Under the Ontario Employment Standards Act, 2000 (“ESA”), employees are entitled to vacation pay calculated at a minimum of four (4) per cent of their gross wages earned within a 12-month vacation entitlement year, or the stub period for which their vacation is being given. If an employee has been employed for five (5) or more years, their vacation pay is calculated at six (6) per cent of their gross wages.
Under section 1 of the ESA, wages are defined as:
(a) monetary remuneration payable by an employer to an employee under the terms of an employment contract, oral or written, express or implied,
(b) any payment required to be made by an employer to an employee under this Act, and
but does not include,
(d) tips or other gratuities,
(e) any sums paid as gifts or bonuses that are dependent on the discretion of the employer and that are not related to hours, production or efficiency,
Employment Standards Officers have found that commissions are considered wages that are to be included in vacation pay calculations and the definition of ‘wages’ includes commissions early.
Therefore, commissioned employees should be receiving vacation pay based on their total compensation, inclusive of commissions, and not just on their base salary. As a result of employers making these payments solely on base salaries, many employees are owed substantial back pay for the wrong payment.
For example, if an employee is paid $50,000.00 as their base salary, but is also earning an additional $50,000.00 in commissions, their total compensation is $100,000.00 annually. Under the ESA, a three (3) year employee would be owed four (4) per cent of their total compensation, or $4,000.00. Therefore, the employee would have been underpaid by $2,000.00 per year for vacation pay alone. A six (6) year employee would be owed 6% of their total compensation, or $6,000.00, and they would have been underpaid by $3,000.00 per year for vacation pay.
The law also has specific rules for employers who pay commission and attempt to state that the commission amounts also include amounts for vacation pay. The Divisional Court clarified this issue for federally regulated employees and created a set of boundaries for vacation payments that are made through commission sales in Kinch v Dufferin Communications Inc, 2015 ONSC 6610 (CanLII). In this decision, the employee was entitled to recover $35,396.02 in outstanding vacation pay.
Within the employee’s employment agreement, the employer had a clause stating that Ms. Kinch would be paid based on her commissions and that her commission rate included the statutory amounts for vacation pay. However, there was no evidence that could show Ms. Kinch had been receiving any vacation pay through her 6 years of employment. As a result of this, the Divisional Court set boundaries for these payments with the aim of preventing employers from attempting to contract out of their statutory obligations to pay vacation pay to their employees.
The requirements are now that (1) the employer ensures the employee is aware of the vacation pay entitlements under the Canada Labour Code (“CLC”) in order to pay vacation pay by taking it out of commission sales; and (2) the employee must be receiving a benefit equal to, or greater than the entitlements under the CLC. In this case, the commission percentage was not adjusted to reflect vacation pay, nor was there evidence relating to vacation pay calculations taking place and thus the clause was not valid and the employee received back vacation pay.
The variable nature of commissioned employee’s rate of pay can create a lot of confusion and ambiguity around whether the basic employment standards laws are being met including the calculation of vacation pay and statutory holiday pay as well as pay for overtime hours. If you have questions about how you are being paid as a commissioned employee or how you should pay your commissioned employees it is important to get legal advice. Contact Monkhouse Law today for a free 30 minute phone consultation.
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