Chapter 6: Sectoral regulation and exemptions

Exemptions and sector specific regulations raise fundamental philosophical and practical questions about approaches to the uniform nature of statutory minima across the province, the need and appropriateness of individualized treatment for certain sectors of the economy, and the process to determine and review exemptions and sector specific regulation.

As collective bargaining in the private sector is relied on less and less to regulate working conditions, sector specific regulation under the Employment Standards Act, 2000 (ESA) is likely to become more necessary and important to ensure that working conditions meet the test of decency, and that certain issues contributing to vulnerability and precariousness are addressed.

Our recommended sector specific approach (outlined below) is designed to provide a consultation process with representatives of employers, employees and government when exemptions are reviewed or requested or where sector specific regulation is being considered. The process is designed to allow all stakeholders an opportunity to advance and protect their legitimate interests, to provide advice and solutions and to seek consensus on outcomes that address the legitimate concerns and interests of all participants.

Many people assume that basic terms and conditions of employment either are or ought to be universal in Ontario and apply to all workers, thus setting a common floor of uniformity and equality. The legitimate concern regarding exemptions from minimum standards is that many employees, particularly vulnerable workers in precarious jobs, may be denied the protections under the ESA that are essential for them to be treated with minimum fairness and decency. This indeed is a major concern of ours.

As the reports of the Law Commission of Ontario (LCO)^{footnote 215[215]} and the research of Vosko, Noack and Thomas,^{footnote 216[216]} establish, Ontario has a troubling patchwork of exemptions by industry (such as agriculture, construction), by occupation, by job classification (e.g., liquor servers), and by employment status (such as temporary agency employees). In research done for the Changing Workplace Review (CWR), it is estimated that the result of the current 85 exemptions and special rules is that only a minority of Ontario workers are fully covered by the statute.^{footnote 217[217]}Overall, the existing exemptions do not fit into a consistent policy framework.

The major concern over the structure of Ontario’s current patchwork of exemptions is that the lack of universality disproportionately affects the disadvantaged - such as recent immigrants and the young - and that it contributes to the precariousness of work and the presence of vulnerable groups of workers in our society.^{footnote 218[218]} Part-time employees are more likely to be affected by exemptions and special rules than are full-time employees, temporary workers more than permanent employees, and low-wage employees are more likely to be affected than higher wage earners.^{footnote 219[219]} Particularly worrisome is that only a small minority of minimum wage earners, 23%, are fully covered by the ESA.^{footnote 220[220]} As well, it is estimated that only 29% of low income employees are fully covered by overtime provisions as opposed to approximately 70% of middle and higher income employees.^{footnote 221[221]}

This patchwork of exemptions, with a disproportionate impact on the disadvantaged, does not lead us to conclude that sector specific regulations or exemptions are per se bad or unnecessary. To the contrary, Ontario has a broad and diverse economy and one size does not always fit all. Sometimes it is neither practical nor appropriate to insist on a single standard for all employers and employees. Sometimes a unique and focussed approach to regulation and/or exemption from the generally applicable standard is reasonable. Also, there may be unintended and unanticipated adverse consequences as a result of the imposition of a standard of general application that warrant an exemption or differential treatment.

While sector specific regulation often results in derogations from the statutory norms, it also means that the standard for employees in a sector could be better than elsewhere. A sector may require a regulation that is designed to reflect the special needs of employees in that sector but which would be problematic if applied across the board. This is evident, for example, in O. Reg. 291/01 under the ESA, which sets higher terms and conditions of employment than the statute in the women’s garment industry.

Simply put, for those who long for a simple world of uniformity and strict equality, such a world has not existed for some time, if ever, and does not reflect the reality of the complexity of the modern economy. In our view, an understandable preference for standards of general application should not preclude exemptions or sector specific regulation in appropriate circumstances. The caveat, however, is that there should be a transparent process in which the opinions, interests and suggestions of stakeholders are taken into account and that is designed to generate outcomes more precisely tailored to the needs and legitimate interests of employers and employees potentially affected. Exemptions, and specific regulations, if justified, should be focussed (not overly broad), balanced, decent and fair.

The recommended consultative process is to be used in circumstances where existing exemptions are being reviewed and where new exemptions or sector specific regulations are being requested and/or considered. The process recommended is designed to ensure that the interests and solutions proposed by employers and employees are heard by each other and by government, and to provide an opportunity to achieve outcomes based on consensus. Government needs a window on various sectors to better understand the legitimate needs and interests of employers and employees in those sectors. Moreover, areas of potential sector specific regulation, such as scheduling, require a process in which the directly affected interests have a voice if the resulting regulations are to be fair, balanced and workable.

Moreover, in our fast-changing world and workplaces, employers and employees need to be in dialogue with one another and with government to ensure that established exemptions remain relevant and justified and also to deal with new developments, concerns and requirements. Exemptions, once established, should not exist in perpetuity regardless of changed circumstances. Currently, there is no mechanism for ongoing review of regulations that take away or modify basic entitlements. This is not acceptable.

Accepting the advisability/necessity of sector specific regulation in appropriate circumstances is not unique and was endorsed by Harry Arthurs in his report on Federal employment standards in 2006:

As noted earlier, the introduction of flexibility at a sectoral level may have important advantages. Compared with a statute or regulation of general application to all employers and workers in the federal domain, sectoral adjustments can take account of the unique structural and other characteristics that give rise to regulatory difficulties types of employment and business conditions. Compared with workplace-level adjustment, the sectoral approach can engage a wider range of participants, address a broader spectrum of concerns, bring more extensive expert resources to bear on the issues, and better maintain a level playing field among competing enterprises. And finally, sectoral procedures have the beneficial side effect of contributing to more positive relation among significant actors in a part of the economy…

The possibility of providing flexibility at the sectoral level is already implicit in Part III, {of the Canada Labour Code} which authorizes the Minister to make orders that apply generally or in particular cases or…to classes of employees or industrial establishments. Moreover, ministerial regulations introducing elements of flexibility into the control of working time may be made with regard to classes of employees.

As noted, this authority has already produced sector-specific regulations concerning working time in several sectors. The Minister is also authorized to establish consultative or advisory committees to advise…on any matters arising in relation to the administration of [Part III] and has done so on many occasions. And finally, the Minister is already required to cause an inquiry to be made and to consider the resulting report before making certain kinds of regulations respecting working time.^{footnote 222[222]}

Similarly, the ESA already differentiates between sectors to a significant degree, and the legislation currently allows the Minister to appoint committees to provide advice.

In conclusion, in our view, the lack of any process for conducting reviews of existing exemptions, or for the consideration of new regulations and exemptions, has resulted in a structural and procedural vacuum where there is no transparency. And while we do not recommend that there must be a binding process for reviewing and evaluating exemptions and proposed regulations in every case, we do believe that there should be a transparent process that government ought to follow, unless there are good reasons not to use the process, in which case government should be accountable and be able to explain those decisions when they occur.

6.1 Review of existing exemptions

Given our views on the type of process which is required to review existing exemptions, as well as new proposed regulations, we concluded that a review process like the CWR is not the right mechanism. There could not have been the kind of in-depth and concentrated consultation on the issues with the necessary participants in a process like the CWR. Also, practically, it would have been impossible for us in this review to examine the large number of existing exemptions in depth, and had we done so, we would have done little else.

We are able to say, conclusively, however, that we have reviewed the existing exemptions sufficiently that we can say that it is imperative that they be reviewed expeditiously. We have found that many of the exemptions raise, at least at first blush, difficult questions about their purpose, origin, breadth, and ongoing justification. Many workers, especially vulnerable ones in precarious work, are being denied either minimum wages, or overtime or hours of work protection or all of the above, without reasons that are apparent.

The current patchwork mechanism and exemptions that are broadly drawn, reflects poorly on the past processes, not necessarily of the current government in recent years, but rather over a long period under many different governments. It appears that exemptions have been granted too easily, too broadly, with little or no rationale, little transparency and too little consultation with employees. In addition, in recent years the Ministry adopted a policy framework for the consideration of new requests for exemptions, but it has not applied that framework to pre-existing exemptions. In any event, given the LCO Report,^{footnote 223[223]} the work in this Review of Vosko, Noack, and Thomas,^{footnote 224[224]} which studied the exemptions, their consequences and costs, we recommend that the review of existing exemptions be given priority and that reviews be conducted in accordance with our recommended process where it is appropriate to do so.

Given our recommendation that the review of existing exemptions should be a top priority, we want to underscore that the process by which this is done is very important. The preference of some in the civil service may be to consult with interested parties separately. Clearly, responsibility for decision-making lies with the government. However, we know from our experience in the world of employment and labour relations that involvement of the stakeholders often results in better understanding of positions and in compromise. All parties can learn from each other and there is often a lot of practical wisdom that they bring to the table. The government’s understanding of the needs and interests of employers and employees, and the quality of its decision-making, will be enhanced if representatives of those most involved have an opportunity to be fully engaged in the problem-solving exercise, with government as an interested participant prepared to listen to and consider advice from those most affected.

The discussions in this process should take place with a framework to guide them. The Ministry of Labour currently has an internal policy framework for considering new exemptions and special rules which was developed after most of the existing exemptions were made. It has never been applied to most of the existing exemptions. These criteria for exemptions, or core conditions,^{footnote 225[225]} are not binding, but they do provide a framework for assessment and discussion. The policy framework should be reviewed and updated as necessary by the Ministry in advance of the new process to review the existing exemptions.

Recommendations

66. The government should establish a committee process that may be utilized when existing exemptions are being reviewed, when new exemptions are being considered, and when sector-specific regulations are contemplated.
67. Committees should be composed of representatives of employers and employees for the purposes of providing advice to government.
68. The government should make the review of existing exemptions a priority.
69. In accordance with the recommendation in Chapter 7, the government should adopt a sector-specific approach to the regulation of scheduling. The government should include scheduling in the scope of the review of existing exemptions on hours of work, overtime, and related matters, where warranted and practicable. As a priority, there should be a committee established to consider a sector-specific scheduling regulation in the retail and fast food sectors.
70. The committee process should be set out in the statute; however, it should not be mandatory and should provide for flexibility in the process, as required. The Minister of Labour should be able to initiate the committee process for the review of existing exemptions or the development of new terms and conditions of employment in a sector or subsector, or parties may request the Minister of Labour to invoke the process.
71. Sectoral and subsectoral committees should be established as necessary. If there are no exemption issues in the sector, then a committee should be established to set up a permanent process for the discussion of:
    1. the application of the provisions of the Employment Standards Act, 2000 to the sector; and,
    2. enforcement issues and proactive enforcement in the sector.
72. The policy framework within which the committees operate should include the following:
    1. the Employment Standards Act, 2000 should apply to as many employees as possible;
    2. departures from, or modifications to, the norm should be limited and justifiable; and,
    3. proponents of maintaining an exemption should bear the onus of persuasion that the exemption is still required;
73. The government should provide committees with costing information on the cost to employees and savings to employers of any exemptions from employment standards.
74. Although the government has responsibility for all regulations promulgated and must remain the ultimate decision-maker, committees should provide the government with assistance and advice with respect to exemptions.
75. The organization and work of the committees is to be supported by the government.

6.2 Sectoral committees

Recommendations

76. The government would appoint the members with respect to the sectoral committees, recommended to be established, above. The committees would be composed of:
    1. a neutral chair, whose role as facilitator is to ensure the views of employers and employees are heard and to explore the possibility of consensus. (If consensus is achieved, the chair will communicate the consensus and recommendations to the Minister of Labour in writing. If consensus is not achieved the chair may make a recommendation to the government, if necessary. Chairs of sectoral committees could include, but would not necessarily be limited to, vice-chairs of the Ontario Labour Relations Board, either full-time or part-time. Resulting reports of the chair would be made public);
    2. representatives of both large and small employers, put forward wherever possible by employer organizations in the sector, including representatives of employers who have adopted best practices;
    3. employee representatives, whom the government will appoint from among the following:
       1. employees, as suggested by community organizations, who are independent from any employer working in the sector and who have experience in the area, or who are otherwise selected;
       2. representatives from community organizations, such as legal aid clinics, workers’ groups, and other community organizations;
       3. following consultations with other trade unions, unions with experience or interest in the sector, even in sectors where there are few unionized operations, as unions have experience in representing employee interests;
       4. professional associations in the sector that represent employee interests;  and
       5. other persons experienced in representing the interests of employees.
    4. representative(s) of government who can provide advice or information and who function in a supportive role to the committee; and,
    5. at the discretion of the government and upon the recommendation of the facilitator, an expert with specialized knowledge to advise and support the committee on issues, e.g., potentially, a scheduling expert or an industry expert.
77. Committees should be small to ensure they are workable.
78. Service on sectoral committees should be unpaid except for the chair and any experts whose advice is sought.

6.3 Recommendations on specific exemptions

6.3.1 Information technology professionals, pharmacists, residential building superintendents, janitors, and caretakers

In our Interim Report, we asked for submissions with respect to several existing exemptions indicating that we would consider recommending their elimination without further review. Included in this list were Information Technology Professionals, Pharmacists, and Residential Building Superintendent, Janitors, and Caretakers.

6.3.1.1 Information technology professionals and pharmacists

We received some submissions with respect to IT professionals and pharmacists that did not persuade us that the existing exemptions are justifiable. The rationale remains unclear and the exemptions seem overbroad. However, the submissions did persuade us that the regulations present sufficient complications that they ought to be reviewed more carefully in the process set out above before any final decisions are made.

Recommendation:

79. The current regulations with respect to information technology professionals and pharmacists present sufficient complications, warranting a more careful review through the process set out, above, before any final decisions are made with respect to these groups.

6.3.1.2 Residential building superintendents, janitors, and caretakers

We received no submissions from residential property employers with respect to residential building superintendents, janitors, and caretakers. As we indicated in our Interim Report, letters received from employees earlier raised concerns about the long hours and the little, if any, free time available for individuals working in these jobs.

Rather than eliminate the exemption on the basis that no submissions were received from the employers, we recommend an early review of the regulation applying to this group of employees because of its breadth and the resulting anomalous treatment compared to others similarly situated in the rest of the country.

Recommendation

80. An early review of the regulation applying to residential building superintendents, janitors, and caretakers is recommended because of the breadth of this group and the resulting anomalous treatment of these employees compared to other similarly-situated employees in the rest of the country.

6.3.2 Student minimum wage for those under 18

There is a separate minimum wage for students under 18 who work no more than 28 hours per week when school is in session, or work during a school break or summer holidays. For such employees, the minimum wage is $10.70 per hour instead of $11.40.^{footnote 226[226]} In the research done for this Review, 59% of affected students report earning less than the general minimum wage, suggesting that employers are using this provision.^{footnote 227[227]} It has been estimated that the individual cost of this special rule is a median of $8 per week per employee, and the weekly cost to all student employees in Ontario is approximately $482,000.^{footnote 228[228]} This is over $25,000,000 per year. Ontario is the only province in Canada with a lower minimum wage for students and those that previously had a lower rate eliminated them years ago. Importantly in our view, the exemption does not apply to youth below age 18 but only to students below age 18. Thus, the regulation actually promotes the hiring of students as opposed to those who drop out of school, providing an incentive to employers not to hire the latter. This seems counter-intuitive and counter-productive as the people who drop out may actually need the income more than the students.

The Ministry states that the rationale for the student minimum wage is to facilitate the employment of younger persons, recognizing their competitive disadvantage in the job market relative to older students who generally have more work experience and may be perceived by employers as more productive.^{footnote 229[229]} Proponents of the lower rate believe it is necessary to give employers an incentive to hire younger workers and that youth employment would decline if the special rate was not there. The Tourism Industry Association of Ontario has opposed withdrawing the lower rate because it claims these students incur training costs and need a high level of supervision, both of which, they submit, justify the lower rate.

The association representing the restaurant industry asserts that the industry employs more than 200,000 young people between the ages of 15 and 24, representing one in five youth jobs in Ontario. There was no data presented as to the number of students below age 18.

The restaurant industry strongly opposes the elimination of the lower rate, stressing the importance of a first-time job to younger students. In its view, the work opportunities provided to young people are extremely important to their future career development,^{footnote 230[230]} and the overt or implied suggestion is that these will be reduced as there will be fewer jobs if the lower minimum wage is eliminated. Based on the evidence of a variety of studies, we have concluded that a rise in the student minimum wage of 6.5% could cause a reduction in younger student employment in a range of 2-4%,^{footnote 231[231]} although there is an argument it could be zero.^{footnote 232[232]}

Data from the Labour Force Survey indicates that, in November 2016, the employment rate for students aged 15-19 (students under age 18 are not separated out in the public data) is 33.7% for all Canada and 29.5% for Ontario.^{footnote 233[233]} Since the rest of the country does not have a lower student minimum wage, one possible conclusion is that the student minimum wage does not appear to accomplish its purpose, which is to encourage greater employment of younger teenagers in Ontario.

The restaurant industry claims that providing these opportunities come with a cost to employers because younger workers, by their inexperience, are less productive and have a higher turnover rate than other, more experienced workers:

Student wage differentials have historically been in place to help employers offset the additional costs in training and lost productivity while giving students valuable work experience and the opportunity to earn and save.^{footnote 234[234]}

No evidence was provided to indicate to what extent turnover of younger students is greater than older students, and to what extent training costs are higher, and productivity is less.

The Ministry of Labour has advised us that this minimum wage rule complicates enforcement and administration of the Act because some employers continue to pay the student minimum wage even after the employee has turned 18, or where a student under 18 works more than 28 hours/week while school is in session, both of which are violations of the current section. Additionally, some employers pay all students the student minimum wage, regardless of their age.

In our view, this provision, although well intentioned, is out of step with current values across Canada. The purpose of the provision is to encourage employers to hire younger students; it is presumably supposed that if the wage cost of younger students is the same as those 18 and over, the employer will hire the older students because they are more productive, and have lower training costs and turnover rates than younger students.

In our view, the impact of the provision is discriminatory and although the Human Rights Code effectively permits discrimination of those under 18, the Charter of Rights and Freedoms does not. Although we do not opine on whether the provision offends the Charter, the fact that other Canadian provinces do not have similar laws suggests that the government might have some difficulty in justifying the treatment under section 1 of the Charter.

Although there may be other reasons to explain the evidence, it is at least worth nothing that the employment of younger students is not more prevalent in Ontario than elsewhere in Canada. Nor was there evidence, beyond assertion, that training, productivity and turnover of 16 and 17-year-old students is markedly greater than 18 and 19-year-old students. That said, we are prepared to accept that there is some truth behind the assertion, but without some indication of the extent and reality of the supposed justification for the lower rate, it is difficult to conclude that it really is warranted, especially in light of the experience in other provinces.

It seems apparent that employers do use the provision and, presumably, if the younger students were truly not up to the employment tasks, or made the businesses so much less productive, they would not be employing them at all.

The real issue is an economic one and approximately $25,000,000 per annum in lost income to young students is in issue. It will either continue to be absorbed by the students, or, if the lower rate is eliminated, it will be absorbed by consumers or by the employers. There may well also be some impact on the employment of teenagers, at least in the short run, if the lower rate is eliminated. As we indicated above, however, the studies indicate this will be relatively small and if the change is phased in, it may be even smaller. It is also possible that a higher rate will lead to a higher participation rate.

We do not think that the law is justifiable in the modern world where student debt is mounting and teenagers make important efforts to join the workforce. The fact that employers make such use of the provision makes it unlikely that the training costs for younger teenagers is so markedly different than for older teenagers, or that there is a significantly greater degree of supervision that makes the lower rate justifiable. Purely and simply the justification for the provision is the encouragement of more employment among this group of young people, and while this is a reasonable objective, the discriminatory treatment which is the consequence has either not been followed in other provinces or has been discontinued.

We think, on balance, that younger teenagers should be fully recognized for the work they do and be as valued as others. The fundamental message should be that our youngest workers are not worth less than others, and laws like this which may undermine the self-worth of young people are not constructive. Finally, the simplification of the law with one minimum wage will assist in administration and enforcement of the Act.

We do believe that the economic impact on employers, which may be  passed on to the public in the form of higher prices, should be mitigated by eliminating the lower rate over time. The increase in wages in respect of those students is 6.5%, a small proportion of the overall wage cost, but we would nonetheless recommend that the student rate be gradually eliminated over a three-year time frame.

Recommendation

81. The minimum wage rate for students under age 18 should be eliminated over a three-year time frame.

6.3.3 Student exemption from the three-hour rule

All students are exempt from the requirement that employees be paid a minimum amount if they report to work and are then sent home. The Act includes what is referred to as the three-hour rule, which provides that, when an employee who regularly works more than three hours a day is required to report to work, but works less than three hours, s/he must be paid whichever of the following amounts is the highest: i) three hours at the minimum wage; or ii) the employee’s regular wage for the time worked.

All students regardless of their age do not have the protection of the three-hour rule.

Unlike the student minimum wage differential, there does not appear to be a policy reason for treating students differently than other employees when it comes to the three-hour rule. Being sent home early will have the same negative impact on students as it does on everyone else in the form of lost wages, or a lost opportunity to work elsewhere. Also, unlike the student minimum wage differential, this exemption treats all students the same regardless of their age.

Once again, this rule seems to be an outdated vestige of the past as only Saskatchewan and Alberta have different rules that apply to certain high-school students. In addition, the provision may be discriminatory as indirectly affecting the young and the Charter of Rights of Freedoms could be arrayed against the provision as well as the Human Rights Code in respect of students 18 and over.

One case that was made for preserving the rule was from the tourism industry based on its seasonal structure. It is unclear to us why the seasonal nature of work would have any material impact on the three-hour rule, and in any event this was not explained. Even if it did have an impact, we cannot see a justification that is sufficiently important to warrant treating the time of all students in a way that effectively says their time and commitment to working does not matter as they can be sent home without any minimum pay, whereas other employees cannot be treated in that way.

We recommend the deletion of the exemption.

Recommendation

82. The student exemption from the three-hour rule should be eliminated.

6.3.4 Liquor servers’ minimum wage

The ESA contains a lower minimum wage for liquor servers than for other employees. It applies to employees who serve liquor directly to customers or guests in licensed premises as a regular part of their work. The liquor servers’ minimum wage is currently $9.90 per hour,^{footnote 235[235]} roughly 87 percent of the general minimum wage or a difference of $1.50 per hour.

There are only three provinces, including Ontario, with lower minimum wage rates for liquor servers. British Columbia and Quebec are the other two, although Quebec’s lower rate is for all tipped employees. Alberta eliminated its liquor servers’ minimum wage on October 1, 2016, four years after it was introduced. The differential of $1.00 per hour was eliminated over two years, but at the same time as other significant minimum wage increases were being implemented.

Women comprise almost three-quarters of liquor servers.^{footnote 236[236]}

We note that the Ontario Legislature recently passed the Protecting Employees’ Tips Act, 2015, which prohibits employers from taking any portion of an employee’s tips or other gratuities, except in limited circumstances. The Act came into force on June 10, 2016. The impact this Act may have on liquor servers’ incomes remains to be seen.

The policy rationale for a lower liquor servers’ minimum wage is that they earn enough in tips to meet or exceed the general minimum wage so that a lower rate is justified. This conclusion is somewhat challenged by the conclusion of commissioned research that 20% of liquor servers earn less than the general minimum wage after tips.^{footnote 237[237]} This research has estimated that, across all liquor servers (approximately 45,900), the cost of the special rule is approximately $258,900 in lost wages each week, or approximately $13,500,000 per annum, that are not adequately compensated for by tips; individually, the cost was calculated at a median of $21.00 per week per employee.^{footnote 238[238]}

In our view, it is likely the case that some servers do not report all their tips, and if that were the case, the 20% figure would be less to some degree, and the cost to servers would likely be less than $13.5 million.

Restaurants Canada, an industry association, challenged the research findings that 20% of servers earned less than the minimum wage with tips. It submitted a survey it conducted from PEI which purported to show that tips per hour ranged from $9.21 to $22.74; however, there was no information on the methodology, or the survey size that would justify our relying on this.

In any event, we are prepared to accept, as did Vosko, Noack and Thomas, that most liquor servers make more than the minimum wage with tips, but there surely are some situations, whether it is 20% or 2%, where that is not the case.

There has in recent years been some movement to eliminate tipping in some locations in favour of higher prices. In any event, a policy of tipping or no tipping is one that is in the discretion of the employer and is not guaranteed to the employee.

In our view, the decision to recommend the abolition or retention of the lower rate falls to be determined on the values inherent in the current structure of wages in the sector, and on the impact the decision could have on employers and servers. In other words, the decision does not turn on precisely how many servers in fact earn less than the general minimum wage when one includes tips.

Based on research on the economic effects of minimum wage increases generally, it can be expected that eliminating the liquor servers’ minimum wage would have some effect on employment levels. More importantly, however, are the costs to the employer community.

From the research that was performed for us there were approximately 46,000 servers working in Ontario.^{footnote 239[239]} While the loss to the employees of the difference between the two minimum wages was estimated by the researchers at $13.5 million annually, we calculate that eliminating the lower rate could potentially cost employers up to $1.50 per hour for every server, or a percentage increase of 15.15%. This assumes that all liquor servers are currently paid the liquor servers’ minimum wage rate of $9.90, but the cost to the employer will be less if liquor servers are currently paid a rate above $9.90 per hour.   Still, an increase of this magnitude would have an impact on employers and consumers, if increased costs were passed on to them. Insofar as liquor servers tend to work in smaller firms,^{footnote 240[240]} eliminating the lower rate may have a disproportionate impact on smaller employers.

Interestingly, Restaurants Canada did not make the argument that the cost of removing this lower rate is problematic, but we raise the issue of its impact on our own. We think that an   increase in the wage cost of servers that is not phased in may put too much pressure on employer salary costs all at once and affect potentially other restaurant salary costs indirectly.

One argument raised by employers against removing the exemption was that the differential allows restaurants to compensate other staff that do not share in the gratuities. While there was no evidence to support this assertion, i.e., evidence that salaries to other staff were higher than they otherwise would be, we do not doubt that a significant increase in liquor server rates could cause some strain on the industry.

The chief objection to the existing lower rate is that it institutionalizes dependence on tips for servers, to make even the minimum wage. Particularly when the cohort of employees is made up largely of women, this raises significant policy concerns.

Most importantly, the policy puts pressure on servers to provide not only good service to attract tips, but may put servers in a position where they may feel pressure to tolerate sexual harassment or other harassment from customers. However, the fact is that this will be the reality in any industry where servers rely on tips for a large portion of their income and will not be completely or even substantially ameliorated by increasing their minimum wage to the same level as anyone else. Tips will still form a very significant portion of their income.

A further consideration is that tipping is discretionary and earning at least the general minimum wage is not guaranteed. As we have already indicated, there is some movement towards no tipping as a policy and, in any event, the entire matter of permitting or limiting tipping is one within the discretion of the employer, including potentially eliminating the practice.

A final consideration is that eliminating the liquor servers’ minimum wage could make the minimum wage rules simpler, and easier to understand and administer. The Ministry of Labour has advised us that employees and employers are sometimes confused about whether the liquor servers’ minimum wage applies to an employee or not, and some employers take advantage of that uncertainty by paying the lower rate to employees who may not actually be subject to it (e.g., bus persons).

On balance our view is that this exemption is an anachronism. The fact that only two other provinces also have it and that one province, Alberta, recently eliminated it, is evidence that the entire idea is increasingly out of keeping with the ideas of decency of many Canadians. It is just wrong in our view to pay a group of workers, especially when so many of them are women, a lesser minimum wage than everyone else, including others who earn tips, or who serve customers in a liquor-free environment. The law is creating an institutional dependence on customers being prepared to tip, something which they currently do, but not always, and which is not mandatory. This is particularly true when the server group is disproportionately female and so there is an unintended discriminatory impact. One is left uneasy about the demographics of the sector and we question whether this anomalous treatment of liquor servers would have survived this long if most of the servers were male.

Recommendation

83. The liquor servers’ minimum wage should be phased out over three years.

6.3.5 Managers and supervisors

The issue here is not whether there ought to be an exemption from the hours of work, overtime and related provisions of the Act, but how the exemption should be defined. In other words, the issue is which employees should not have the protection of the Act because they are genuinely aligned with management to such an extent that they do not need protection or warrant protection, as they are expected as part of their higher remuneration to work longer and harder, as part of the arrangement wherein management is paid more generously.

The managerial exclusion in the ESA has a different purpose than in the Labour Relations Act, 1995 (LRA). In the LRA, managers are excluded because union representation would be a conflict of interest with the duty of loyalty owed to the employer because their duties could bring them into conflict with the union and unionized employees. In the ESA, there is no such conflict of interest issue, but there is a heightened concern that if the managerial exclusion is drawn too liberally, many employees will lose hours of work protection and overtime entitlements unnecessarily.

The exemption is an important one which is estimated to have a cost to employees who are classified as managerial of $196 million per year in Ontario.^{footnote 241[241]}

Employees who are classified as managerial or supervisory are exempt from overtime pay and from the rules which govern maximum daily and weekly hours of work, daily and weekly/bi-weekly rest periods, and time off between shifts.

Managerial and supervisory employees are defined as those whose work is supervisory or managerial in character and who may perform non-supervisory or non-managerial tasks on an irregular or exceptional basis. This means that the supervisor/manager exemption can apply even if the employee is not exclusively performing supervisory or managerial work.^{footnote 242[242]}

The concern with the present definition is threefold:

1. It may be including many people as supervisors and managers who are not really functioning in that role, or who even if they are, are paid too little to warrant the exclusion;
2. It is unclear who is and who is not managerial as the tests are not well described or understood;
3. The current test treats some real managers and supervisors as not being exempt, only because they perform some of the same work of the people they supervise on a regular basis.

In our view, this is not the kind of exemption which requires more consultation than we have had in this process. It is not really a sectoral issue but one of general application that cuts across most sectors. While we do not preclude that some sectors may need a special rule or a different test than the one we are recommending, in our view, we are as well positioned as anyone to recommend a generalized solution to this issue.

The current test

The test focuses in part on the regularity and exceptionality with which the person performs the same work as those they supervise to determine whether they are managerial or not. Litigation has focused on that issue.

The focus of the current test, means in practice, for example, that store managers in retail who will regularly help or serve customers when the store is busy, or kitchen managers in restaurants who are supervising employees but who will pitch in and help when the kitchen is busy, may not be considered to be managerial and must be paid overtime and be subject to hours of work restrictions.

This test has been criticized by the Retail Council of Canada, for example, as concentrating on the wrong factors. It argues that the exemption should look at the primary function of such persons by looking at their compensation levels and training and not consider whether part of their work includes doing the work of non-managerial or non-supervisory employees. It is arguing that managers’ and supervisors’ serving customers as part of the team should not convert them into regular employees entitled to overtime.

In our view, concentrating on whether the persons perform the duties of the people they supervise and how often is not an appropriate indicator as to whether they should be protected under the Act. If they genuinely perform managerial functions and if they are paid appropriately, the law should have no concern as to how much work they are doing of those they are supervising. Accordingly, we recommend that the existing test be eliminated.

What should the test be?

First, in our view, the duties which will make employees managerial should be defined in detail, much in the same way as it is in the American federal sphere under the Fair Labor Standards Act (FLSA). Unlike the Labour Relations Act, 1995 (LRA), where the definition is restricted to the OLRB defining who in its opinion is managerial, and therefore the term is extensively defined in jurisprudence,^{footnote 243[243]} under the ESA there is clear need among employees and employers to be able to know with clarity if the employee is managerial or not. So, for example, we would endorse the detailed American approach we set out in the Interim Report and which is set out again below.^{footnote 244[244]}

Administrative Employees:  Exempt if the following conditions are met: The employee must be compensated on a salary or fee basis at a rate not less than $455 per week. [This equals $23,660 per year for a full-year worker.] The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Highly Compensated Employees: Employees who perform office or non-manual work and are paid total annual compensation of $100,000 or more are exempt if they customarily and regularly perform at least one of the duties of an exempt executive or administrative employee identified above.

The Department of Labor (DOL) updated the salary threshold for the exemptions. Under the new rule, which was scheduled to come into effect on December 1 2016, the standard salary level was to be set at the 40^th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region (currently the South); this would have been  $913 per week ($47,476 annually for a full-year worker). The high income exemption was to be set at the 90^th percentile of earnings for full-time salaried workers nationally, which would have been $134,004. These salary figures would be automatically updated every three years, beginning on January 1, 2020.

The DOL estimated that, in the first year, 4.2 million currently exempt workers could be entitled to overtime. Similarly, it estimated that 65,000 workers currently exempt under the highly compensated employees category may become covered.

A federal court enjoined the revision as the legality of the provision was challenged. It is also unknown if the new salary figures will survive the change in the American Administration.

These efforts at greater specificity and clarity can help to educate and contribute to a simplified and broader understanding of what is required in terms of duties in order to be managerial.^{footnote 245[245]}

Second, the person should be excluded if they have genuine management responsibilities, but if they are paid very little, it is unreasonable and exploitive to deny them the protection of limits on working hours and entitlement to overtime and rest protections. Giving someone management responsibilities, without adequate income, is not a license in our view to insist that they work without limits. Having only a duties component but not a salary component to the test exposes too many people to exploitation. In short, in our view an adequate income is essential for the exemption together with the actual duties. Accordingly, we agree with those who argue that the test should have two components: first, a requirement for genuine management functions, but second, also a salary test that is sufficiently high so that such persons are compensated for the statutory rights they are giving up. This duties plus salary approach is precisely the American approach and we endorse it.

Where should the salary threshold be set?

The purpose of the salary threshold is to ensure that persons are earning enough so that being exempt from hours of work maximums, rest periods, and overtime entitlements is effectively included in the weekly or annualized salary, and is sufficient to giving up statutory rights and protections. On the other hand, setting the rate too hig may cause difficulty for some sectors, where genuine managerial employees are not well paid because of the overall level of wages in the sector. This potential variation and one size not fitting all could be dealt with on a sectoral basis if the salary level that is chosen is demonstrably too high for a specific sector. We are not suggesting a wide variability in the threshold but point out that a threshold can be set and modified appropriately if necessary.

Since this is the first time a salary test will be included, we have decided to be conservative in recommending where it should be set. The current American figure of $455 per week, which equals $23,660 per year for a full-year worker, was set in 2004 and was proposed to move to $913 per week (or $47,476 annually for a full-year worker) at the end of 2016. The high income exemption which essentially creates a more liberal duties test for high income employees was scheduled to go from $100,000 to $134,004. The implementation of the new regulation has been enjoined and it is unclear whether it will ever proceed.^{footnote 246[246]}

Our view is that a multiple of the minimum wage is an appropriate basis on which to put the salary test for purposes of the managerial exclusion. It seems to us that assuming a person is genuinely assigned managerial responsibilities, they ought to be compensated at least 50% above the general minimum wage on a weekly basis in order to deprive them of rights to hours of work and overtime protection.

Based on the research done for our review,^{footnote 247[247]} about 30% of Ontario employees in 2014 were below 150% of the minimum wage. Since the proposed new US figure was set at the 40^th percentile of the lowest wage region in that country, a 30% percentile is more conservative. However, converting to a 44 hour work week, which is the number above which overtime is payable in Ontario, would increase the number by 10% and take it on a weekly basis to $750 (based on the existing minimum wage of $11.40) and on an annualized basis to $39,000. Also, tying the number to the minimum wage means it will automatically index as that number increases by CPI from year to year. We do not believe that a special rule is required for high income earners and do not recommend one.

Recommendation

84. We recommend that the current test for managers be changed to a salaries plus duties test where, in order to be exempt from hours of work and overtime protection, a manager would have to perform defined duties, which would generally follow the U.S. tests for executive and administrative employees (these are, in broad strokes, compatible with the Ontario Labour Relations Board criteria). We recommend that the salary figure be 150% of the general minimum wage (currently $11.40), converted to a weekly salary of $750 per week, on the basis of a 44-hour work week, which is the threshold for the payment of overtime.