3966-99-ES Corey Fruitman, Applicant v. Stephenson’s Rent All Incorporated and Ministry of Labour, Responding Parties.
Employment Practices Branch File No. 30012393
BEFORE: Russell Goodfellow, Vice‑Chair.
APPEARANCES: Corey Fruitman for the applicant; Jonathan Cocker, Sterling McArthur and Damon Alyea for the employer; Karima Chatur for the Ministry of Labour.
DECISION OF THE BOARD; November 9, 2000
This is an employee application for review of a refusal by an Employment Standards Officer to issue an order to pay in respect of an allegedly unpaid bonus entitlement and a partial refusal in respect of an allegedly unpaid overtime entitlement. During the course of the hearing the parties agreed to settle the overtime claim for $200.00, less statutory deductions, and for a further amount of $64.17, net of deductions, as a replacement sum for an earlier uncashed cheque.
The bonus claim rests on the assertion that the employer’s company-wide bonus plan violates section 8 of the Employment Standards Act, which states:
Except as permitted by the regulations, no employer shall claim a set-off against wages, make a claim against wages for liquidated or unliquidated damages or retain, cause to be returned to the employer, or accept, directly or indirectly, any wages payable to an employee.
There is no dispute that the amounts paid to employees as a bonus under the terms of the plan constitute “wages” and that the formula for arriving at those wages takes into account cash and merchandise shortages. The applicant submits that this constitutes an unlawful set-off.
- This issue was dealt with by an Employment Standards referee in The Becker Milk Company of Canada Limited, December 12, 1995 (Egan) E.S.C. 2002. In that case, the employees’ contracts of employment provided for a “merit bonus equivalent to an amount representing the difference between two and three quarters per cent (2 ¾%) of the amount of gross sales in the seven day period and the aggregate of [various forms of shrinkages and shortages]”. In Becker Milk, unlike this case, the Ministry took the position that the plan called for an unlawful set-off. For the following reasons, Referee Egan disagreed:
An examination of Section 5(1)(f) of the contract of employment however discloses that it does not set out the amount of the merit bonus to which an employee may become entitled but rather, provides a formula by which the amount of the bonus, if any, is to be determined. It is a fact that the calculations set out in the formula in Section 5 of the contract of employment provide for the deduction of an amount called the “aggregate of items of expense” from two and three quarters per cent (2 ¾%) of the amount of the gross sales in a seven day period. The wages or bonus payable to the employee cannot, however, be determined until the calculations set out in the formula have disclosed the “difference” between the 2 ¾% of gross sales and the aggregate of items of expense. The amount of the “difference” is the amount of the bonus payable under the contract of employment. Thus, under the contract of employment no bonus may accrue to the employee until after the formula agreed upon by the parties has been applied. It is to the resultant amount that Section 8 of the Act must apply.
It is submitted by the Ministry that the formula and the deductions for which it provides are contrary to the spirit and intent of the Act and comprise the very mischief which the Act is designed to prevent. The “mischief” as the Ministry puts it, “is that of employers exerting their uneven bargaining position and unilaterally assessing both the quantum or a debt and the employee’s liability for that debt and taking that money from him by a deduction from wages to which he would otherwise be entitled without giving him an opportunity to dispute either liability or quantum.”
One cannot dispute the correctness of the foregoing delineation of the purpose of the Act and of the mischief it attempts to prevent. There therefore is no doubt that no deductions from or set-offs against the bonus earned by an employee may be made by Beckers after the amount of the bonus has been calculated in accordance with the formula agreed upon by the parties to the contract of employment. At that point the “bonus” becomes “wages” to which the employee is entitled and to which Section 8 of the Act and the above considerations as to intent and mischief may then be applied.
It should be observed that, apart from those sections which deal with minimum wages and overtime the Act cannot be said to govern the methods or formulae which parties to a contract of employment elect to use in setting the basic wages to be paid to employees. As Beckers argued, it is unreasonable to conclude that a bonus clause which sought to provide a bonus based upon, for example, ten per cent (10%) of net profit would be illegal under the Act simply because certain deductions have to be made from gross receipts before the profit upon which the bonus is be paid can be ascertained. Generally speaking a bonus, other than the discretionary type, is based upon contingencies and it can hardly be said that in inclusion of bonuses in the definition of wages requires the elimination of this inherent quality of the most common type of bonus. The reasonable interpretation of Section 8 is that it is intended to prevent interference by the employer by way of set-off or other claim, against the amount of the bonus once the amount has been determined according to the agreement.
Thus, in the present case, it is my opinion that not until the formula set out in Section 5 of the contract has been worked out and the “difference” which represents the amount of bonus, if any, payable to the employee has been determined, that Beckers, unless it brings itself under the exceptions set out in the Regulations, could incur liability for a breach of Section 8.
I find however that Section 5(1)(f) of the contract of employment does nothing more than set out the method by which the amount of the bonus is to be calculated. Until that exercise has been completed the “difference” which constitutes the bonus remains unknown to either party. The language of Section 5 of the contract makes no reference to any reservation of rights of set-off or to any attempt to reserve to Beckers any of the other claims or actions prohibited by Section 8 of the Employment Standards Act with respect to reducing the amount of the bonus once it has been determined.
For all the above reasons I find that Section 5(1)(f) of the contract of employment made between The Becker Milk Company Limited and David Ure does not either in intent or in application constitute a violation of Section 8 of the Employment Standards Act.
That is precisely the case here. Employees at the company’s stores are paid bonuses from a pool of funds arrived at by taking 1% of sales volume equal to last year’s sales, plus 5% of this year’s sales volume in excess of last year’s sales, plus a maximum top-up of $3,500.00 (based upon an estimate of the average annual cost of write-offs of missing merchandise and rental equipment shortages), minus actual cash shortages and merchandise shortages. Only when all of those calculations have been made is the final amount of the bonus pool available to employees determined. No dollar-for-dollar charge is made against individual employees for cash shortages from their tills or merchandise shortages from their shifts; nor are such shortages deducted from any employee’s base salary or wage rate. Rather, the bonus plan enables cash and merchandise shortages from one store to be spread across all stores in determining the final pool of funds available to be paid as bonuses. While, for accounting purposes, this is not the same as paying bonuses out of an employer’s “net profits”, for purposes of section 8 the effect is the same.
The purpose of the “no set-off” provision of the Act is accurately expressed in the Ministry’s Interpretation Manual at section 8.3:
The purpose of the section is to protect the employee from improper interference with his or her earnings by ensuring that the employer who owes an employee wages is not in the position of being both a claimant of monies against the employee and the arbiter of the validity of the claim. …
Section 8 prohibits deductions from “wages”, as defined in s. 1; that is, deductions from monetary remunerations that is due the employee under his or her contract.
That purpose is not offended where, as here, the wages take the form of a bonus over and above the minimum wage required to be paid under the Act and the final amount of the bonus paid to employees is not the product of a deduction for monies said to be owing by any individual employee but, rather, is a function of sales minus losses for the store or stores. This is the kind of “contingency” that Becker Milk says forms an inherent part of most bonus schemes.
- Accordingly, the application is dismissed as it relates to the bonus claim. However, on the basis of the agreement set out above, the Board orders the employer to pay to the applicant the sum of $200.00, less statutory deductions, and $64.17, net of deductions, for unpaid overtime.
“Russell Goodfellow”
for the Board