HUMA Committee Report

OTHER FINANCING ISSUES

I.        Yearly Basic Insurable Earnings Exemption

            Under the Employment Insurance Act, individuals who are unlikely to qualify for benefits are entitled to a premium refund if their earnings are less than $2,000 per year. Employers are not entitled to these refunds, a situation which understandably was regarded as inequitable by business groups, particularly those representing small businesses, who appeared before the Subcommittee.

            In addition to the inequitable treatment afforded employers, the premium refund also has some shortcomings with respect to its treatment of employees. While the purpose of this provision is to refund premiums to workers who are unlikely to qualify for benefits because their earnings are insufficient, it undoubtedly fails to perform this task because it is set too low and it is not indexed to growth in earnings. The current threshold of $2,000 is not high enough to ensure that those with low annual earnings and no chance of meeting EI’s minimum qualification requirement receive a premium refund. For example, combining the lowest minimum wage rate ($5.90 per hour) and the lowest minimum qualification requirement (420 hours of insurable employment), those with annual earnings between $2,000 and $2,478 would not qualify for EI or a premium refund. More importantly, the gap between the current premium refund threshold and other minimum wage and minimum qualification requirement combinations rises as the minimum wage rises and/or the unemployment rate falls in EI economic regions.

            In view of the fact that the government seems unwilling to augment the premium refund and devise some means for applying it to employers, the issue of introducing a basic insurable earnings exemption, akin to that used under the Canada Pension Plan, surfaced during the Subcommittee’s hearings. This issue has been raised on other occasions as well and, in fact, was addressed in a report prepared by this committee in May 2001 entitled Beyond Bill C-2: A Review of Other Proposals to Reform Employment Insurance.

… a yearly basic exemption in the EI program would help alleviate the payroll tax burden of all Canadians and all businesses but would most benefit those most punished by high payroll taxes, low wage and entry level workers, and labour intensive businesses. (Joyce Reynolds, Canadian Restaurant and Foodservices Association)³⁰  

            The Committee agrees that the current limited and one-sided application of the premium refund needs to be addressed, and the introduction of a yearly basic insurable earnings exemption is appealing in at least two respects. Firstly, it alleviates some of the regressivity of EI premiums. Secondly, its application is administratively simple.

            However, a yearly basic insurable earnings exemption is wanting in other respects. For one, proponents of this feature assume that exempt earnings would be insurable for the purposes of qualifying, but not for the purposes of premium collection, which seems to be tantamount to free benefit coverage. In addition, if earnings up to the yearly basic insurable earnings exemption are only insurable if earnings exceed the exemption (basically the same treatment afforded pensionable earnings for the purposes of the Canada Pension Plan), then some individuals, for example, multiple job holders might find this approach to be inequitable. In this case, a multiple job holder whose earnings in each of the multiple jobs are less than the earnings exemption could end up with no insurable earnings even though total earnings are well in excess of the insurable earnings exemption. Another issue, although no more serious than that under the Canada Pension Plan, is that a yearly basic insurable earnings exemption might induce some employers to create short-hour jobs that terminate just before the earnings exemption threshold is reached.

            Assuming most of the administrative irregularities associated with a yearly basic insurable earnings exemption are adequately addressed and resolved in favour of workers, the Committee is generally supportive of this proposal.

Recommendation 7

The Committee recommends that the government implement a $3,000 yearly basic insurable earnings exemption to replace the premium refund for contributors with low earnings. This exemption threshold would be indexed upward according to growth in average weekly earnings in Canada. This new provision should be reviewed two years after its implementation to examine its impact on hours of work.

II.       Return of Over Contributions to Employers

            Along the same lines as the premium refund discussed above, employees are entitled to a return of contributions if they contribute more than the maximum amount in any given year, but employers are not afforded the same treatment. The maximum payment by an employee is calculated as the product of the premium rate and maximum insurable earnings divided by 100 (the maximum payment in 2004 is $772.20). All EI premiums paid in excess of the maximum contribution are returned to the contributor. Employers, who pay 1.4 times the employee premium rate, are entitled to a refund of over-contributions only where the actual amount remitted in a given year exceeds the amount they are required to remit on the basis of earnings paid to each employee. Hence, even though an employee has contributed, for example, the maximum amount in previous employment with a different employer in a given year, the employee’s current employer must contribute on the basis of current, not previous, earnings paid to the employee in that year. In other words, employers contribute to EI on behalf of a given employee as if they are the first employer to pay premiums on behalf of that employee.

            This anomalous and inequitable treatment arises under the rubric of employee privacy, which, of course, we do not take lightly. Nevertheless, Committee members are somewhat puzzled by the fact that the government has been unable to identify some administrative solution to resolve, at least in part, this problem, given its capacity to create a program as administratively complex as EI.

We’d like to see a mechanism for refunding employers for EI over contributions particularly with respect to associated companies who are treated as a single taxpayer for the purposes of other income tax matters and yet for EI are treated as separate employers. (Michael Atkinson, Canadian Construction Association)³¹

While it is difficult to quantify the exact level of over-contributions by employers, the level is certainly in the several hundred million dollar range. However, there is currently no mechanism in place to refund employers for over-contributions. Given the fact that EI premiums represent a barrier to job creation, the Canadian Chamber believes that the federal government must immediately implement a system that allows for over-contribution by employers to be refunded by the federal government. (Michael Murphy, Canadian Chamber of Commerce)³²

            We believe that a more satisfactory approach can be found than currently exists to afford employers, who pay 1.4 times what their employees pay, more equitable treatment regarding over-contribution refunds. The solution, perhaps one that incorporates a first-payer principle, may continue to be inequitable for some employers, but others would be treated far more fairly than is currently the case. Over-contribution refunds need not be paid in reference to specific employees; a lump-sum payment is an option worth considering. In cases involving businesses in which only one employee has worked for the business in a given year, perhaps the permission of that employee could be sought prior to refunding an over-contribution.  Finally, and perhaps most important, the solution to this problem should not be administratively complex or costly to deliver. These are but a few suggestions that could be considered in resolving this important matter.

Recommendation 8

The Committee recommends that in 2005 the government devise and implement a method for refunding employment insurance premiums to employers corresponding to over-contributions to employment insurance from employees.

III.      Employee/Employer EI Cost Sharing

            Most of the business groups who appeared before the Subcommittee maintained that there should be a more equitable EI cost-sharing arrangement between employers and employees. This view was framed in the context of the current cost-sharing arrangement and/or experience-rating. Employer groups generally maintained that employers should not be required to pay a higher premium, or any premium at all, in relation to social benefits, often intended to mean benefits paid for purposes unrelated to involuntary unemployment. Some groups representing workers recommended that general revenues be used to contribute to the cost of providing regionally extended benefits and additional program costs due to high unemployment.

            For more than three decades, employers have contributed 1.4 times employee contributions. This approach has been justified on the grounds that employers have the greatest influence over layoff decisions and hence EI program liabilities related to benefit payments. This rationale is considerably less robust today than in the past, because the relative share of EI program costs unrelated to employers’ layoff decisions has increased significantly. In 1972-1973, when this cost-sharing formula was first introduced, regular benefit payments (those benefits paid in relation to involuntary unemployment) constituted roughly 88% of total program costs (excluding interest payments to the CRF). In 2003-2004, regular benefits accounted for about 55%. Not only has regular benefits’ share of total program costs plummeted during this period, it has done so in conjunction with a gradual decline in CRF contributions to the EI program. In 1973-1974, the CRF accounted for about one-half of UI revenues. Since then, the CRF has gradually reduced its role as an EI contributor, and in 1990 the program became financed exclusively through employee and employer contributions.

… employers have been paying 1.4 times what employees pay, about 58% of total premiums collected. The multiple of 1.4 was set as a default for all employers until one experience rating system was implemented and although the enabling provision for experience rating was removed, the 1.4 employer multiple has been retained. The apparent rationale behind this is that employers have greater control over layoff decisions and therefore should bear a higher overall share of program costs. In recent years, however, EI benefits totally unrelated to layoffs — for example, parental leave, to name a significant program — have contributed to much higher costs. There was little justification for requiring employers to pay for these benefits, and more so than employees do ... The Chamber recommends the federal government reduce the employer multiple so the premium rate equals the employee premium rate. (Michael Murphy, Canadian Chamber of Commerce)³³

Right now we’re looking at employers paying 60% and employees paying 40%. We believe that if you keep all the social programs within the EI program, whatever the percentage of those are, government should pay. The structure of the board would reflect the contributions of employers, employees and government. (Joyce Reynolds, Canadian Restaurant and Foodservices Association)³⁴  

            Given the significant decrease in the share of program liabilities related to employers’ decisions to lay off workers, some Committee members believe that it is time to rebalance the cost-sharing arrangement under the EI program. Others believe that the current cost-sharing arrangement should be maintained.

Recommendation 9

The Committee recommends that the current cost-sharing arrangement between employers and employees be maintained.

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30	Ibid., (15:35)

31	Ibid. (15:25).

32	Ibid. (15:45).

33	Ibid. (15:40).

34	Ibid. (16:35).