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New Year’s Hangover: The Curious Case of the 27 Paycheque Year

The calendar has now changed over to 2015, and with the New Year comes an interesting legal situation for certain employers.

Most employees in Canada are paid biweekly.  However, years do not divide perfectly into biweekly segments.  Once every 13 years, an employee paid on a biweekly basis will receive 27 paycheques, rather than 26 (an “extra paycheque year”).

In 2015 employees who are paid biweekly and are scheduled to receive paycheques on Wednesday, January 1, will receive this extra paycheque.

This raises a conundrum for employers with salaried employees: should they maintain the paycheque of the employee at the same level (resulting in additional pay to employees for the extra paycheque year) or can they reduce the gross amount of each paycheque so that the same annual salary is ultimately reached?

Recalculating the same annual salary over 27 paycheques as opposed to 26 leads to a reduction in the gross wages paid per paycheque of roughly 3.7%.  Maintaining the gross per paycheque salary results in a similar sized bonus to the employee.

An employer looking to deal with the extra paycheque year should refer first and foremost to the overriding maxim of employment law – look at the contract.  If a contract stipulates what an employee is to be paid weekly or per biweekly period, an employer would be in breach of contract if it were to reduce the gross wages per paycheque.

If an employee’s contract specifically stipulates that they are to be paid a set gross sum annually, then the employer may be able to reduce the per paycheque gross pay for an extra paycheque year without breaching the contract.

If there is no written contract, then the terms of the employment contract have to be determined by practice.  In such a case, the employee’s employment contact would likely be considered to be that the employee will receive the established pay amount every bi-weekly pay period.  Reducing it would likely be considered a breach of the contract.

If an employer plans to reduce an employee’s biweekly pay so as to avoid paying more than the employee’s annual salary, we recommend that the employee be given advance notice.

The Ontario Labour Relations Board addressed an analogous situation in Rowell v Sudbury Racetrack Slots.  In Rowell, the employer changed payroll practices mid-year, resulting in an adjustment of an employee’s gross pay per paycheque.  Moreover, the changes resulted in the final paycheque being delivered several days after the end of the service year. The employee argued that as a result of the change he had not received what was guaranteed to him under the contract for that time period.

The Board found that the change did not contravene the Employment Standards Act or the employment contract, since the employee still received the wage entitlement set out in the employment contract.  The contract only stipulated the salary that would accrue on an annual basis, and not the manner in which it was to be paid out.  In fact, the change resulted in the employee being paid more than his annual salary for the particular year.

Despite the employer’s success, Rowell highlights the risks faced by employers dealing with the extra paycheque year.  If an employee believes the employer has breached the contract by reducing the biweekly pay to even the pay out on an annual basis, he or she may bring a complaint to the Ministry of Labour under the Employment Standards Act, 2000.  The complaint would allege that the employee was not paid wages that were earned.

Such a complaint comes at no risk to the employee and can be filed without severing the employment relationship.  The success of a complaint would of course be specific to the particular relationship and any applicable contractual language.  In our view, the Ministry of Labour would look skeptically at any scheme which appears to reduce the wages paid to an employee under a contract.

This blog was first published on First Reference Talks.

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