Employment & Labour

Can employers claw back employee benefits?

By AdvocateDaily.com Staff

For many Ontario employers, the recent changes to the Employment Standards Act will result in higher payroll costs, writes Toronto employment lawyer Doug MacLeod in The Lawyer’s Daily.

Employers with a workforce that’s being paid the minimum wage — such as retail, fast food and unskilled labour in smaller markets — are disproportionately affected, says MacLeod, principal of MacLeod Law Firm.

“It was recently reported that a Tim Hortons franchisee eliminated paid breaks and paid employee benefits in response to these changes. This is one possible response to these increased payroll costs,” he writes.

Another option is to pass these costs on to consumers by raising product costs, MacLeod says, noting that media reports indicate Tim Hortons' corporate office is prohibiting franchisees from taking this route.

“I think some sophisticated employers with access to capital will respond to the changes by deciding to automate duties that are currently being carried out by employees,” he says. “In this regard, you can already see self-service kiosks being added at grocery stores and fast food restaurants. If this occurs then the changes, which were intended to protect vulnerable employees will have the opposite effect.”

In the article, MacLeod considers if employers have the right to claw back employee benefits to compensate for the increases in minimum wage, paid vacation and paid leave.

As of Jan. 1, 2018, the minimum wage in Ontario jumped by 20 percent — from $11.60 to $14 an hour, employees with five or more years of service are now entitled to three weeks of vacation, and employees with at least one week of service are entitled to two paid emergency leave days each year, he notes.

“The legal issue to consider is whether such a clawback is a 'constructive dismissal,'” MacLeod writes.

“Here is a definition of this term from Canada’s highest court: A constructive dismissal occurs when an employer makes a unilateral and fundamental change to a term or condition of an employment contract without providing reasonable notice of that change to the employee. Such action amounts to a repudiation of the contract of employment by the employer whether or not he intended to continue the employment relationship. Therefore, the employee can treat the contract as wrongfully terminated and resign which, in turn, gives rise to an obligation on the employer’s part to provide damages in lieu of reasonable notice.”

Three key questions arise, says MacLeod:

1. "Has the employee agreed to the change? In the Tim Hortons case, the employer asked the employee to agree to the changes. If the employees agree then there is no constructive dismissal."

2. "Has the employer provided reasonable notice of the change? Sometimes an employer will give some notice of the change but is the notice enough? It usually depends on the employee’s length of service. If the employees are given reasonable notice of the change there is no constructive dismissal. In the Tim Hortons case, the employees were given less than one month’s notice of the changes."

3. "Is it a fundamental change? This is the toughest question to answer. Is a five per cent clawback fundamental? How about 15 per cent? How about 20 per cent? In many cases, there are a number of changes over a period of time and the court will look at the totality of the changes. If the change is not fundamental then there is no constructive dismissal. In the Tim Hortons case, the change was the value of the lost paid break(s) and the value of the lost employee benefits. If the total clawback is less than 10 per cent of total compensation then some judges have concluded that the clawback does not constitute a constructive dismissal. But I’m sure I could find a case where a judge concluded otherwise if I looked hard enough!"

The bottom line, MacLeod writes, is that reducing employee benefits without notice can result in a constructive dismissal, but there are a number of legal measures an employer can adopt to accomplish the same end.

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