Sunday, September 25, 2011

Withholding Unearned Vacation from an Employee's Final Pay

This topic recently came up in a discussion group I'm part of on LinkedIn, and I thought it deserved some attention on this blog.  Essentially, the question is this:  If your employee takes unearned paid vacation then quits before earning it, can you withhold the pay from his final pay cheque?

The answer is, in true lawyer's form, a firm "Maybe".

It happens often enough, sometimes because an employer just wants to be generous, but more often where employees are permitted to take vacation in the year in which it is earned.  Suppose I earn three weeks of vacation per calendar year, and am expected to take it in the year earned:  Unless my last week of the calendar year is a vacation week (which would unduly restrict the scheduling freedom of both the employee and employer), it's inevitable that some of my vacation will be pre-taken.

So supposing I took all three weeks of vacation in the first part of the year, and quit at the end of August...I've received three weeks of vacation pay, but only earned two weeks, so I've gotten a week's pay out of my employer that I'm not entitled to.  Of course, my last pay will usually contain a week or two (or more) worth of wages, so my employer can just take what I'm owed out of that, right?

Usually, the Ontario Labour Relations Board is really finicky about employers withholding sums owing out of money owed.  There are certain circumstances in which it is permitted.  But outside of those specific circumstances, it is not.  So there have been cases in which the employer has suspected an employee of theft, fraud, or damaging employer property, and fired the employee, withholding any wages due as partial compensation for the damages the employer has suffered.  The employee goes to the Ministry of Labour, and the Ministry then tells the employer something to the effect of, "As far as payment for wages earned goes, we don't care if he walked away with a full cash register; you still have to pay him the money.  If you want to sue him separately, that's your own business."  And the OLRB will come to the same conclusion.

Withholding an overpayment of vacation pay is different, however, because vacation pay is *also* a form of wages.  In essence, cutting my vacation overpayment from my last pay is like saying, "Oh, we've already paid you that portion of your last pay."  And the OLRB will frequently accept that.

But not always.  There's a line of cases in which the employer never suggested that overpayments of vacation pay would be recovered until after the employee made a complaint to the Ministry regarding other unpaid amounts - essentially making an ex post facto assertion that their obligations were satisfied or offset by those vacation overpayments.  The OLRB rejected the employer's asserted entitlement to withhold the overpayment in these cases, and there's a certain logic to it.  When the relationship was working well, the employer was perfectly happy to let the employee take a couple of extra vacation days in a year without feeling the need to conduct a reconciliation of it.  It's the same underlying logic as a discretionary bonus - you give the employee more than they're entitled to because you're happy with the job they're doing, and you want them to be happy to stay in the job.  Then, down the road, the relationship breaks down, and the employer goes back and says, "Oh, you remember all those perks I gave you?  I want you to compensate me for them now."  It seems wrong.

There's an easy way around this, however.  Keep track of vacation entitlements on a regular basis.  Maintain a good vacation policy that asserts that overpayments must be reconciled, and will be deducted from the employee's final pay if the employee leaves before earning the vacation taken, and have the employee agree to that policy.  When an employee requests vacation time that isn't already earned, make sure that, if you approve the request, the approval contains a reminder of the policy, that if they leave before earning the vacation pay they'll be responsible for the overpayment and it will be deducted from their wages.

I've heard HR and bookkeeping professionals say that this sort of policy is *necessary* to recover an overpayment - i.e. it's inappropriate to withhold an overpayment unless you have such a written policy in place or told the employee in writing that it would be the consequence.  That's not strictly true.  It probably arises from the Carlisle case, in which the employee was entitled not to have a deduction for vacation pay that she overtook *right before her effective resignation*, and the OLRB justified the "harsh" result by pointing out that the employer could have avoided the situation through proper use of a policy.  (Or by refusing the vacation she had requested after putting in her two weeks notice.)

However, I would opine that the current state of the law is set out more concisely by Brown Bear Day Care case, in which there was an 'understanding' of pre-taking vacation, once discussed in a staff meeting but never reduced to writing.  The Board summarized the existing case law on the point and came to the following conclusion:

The circumstances before me most closely resemble the situation in MenuPalace.  On the evidence before me, Hollander (and all other employees) were made aware well before Hollander’s employment ended that there would be an annual reconciliation of vacation days taken and vacation days earned.  It cannot be said that she was lulled into thinking that the overpayment would not be recovered, which is a consideration that seems to have affected the decisions in Modern Niagara and Hillis, and which also finds currency in the comment in MenuPalace that the reconciliation of the overpayment must occur “within a reasonable time”.   I find that the Employer here was permitted recover the overpayment it had made to Hollander, and did not require her written authorization to do so.  On the basis of the same reasoning, it was also permitted to recover the overpayment it had made to Hollander in respect of paid sick leave, and did not require her authorization to do so.


This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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