Don’t be fooled: HR law compliance is a finance issue, too

Virtually every CEO would agree that employment law non-compliance, a failure to take workplace harassment seriously, and the general flouting of accepted human resources standards, is unacceptable. Building workplaces free of anti-social behaviour isn’t just an aspirational goal, it’s a basic legal requirement in every province in Canada.

That’s especially so in Ontario, which has some of the toughest anti-harassment laws in the country, anchored by key legislation such as the Occupational Health and Safety Act, the Human Rights Code and the Sexual Violence and Harassment Plan Act, which came into force in September, 2016. These laws require employers to investigate all potential incidents of harassment, no matter the circumstances, to maintain and update their harassment policies on a regular basis and to communicate to employees the findings of any harassment investigations.

All Ontario employers must have a policy addressing workplace violence and harassment upon hiring their first employee, and the policy must be in writing if they have five or more employees.  Further, an employer with five or more employees must have a written occupational health and safety policy.

But compliance with those stringent rules and regulations is lackluster in many industries, notably restaurant and hospitality, according to a recent Globe and Mail analysis.

In their review of province-wide compliance rates, the Globe found that:

“More than 3,500 employers were cited for labour violations by provincial inspectors over an 18-month period ending in January, 2017, according to Ministry of Labour data obtained through a Freedom of Information request. Up to now, however, no prosecutions have been initiated under harassment-related laws, ministry spokeswoman Janet Deline said. Instead, employers have been given deadlines to comply with the law.

The Globe and Mail’s analysis shows that 3,563 Ontario employers violated all harassment-related laws from September, 2016, to January, 2018, the most recent period for which data is available. Those employers were cited for 7,800 instances of failing to follow the law.”

So, the bottom line is that some employers in Ontario are far less diligent about meeting their employment law obligations than others, right? Yes, but there’s much more to the story. The Globe’s report offers a tiny snapshot of a much larger area of risk exposure for companies of all sizes—medium-sized ones in particular. I would argue that non-compliance isn’t merely an HR problem, but rather a financial and strategic operational concern that can impact an organization’s long-term growth trajectory.

There are many ways in which this scenario can play out, but let’s take one example: Your advanced manufacturing company has grown its workforce to about 150 employees over a 10-year period, and now boasts annual revenue in the $75 million range. Growth has been particularly rapid in the past three years after landing a few major clients. Now, a competitor is eyeing up the business for a potential acquisition. A few numbers have been bandied about, your EBITDA is strong and the business looks to be worth at least $125 million. In other words, as the sole owner/operator, you can foresee a major payout on the horizon.

But during the due diligence process—which sees the interested competitor analyze key metrics and characteristics including the health of your company’s balance sheet (from free cash flow to debt loads and everything in between), potential strategic fit and the value of your IP and contractual commitments—their focus shifts to operational issues. Upon closer review, they realize that your HR infrastructure is insufficient, you’re facing litigation from an employee over a harassment-related incident and have faced Ministry of Labour scrutiny for your employment practices. Suddenly, a sure-thing deal shifts onto thin ice and eventually falls through due to issues that were completely avoidable.

This scenario is anything but far-fetched. We’ve worked with many organizations whose business opportunities—from M&A situations to their ability to secure positions on preferred supplier lists—became overshadowed by foreseeable risks and liabilities. In other words, HR issues may seem innocuous, but can easily derail a strategic plan.

The cost of protracted employment law litigation, potential civil settlements and government-imposed fines, for example, can be hefty. Simply dedicating the time to deal with such matters is a drain on your balance sheet, not to mention a time-consuming stressor that can negatively impact productivity, employee engagement and staff retention—all of which are also incredibly expensive to manage, not to mention distracting.

Worse, if the violations have to do with health and safety, your entire facility can be shut down. If you haven’t conducted due diligence on prospective employees and haven’t confirmed their right to work in Canada—a major issue in sectors such as agriculture and food production—a government enforcement raid could gut part of your workforce in one fell swoop. Perhaps an outside supplier is the cause of your HR concerns. Earlier this year, for example, a resort in Central Ontario was embarrassed to learn that the cleaning company it had contracted to service its on-site hotel was tapping the services of Mexican workers who were being forced to work for little or no pay, their passports confiscated by the agency that employed them. In effect, these individuals were slave labourers.

The negative press generated by incidents such as these have an obvious impact on an organization’s standing in the community and among prospective clients, but also its employer brand and ability to attract and retain top talent. At a time when large corporations are implementing and enforcing stringent corporate social responsibility strategies dictating everything from the basic diversity requirements to the environmental practices of the suppliers and partners with whom they engage, your organization’s ability to secure new business can also be affected by non-compliance violations.

Of course, as Chartered Professional Accountants, we’d be remiss in discussing HR compliance without also mentioning tax compliance as a critical issue for so many organizations. Scrutiny from a provincial labour ministry is bad, but an unwelcome knock on the door from the Canada Revenue Agency can generate a whole other level of pain for business leaders.

Audits, tax litigation and potential fines and interest can throw even the most carefully-planned financial projections into disarray. HR and tax compliance are related in the sense that government agencies collaborate more than we think. A labour law violation can easily spark a CRA audit—or worse.

Case in point: a CRA investigation into international tax evasion allegations against 15 businesses in Ontario and Quebec earlier this year eventually turned criminal, culminating in a joint raid on those organizations in conjunction with the RCMP.

The takeaway here is that legal compliance—HR or otherwise—should never be taken lightly. Invest the time and effort to put a comprehensive HR infrastructure (including compliant policies and procedures) in place to guard against the kind of unwanted scrutiny that could put a major financial and strategic dent in your organization’s growth ambitions.

Hartley Cohen, Partner

Hartley Cohen

905-946-1300, x. 223