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Lessons learned from being involved in several of the 468 payroll audits that took place last year

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I have, over the years, helped many employers with Ontario Employment Standards Act  (“ESA”) compliance related issues. I provided such assistance for some clients who were part of the 468  “random” payroll compliance audits that took place in 2011/ 2012 and for some clients who have been audited in 2013 and…I have lived to tell about it!

Many employers are intimidated by the audit process especially since the ESA provides inspectors with a large range of powers which include:

  • The ability to enter and investigate without a warrant;
  • Examine company records (including payroll records, time sheets, T4 documentation, etc.);
  • Require production for inspection of relevant documentation (e.g. corporate incorporation documents, company policies etc.);
  • Take records or any other relevant documentation; and
  • Speak to and question any person, including employees (this is the one that I found most interesting and possibly most dangerous as an employer never quite knows what its employees will say to the inspector).

Ramifications for breaching the ESA include:

  • Paying up to $10,000 to each affected employee;
  • Being issued a ticket under Part 1 of the Provincial Offences Act (“POA”) with a fine of up to $295.00 per offence (by the way, the ticket looks like a yellow parking or speeding ticket in case you’ve never seen one) plus a victim surcharge;
  • Summons under Part 1 of the POA with a maximum fine of $1000.00 per offence; and
  • Prosecution under Part III of the POA with a maximum fine of $50,000.00 and/or imprisonment for up to 12 months for a director of the employer company, and for the company, a maximum fine of $100,000.00 for a first offence, $250,000.00 for a second offence and $500,000.00 for the third and more offences.

Is it a wonder that employers are anxious?

In assisting employer clients through audit processes I found the following to have been useful in not only alleviating the stress of the process, but in playing a role in reducing the number of tickets being issued and the severity of the fines imposed:

  1. Presenting to the Inspector any and all documentation requested in the audit notice and also being proactive and having ready for inspection documentation which may not have been requested but that can assist the inspector in reviewing payroll information and company practices.  For example, if the company was in the process of revising its policies and procedures in order to address any non-compliance that it may be already aware of, showing the inspector that the company recognized its failings and was already taking steps to address the issue can be helpful to demonstrate that it is being pro-active and it may potentially have a beneficial impact on the penalty imposed.
  2. Not waiting until a Ministry of Labour audit is imposed to conduct the employer’s own internal audit.  It is a good practice to review entitlements and practices relating to common areas of violation such as vacation time and pay entitlement, overtime payments, public holiday payments and employee vs. independent contractor status on a regular basis.  In so doing, it is more likely that employers will catch any errors or gaps in compliance and be able to amend the situation without having a penalty/ fine imposed so that the error is addressed long before a ministry audit takes place. If the error is not corrected prior to the audit, then I believe being up front and honest with the inspector about the existence of the error and demonstrating what steps have been taken to start correcting it (as per my comment in a above ) will assist in reducing the likelihood of a penalty being imposed.
  3. If an employer has not done so already, it should consider obtaining overtime averaging and excess hours of work permits to avoid fines related to non-payment of overtime or violations relating to requiring employees to work more hours than they should without a permit. The Ministry of Labour publishes self-help guides to obtaining those permits.
  4. Employers should ensure that all employee work-related activities are properly documented.  While this sounds overwhelming and some would argue impossible, it is crucial to being able to  identify any areas of risk or, better yet, being able to demonstrate to an investigator that the company has properly complied with its legal requirements.  I’m referring here to things like: i) documenting when employees work longer hours and if they take time off in lieu of those “extra” hours, that the amount of time taken off  is documented, ii) keeping an accurate record of vacation pay carry over entitlements and ensuring that there is accurate record keeping of what vacation time has been taken in a year, what vacation pay has been paid in a year, and what is being carried forward(if anything);  iii) accurately documenting travel time and understanding whether the travel time counts as hours of work or whether it is commuting time and not hours of work; iv) accurately documenting greater rights or benefits provided to employees such as overtime after a lower threshold than 44 hours, for example.
  5. Understanding the exemption provisions of the Ontario Employment Standards Act.  Many employers may be Canadian subsidiaries of American or other international companies and exempt status often has a different meaning in those countries. I find that many Ontario employers follow policies imposed by non-Canadian parent companies and therefore either miss exemptions that may allow them to save money, or incorrectly treat some employees as exempt to some entitlements and then find themselves in a liability situation.  A common error I’ve encountered is where employers treat all salaried employees as being exempt from overtime; they are not all exempt!

Also of note from my experience is that that if there are errors in payments or record keeping, an auditor may impose a “self audit” with deadlines for compliance.  When this happens, employers will likely be put in the position of having to ask their employees for information that was not properly recorded (e.g. how many vacation days were carried over from one year to another, or how many hours beyond their regular work week did they work). Unfortunately, if proper records were not kept, an employer will have to take an employee’s information as truth and report it accordingly in their self audit results to the inspector.

Who is next on the audit target list?

The Ministry of Labour has indicated that from October 2013 to December 2013, it will be focusing its payroll audit efforts on the Retail Services sector which includes: gas stations, retail chains, convenience store franchises/chains and other retail/ grocery store companies. While the Ministry has indicated that it will focus upon the retail sector, it is not limited to such a sector and any employer can be audited.

Patrizia Piccolo