As we come to the end of 2021, many not-for-profit employers must turn their minds to the application of Bill 124, the Protecting a Sustainable Public Sector for Future Generations Act (“Bill 124”). The restrictions of the Bill are coming into direct conflict with operational needs associated with recruitment, retention and compression. All, which has been exacerbated by the pandemic, are showing significant impact on operations.
In this PooranLaw Insights article we review the law, its application, and recent case law developments that, if carefully applied, may provide opportunities for addressing these challenges while maintaining compliance.
Background
Bill 124 was introduced in the Ontario legislature on June 5, 2019, and came into force on November 8th, 2021. Bill 124 restricts compensation growth within the public and broader public sectors. It applies to not-for-profit organizations that received at least $1 million in funding from the government of Ontario (the “Province”) in fiscal 2018-2019 (as well as other employers that are not relevant here). It applies to both union and non-union employees.
Moderation Periods
Bill 124’s restrictions apply for a period of 3 consecutive years (known as the “moderation period”). For unionized employees, the moderation period begins automatically from the first day of the first collective agreement negotiated after June 5, 2019.
For non-union employees, the moderation period will depend on whether non-union compensation is tied in a compensation plan to the wages of the unionized employees of the same employer (through a “me-too” agreement or policy for instance). In the absence of a union, or a link to union wage increases, the moderation period for non-union employees is discretionary and can begin anytime on or before January 1, 2022 as determined by the employer.
Restrictions on Compensation
During the moderation period, Bill 124 restricts employers from providing the following:
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- Restriction on Base Wage and Salary Increases – Wage or salary increases in excess of 1% in each consecutive 12-month period for a position or class of positions, subject to exceptions for certain merit or performance increases, length of service, or successful completion of a program or course of technical education; and
- Restrictions on Total Compensation Increases – Increases to “compensation” (which includes salary/wages, benefits, and all other forms of compensation) that result in average employee compensation increasing by more than 1% in every consecutive 12-month period.
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“Compensation” is defined broadly so that it covers essentially all benefits of value paid to or on behalf of employees. It can include salary, premiums for employee benefits, increased overtime benefits, premiums, stipends, honorariums, bonuses, and all other forms of non-statutory compensation. For clarity, Bill 124’s limits on compensation are inclusive of any limit on salary and wage increases. That is, a salary or wage increase generally also counts towards average employee compensation.
Bill 124 also prohibits providing increases to salary or compensation before or after the moderation period to make up for amounts that would otherwise have been paid during the moderation period (“anti-avoidance measures”).
Enforcement of Non-Compliance Under Bill 124
The penalties for non-compliance for non-union employees are relatively light. Bill 124 provides that any contract or compensation plan that is non-compliant is not enforceable to the extent of the non-compliance. In essence, the part of the contract that is not in violation can still stand, and the part that is non-compliant is likely only going to be read-down to be compliant (though the case law is not entirely clear on the latter point as of yet and the text of the legislation is not entirely clear).
There are, however, practical risks to being non-compliant with Bill 124. The bill contemplates that the Ontario Attorney General may seek a court order forcing an employer to become compliant with Bill 124. This could require such an employer to incur legal fees and a negative decision. Moreover, the terms of an employer’s specific funding agreement with the Province could be violated by non-compliance with Bill 124, jeopardizing an employer’s funding.
Global Limit on Compensation Growth
The compensation limit of 1% for every 12-month period is the most important restraint under Bill 124. It requires that compensation does not increase on average for employees by more than 1% in every consecutive 12-month period during the moderation period.
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- Traditional Interpretation: Originally, most employers assumed that average compensation from year to year was calculated by looking at the amount actually paid on compensation items in the prior year and dividing it by the number of employees. This could then be increased by 1% in the next year of the moderation period. This approach was a relatively simple, easy to calculate, and succeeded in practice in preventing employers from increasing compensation by more than 1% on average each year.
- Creative Interpretation: However, a labour arbitrator[1] has recently decided that calculating the 1% limit on compensation growth should use a different, far more generous methodology. This new method may in fact effectively undermine the 1% compensation limit. The above-referenced Arbitrator held that employers should not calculate their average compensation for a given year by looking at the actual compensation paid out in the prior year, but rather by identifying the compensation rates that are in place on day 1 of the new year and projecting those rates forward.
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This new method means that an employer could grant large compensation increases midway through the year (or even on the last few days of the year) that in practice increases compensation from one year to the next by more than 1% without violating Bill 124. This is because the law would only be concerned with the rates that were already in place on day 1 of the year, without looking at what time in the previous year they were introduced. In short, all that would matter is that compensation must not increase by more than 1% on average within each year of the moderation period, not between each year.
Unions have argued that this new, more generous method can provide a creative way to increase employee compensation significantly during the moderation period.
This case law and the union push for compensation for increases based thereon needs to be approached with caution. The Province has a power to review interest arbitration decision that they feel do not comply with Bill 124 and it is very possible that the Province will not endorse this new method.
Application and Next Steps
Bill 124 is pre-pandemic legislation designed to limit compensation for publicly funded organizations. In the wage of the pandemic however, the Bill has served to exacerbate existing challenges associated with retention, recruitment, and compression issues in broader public sector agencies. Employers seeking to navigate this Bill, especially as we enter the fourth quarter of the fiscal year, need to ensure that they understand how the bill operates including the impact of:
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- Pandemic Related Exemptions and Provincial Wage Enhancement
- Performance and Merit Compensation
- Promotions and restructuring of roles
- Hiring of additional staff, layoffs, or conversion of part-time roles into full-time positions
- Changes in benefit costs
- Stipends and Signing Bonuses
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PooranLaw has the expertise and experience to help agencies navigate this challenging area of the law and will continue to provide regular updates on all things Bill 124.
[1] Windsor Regional Hospital v OPSEU, Local 101, 2021 CanLII 80170 (ON LA) (Knopf)
Note: This article provides general information only and does not constitute, and should not be relied upon as, legal advice or opinion. PooranLaw Professional Corporation holds the copyright to this article and the article and its contents may not be copied or reproduced in any form, in whole or in part, without the express permission of PooranLaw Professional Corporation.
