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Letter of Credit (for Orders to Pay Compensation)

To have an order to pay compensation reviewed by the Ontario Labour Relations Board (Board), an employer or temporary help agency client generally must pay the lesser of (a) the amount of the order and (b) $10,000 to the Director of Employment Standards in trust. However, as an alternative the employer may instead submit an irrevocable letter of credit in favour of the Director for that amount, provided that the letter of credit is acceptable to the Director.

What is a letter of credit?

A letter of credit is a promise made by a financial institution at the request of a customer (in this context, the employer or temporary help agency client) to pay a specified amount to a third party (in this context, the Director of Employment Standards). The financial institution makes the payment automatically if the third party demands payment; the financial institution does not make any enquiry about whether the third party has a right to demand payment or is justified in demanding payment.

What does the Director do with the letter of credit?

The Director will hold the letter of credit pending a decision from the Board (and under any subsequent Court proceedings) concerning the application for review of the order. If the order is rescinded, the letter of credit will not be cashed and will be returned to the employer or temporary help agency client. If the order is upheld, and the employer or client does not pay the amount of the order, the Director will demand payment from the institution that issued the letter of credit. Where an order is upheld in part and the employer or client does not pay the amount upheld, the Director will demand payment of that amount from the institution that issued the letter of credit.

What does the Director consider to be an acceptable letter of credit?

While the Director may establish other criteria, generally speaking the Director will find a letter of credit to be acceptable if:

  • It is irrevocable;
  • It contains a condition providing for its automatic renewal following the expiry date of the letter of credit
  • It contains no other conditions, i.e., conditions other than the automatic renewal condition;
  • It permits “partial drawings”, i.e., the Director can demand and receive payment of less than the entire amount specified in the Letter of Credit. (This is in case the application for review of the order is partially successful and the Board reduces the amount of the order.)
  • It is issued by a bank or similar financial institution having an office in Ontario

If an employer or temporary help agency client believes there are good reasons why the Director should consider a letter of credit to be acceptable despite it not meeting the above criteria, those reasons should be provided to the Director in writing and the Director will consider them. (Note: the Director only has the authority to accept a letter of credit that is irrevocable.)

What happens if a letter of credit is submitted but turns out not to be acceptable?

The Employment Standards Act provides that if an employer or temporary help agency client wishes to apply for review of an order to pay, it must either pay the amount of the order to the Director in trust or provide the Director with an irrevocable letter of credit in that amount that is acceptable to the Director. There is no right under the Act to have the order reviewed by the Board if the employer does not pay the amount of the order or provide an acceptable, irrevocable letter of credit in the amount of the order.

Disclaimer: This resource has been prepared to help employees and employers understand some of the minimum rights and obligations established under the Employment Standards Act, 2000 (ESA) and regulations. It is not legal advice. It is not intended to replace the ESA or regulations and reference should always be made to the official version of the legislation. Although we endeavor to ensure that the information in this resource is as current and accurate as possible, errors do occasionally occur. The ESA provides minimum standards only. Some employees may have greater rights under an employment contract, collective agreement, the common law or other legislation. Employers and employees may wish to obtain legal advice.