Employee Payroll Costs in Ontario: Nowhere to Go but Up

The Minimum Wage is Increasing

On June 1, 2014 the minimum wage increased to $ 11 per hour for most employees. A momentous increase for employers? Perhaps not. But let’s take a look at the bigger financial picture; the cost of employing a person in Ontario is more than the person’s salary or wages.

A Mandatory Pension with an Employer Contribution is coming

Employers are not currently required to provide any employee benefits. However, it appears that the tables are turning. On July 14, 2014,the Ontario government announced an intention to create an Ontario Retirement Pension Plan “to help working families build a more secure retirement.” The proposed plan requires workers to contribute 1.9 per cent of their earnings up to $90,000, matched by a 1.9 per cent contribution from employers.

The Ontario Retirement Pension Plan, if passed into law, will be mandatory for the more than three million Ontarians without a workplace pension plan.

The $ 64, 000 Question: Employee or Independent Contractor?

Employers currently have two options when it comes to payroll costs: absorb ancillary wage costs (which are on an upward trajectory) or save these costs by contracting out certain business functions to a consultant.

When answering this question, employers need to consider the totality of all payroll costs.  To that end, this blog outlines some of the ancillary payroll costs that an employer must pay in addition to an employee’s salary or wages.

1. Payroll taxes

 Employment Insurance

Employers are generally required to deduct and remit the employee and employer contributions to the employment insurance commission.

In 2014, the employee’s contribution is 1.8 % of wages up to $48 600 or a maximum contribution of $ 913.68 per year.

The employer’s contribution (or additional payroll cost) is 1.4 of the employee’s contribution up to $ 48 600 or a maximum contribution of $ 1,279.15per year.

2. Canada Pension Plan

Employers are generally required to deduct and remit the employee and employer contributions to the Canada pension.

In 2014, the employee’s contribution is 4.95 % of wages up to $ 49 000 or a maximum contribution of $ 2425.50 per year.

The employer’s contribution (or additional payroll cost) is also 4.95 % of wages up to $ 49 000 or a maximum contribution of $ 2425.50 per year

3. Workers Compensation

Employers who are covered by the Workplace Safety & Insurance Act are required to pay premiums to the WSIB. The amount of premiums (or payroll tax) depends on the nature of the employer’s business. For example, the rate for employers in auto vehicle assembly is $ 3.59 per $ 100 earnings up to $ 84,100 or up to $ 3019.19 per year.

4. Employer Health Tax

Employers are required to pay up to 1.95 % of Ontario payroll as an employer health tax. No tax is payable on the first $ 450 000 of compensation.

Mandatory Paid Unproductive Time

An employee is entitled to receive two weeks paid vacation each year and vacation pay is generally calculated as 4% of the employee’s wages in a vacation year minus vacation pay received in that year.

An employee is generally entitled to 9 paid statutory holidays which is approximately equal to 4% of the employee’s wages.

Employers are also required to provide mandatory training to employees. In 2012, a new law required training under the Accessibility for Ontarians with Disabilities Act for employers with 20 or more employees, and by July 1, 2014 employers should have provided mandatory health & safety training to its employees.

The Cost of Terminating an Employee

An employee is generally entitled to a minimum amount of notice of termination. Employers rarely provide an employee with notice of termination so the employer is required to provide pay in lieu of this notice. The amount this termination pay depends on the employee’s years of service and whether the employee has signed an employment contract with a termination clause. An employee with more than 8 years service is generally entitled to between 8 and 104 weeks termination pay depending on whether there is a termination clause in an employment contract. That’s right. 104 weeks.

An employee is generally entitled to at least 5 weeks severance pay if the employee has worked more than 5 years and the employer’s payroll exceeds $ 2.5M.

The cost of payroll taxes

 An employer with an Ontario payroll of over $ 850 000 in the auto vehicles assembly business pays $ 6474.65 payroll taxes each year for an employee earning $ 50 000 (i.e  $ 1,279.15 for EI, $ 2425.50 for CPP, $ 1795 for WSIB, and $ 975 EHT).

In addition the employer is required to pay a minimum of $ 2 000 in vacation pay and $ 1730.77 in statutory holiday pay for a total of $ 10 205.42 which is about 20% of the employee’s salary.

If the Ontario Retirement Pension Plan comes into effect as proposed then this amount will increase by $ 975 per year.

How to Avoid Payroll Costs

As mentioned previously, one way to avoid payroll costs is to contract out certain work to a consultant. An organization is not required to pay payroll taxes on a consultant’s compensation or provide paid vacation or pay for statutory holiday. An employer must, however, be very careful when doing so because the Canada Revenue Agency (CRA) carefully reviews these arrangements. If the CRA concludes the consultant is really an employee then the CRA will order the employer to pay EI and CPP premiums on the consultant’s income. The CRA generally applies a four part test when determining whether a person is an employee or an independent contractor. The same test is generally applied by the Workers Compensation Board in connection with workers’ compensation premiums, and the Minister of Finance in connection with the Employer Health Tax. If an employer carefully considers the nature of the work and ensures that a consulting arrangement passes the four part test then an employer can save the above noted payroll costs.

For the past 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on whether to hire employees or retain consultants to perform certain business functions. You can contact him at 416 317-9894 or at [email protected]