the extent any current employee has not taken all the time off in lieu he or she elected to take by September 30, 2009, the remaining lieu time will be paid out to the employee as compensation.
Each employee's potential overtime compensation has been evaluated by KPMG based on the following criteria:
- (a) The Employee was an eligible Employee during the years January 1, 2000 to September 30, 2007;
- (b) The Employee worked overtime hours as defined in the applicable provincial employment standards legislation; and
- (c) The Employee was not compensated or provided with time off in lieu of overtime pay in respect of such overtime hours primarily based upon KPMG's time and payroll records.
c. Cindy Fulawka v. The Bank of Nova Scotia (December 2007)
On December 10, 2007, Ms. Fulawka began a class action suit against the Bank of Nova Scotia on behalf of over 5,000 current and former employees, alleging that the bank failed to pay personal bankers, commercial bankers and account executives for overtime work in violation of the Canada Labour Code. Specifically, the claim alleges that the Bank discourages its employees from requesting payment for unpaid overtime, and where such payment is requested, it regularly refuses such payment. Further, the Bank's overtime policy requires that employees secure advance authorization to work overtime. Failure to obtain advance authorization means that the work will not be compensated. The claim also alleges that where an advance authorization request is made, the Bank is reluctant to grant authorization, even where it is necessary to fulfill the employee's duties.
The claim seeks C$250 million in damages for the unpaid hours worked and C$100 million in punitive damages. In addition to monetary damages, class members are seeking an order restraining the bank from enforcing its current overtime policy, requiring the Bank to accurately record all overtime hours worked, and an order for the costs of administering a plan of distribution of money to the plaintiffs. This action is still pending.
d. Michael McCracken v. Canadian National Railway Company (March 2008)
This is most recent of the four class action suits. Here, Mr. McCracken filed a class action suit against the Canadian National Railway Company ("CN") on behalf of 1,000 former and current first line supervisors, alleging that the railway misclassified them as managers to avoid having to pay them overtime under the Canada Labour Code. Under section 167(2) of the Canada Labour Code, employers are not required to pay managers overtime pay. The claim alleges that prior to July 5, 2002, CN had a policy in place of treating supervisors as non-managerial employees, entitled to overtime pay. After July 5, 2002, though, the claim alleges that CN began to treat supervisors as managers, purporting to exempt them from the requirement under the Code to payovertime pay.
The claim is for C$250 million in damages of unpaid overtime wages and C$50 million in punitive, aggravated and exemplary damages. Mr. McCracken also seeks a declaration that CN's current compensation policy is "unlawful, void and unenforceable". This action is still pending.
Doubtless, some of the C$15 billion in unpaid overtime each year is going to remain unclaimed. Doubtless too, some of that overtime is worked by employees who are exempt. Nonetheless, employees in Canada are more aware of their employer's potential liability for unpaid overtime than ever before. Every employer should be taking precautionary measures to reduce the chance of a claim for unpaid overtime, reduce the chance such a claim will be successful if it is brought and ensure all of its policies are in compliance with the law.
The following recommendations are important for nearly every employer:
- 1. Know the legal rules: Managers and employees in certain industries are exempt from overtime. Employers should review the regulations specific to their workers.
- 2. Get employee sign off: Employers who demand that employees regularly submit overtime claims will have the upper hand. If employees confirm they did not work any overtime during the relevant period, the employer will likely have built an effective defence against future claims because it is accountable and transparent.
- 3. Avoid side deals: Many employers try to cut unlawful deals with employees. The effort is doomed to fail. Under the legislation, an employee cannot "contract out" of overtime, even if they want to. The result is that employers cannot, for example, agree to a higher wage but no overtime pay.
- 4. Police what work employees are doing: If an employer does not want employees to work overtime, the employer must not only order them to refrain from or stop the overtime, it must also see to it that they do not work it. Surprisingly, this will be the case even if employees can trade shifts between themselves in order to maximize their overtime entitlement. A failure to properly manage employees' workload can therefore be costly to employers.
- 5. Use overtime banks with care: Many employers allow employees to "bank" time, indicating that overtime is "paid" through giving time off in lieu. This can be a good way to save money. Employees also often like this system, since it smoothes out their pay, and they get more time off. One concern for employers, however, is that banked time needs to be compensated for at overtime rates if the time was originally worked as overtime. Caution must be exercised by employers when using overtime banks.
- 6. Maintain accurate records: Sloppy or inconsistent employer records are common and often lead to employee success in overtime law suits. Employers must have a complete record of the actual hours worked. Employees who dispute their pay often produce comprehensive and convincing records or diaries. When the employer has no record to dispute a claim, it is much tougher to fight the case, even if the claim is excessive.
- 7. Consider an averaging agreement: The employment standards rules allow employers and employees to agree to effectively override overtime. A properly prepared averaging agreement amends what would otherwise be weekly limits on hours of work, with overtime kicking in only if more hours than the ordinary weekly average are worked over two weeks or more.
- 8. Beware the "fixed salary" trap: Simply stating that an employee will only be paid a fixed salary with no overtime does not end the overtime issue. If the employee's hours of work exceed the overtime threshold, then the employer will need to show that the employee agreed that the salary covered these hours. On the other hand, if the fixed salary is not really fixed, but varies, then, despite being stated as "salary", there will be a "wage rate" for hours of work. The employee can then claim overtime.
- 9. Fight false claims: Employees often make inflated claims, and employment standards officers have been known to make erroneous findings. Employers have in the past successfully appealed payment orders based on a failure to consider relevant evidence. It is important to vigorously fight these cases, since a precedent can be relevant to claims by other employees. Losing also carries a price the next time around, since officers more carefully scrutinize employers who have previously been the subject of an order.
- 10. Have a clearly understood policy: A written set of guidelines is helpful. Employers should be consistent in (a) communicating the rules to employees, and (b) enforcement. If overtime is to be mandatory when requested, state that fact throughout the hiring process and include a statement to be signed by the employee acknowledging an understanding of the company policy regarding mandatory overtime. Even with such a policy, there may be occasions where certain mitigating circumstances, such as illness or death in the employee's immediate family, can and should be exceptions. Employers should document all exceptions to the policy.
Where serious allegations of unpaid overtime are made, the employer should engage an experienced external professional to conduct an audit and have a trusted legal advisor review the results, recommend changes and help with the implementation of those changes. With attention and care to prevention, employers may be able to avoid any serious overtime claims in the first place.