Canadian Payroll Reporter

2 Canadian HR Reporter, a Thomson Reuters business 2014 News November 2014 | CPR More options have been tabled over the years from EI on page 1 to establish an unemployment insurance system. While the financing of the system is very different than it was in the early years, the structure of employer premiums has not fundamental- ly changed in over 40 years. Today's model of employers paying 1.4 times the employee rate dates back to the 1971 Un- employment Insurance Act. Before then, they contributed equally, with the federal govern- ment also paying a fixed per- centage of the premium cost. Under the first act in 1940, the government created groups called earning classes for setting contribution rates. Employees and employers were put in the groups based on employees' earnings. The classes were "designed to result in equal contributions from workers and employers for all classes based on the dis- tribution of covered workers in each of the classes," says the for- mer department of Human Re- sources Development Canada (HRDC) in a historical overview of the system called The History of Unemployment Insurance. With some amendments, gov- ernments handled UI premiums this way until the 1971 act was implemented. The rationale for employers paying a higher percentage of premiums than employees was employers had more control over layoff decisions and the un- employment rate. Over the years, business groups have questioned this premise, especially as the labour market has changed and EI (as it is now called) has broadened to provide benefits beyond a job loss or layoff (such as for mater- nity, parental and illness leaves). In a submission in August to the House of Commons Stand- ing Committee on Finance look- ing at suggestions for the 2015 federal budget, the Canadian Federation of Independent Busi- ness (CFIB) said, "Another way the federal government can help small business owners would be to implement a 50:50 split in EI premiums, so that employer and employee contribute equally." Three years ago, in a submis- sion to the federal Finance De- partment, the Calgary Cham- ber of Commerce wrote, "(T)he rationale that employers should bear a higher overall share of program costs is not unwar- ranted, as they have traditionally had greater control over layoff decisions and should have to pay a component of the social costs of unemployment," it said. "But when the premiums have been increasing in the past decades due to non-unemploy- ment related costs, it is difficult to justify why employers have to pay significantly more into the system than employees." The Calgary chamber also suggested variable premium rates based on economic re- gions. Areas with higher unem- ployment would have higher premiums and those with lower levels would have lower EI rates. Some business groups have also called for the federal gov- ernment to contribute again to EI financing, something it has not done since 1990. "We ask the government once again to gradually reintroduce its contribution so that the em- ployers' contribution can be kept under control (40 per cent employer, 40 per cent worker, 20 per cent government)," said a submission from the Quebec Employers' Council in August to the House of Commons Stand- ing Committee. Another suggestion is experi- ence rating, the idea being em- ployers who have more layoffs or terminations pay higher premi- ums than those whose workforce is more stable. It is similar to the programs in most workers' com- pensation boards in Canada. In a 2010 submission to the federal government, the Canadi- an Chamber of Commerce rec- ommended the gradual phase in of the experience rating system. "Without employer-based experience rating, the EI sys- tem levies taxes on firms that minimize layoffs (for example, through smoothing of produc- tion and the use of work-sharing arrangements) and subsidizes businesses that readily resort to layoffs," the Chamber wrote. The United States uses experi- ence rating at the state level for its unemployment insurance program. State unemployment insurance (SUI) taxes, in con- junction with the federal unem- ployment tax, fund the states' unemployment compensation programs. Employer SUI contributions are usually based on the amount of wages the employer has paid, the amount it has previously contributed to the unemploy- ment fund and the amount em- ployees it has terminated have received from the fund. Based on these factors, states issue employer experience rat- ings. The ratings determine the amount of tax an employer pays. Low employee turnover gener- ally leads to a low rate and high turnover generally means a high rate. Canada's 1971 UI Act gave the Unemployment Insurance Commission the authority to create regulations establishing an experience rating system. The idea came from a recommenda- tion in the 1970 UI study. "Employers would pay 1.4 times the basic employee rate. In addition, they would pay pre- miums based on their average yearly layoff experience. This 'experience rating' would apply to employers with an annual in- surable payroll over $78,000," the study said. The Commission never im- plemented it though and the regulations allowing for it were removed. Various studies — in- cluding government-commis- sioned reports — have come to different conclusions, with some advocating experience rating and others saying it would be too complex and costly to work. Dr. Norma Nielson, a profes- sor affiliated with the University of Calgary's School of Public Pol- icy, agrees with the latter conclu- sion. She says while experience rating makes sense in theory, it would be difficult to implement. "It's very common in a private insurance sector. I guess it's a philosophical question whether one thinks it should be employed in a social insurance program or not. In workers' comp, it's pretty much proven to be necessary to provide incentives for employers to take safety measures and try to change cultures that maybe don't produce safe workplaces," she says. "To the extent that the risks in EI are following a very large cycle where it's likely to hit all industries at the same time in a big recession, for example, do you then turn around and charge more to the companies that got hit hard in a recession because they got hit hard in a recession?" she asks. "If you charge experience rat- ing to the employers, do you also change what you charge the em- ployees or (those) working in an industry that's more cyclical?" A 2011 study of EI by the Mowat Centre, a public policy think tank located at the Uni- versity of Toronto, cited other problems. It noted "firms may pressure employees not to make claims, challenge the legitimacy of laid off employees' claims, or simply pass on the cost of in- creased premiums in the form of reduced wages." Nielson says while it is un- derstandable employers may want lower rates, any decision to change the structure of pre- miums has to take into account the costs of making significant changes to the EI system. Officials in the federal Finance Department did not respond to an interview request about these proposals. The federal government an- nounced it will implement a new formula for setting EI premium rates in 2017. The new method, called the seven-year break-even rate, will require premiums be no higher than they need to be to ensure the EI Account is bal- anced at the end of that period. Yearly changes to the EI rate will be limited to five cents, ex- cept for 2017 when the govern- ment will put no limit on how much it can go down. The Fi- nance Department estimates the employee premium rate for workers outside Quebec could be 1.47 per cent in 2017. Under the current formula, the employer premium rate would then be 2.058 per cent unless the federal government changes the calculation formula. So far, there has been no indica- tion it intends to do so in 2017. Employers (and payroll profes- sionals) will have to await further announcements. For more information, visit www.labour.gov.on.ca/english/es/ index.php.

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