Banked overtime a common practice, but there are administrative traps to avoid – perhaps it's time to consider simplifying EI reporting
By Alan McEwen
Banked overtime is a common practice in some industries, probably for the main reason that this can smooth weekly or pay period variations in employee wages. Further, since income tax source deductions are calculated at marginal rates on overtime earnings, overtime banked and taken later, when other earnings are lower, helps maximize net pay.
However, there are administrative traps around banked overtime. Some of these include limits on how long overtime can remain in the bank, whether dollars or hours are banked and which hourly rate must be used when time is take out of the bank — the hourly rate when overtime was worked or the rate in effect at the time of payment.
5 possible overtime scenarios
But perhaps the worst of these traps is the EI reporting involved. Let's use the following example to illustrate five possible overtime scenarios:
Example: Joan works a total of six overtime hours in the workweek ending Saturday, Sept. 15, 2012. During that week, her regular hourly rate is $16 and the six overtime hours are worked at time and a half.
Joan works under a collective agreement, in which overtime hours may be banked for up to six months. Similarly, on layoff, under the collective agreement, any banked overtime hours remaining must be paid on what would otherwise be the next regular pay date. Employees may also ask for cash out of the bank, without taking time off. Joan is paid on a biweekly basis, where every second Saturday is the last calendar day in a pay period, with pay day being the following Thursday.
Scenario 1: Joan gets paid for the overtime worked on the regular pay date for that pay period, Thursday, Sept. 20, 2012. For EI purposes, the overtime hours and earnings would have to be allocated to that period, for reporting on any subsequent record of employment (ROE). The six hours worked would be reported in Block 15A and the $144 in earnings (six hours at 1.5 at $16 an hour) in Block 15B.
However, let's look at the what happens to any ROE reporting if these overtime hours or dollars are banked.
Scenario 2: Joan banks the overtime earned until just before Christmas when she asks for cash out of the bank, without taking any time off work. The same $144 is now paid on Thursday, Dec. 13, 2012. For ROE reporting purposes, the hours worked must be included in the pay period ending Sept. 15, but the insurable earnings for the cash taken must be allocated to the pay period paid on Dec. 13, 2012.
Note, the discrepancy between the reporting of EI insurable hours and earnings in this scenario. Insurable earnings are allocated to pay periods, for ROE reporting, based on section 23 of the Employment Insurance Regulations. There are no similar allocation rules for insurable hours — hours worked and paid, without additional time off, are reported on the ROE according to when they were worked.
Scenario 3: Joan keeps the six hours worked in the bank until she is laid off on Friday, Feb. 1, 2013. The next regular pay day is Feb. 7 and that is when Joan is paid overtime for her six hours banked the previous September. The last day Joan worked was Monday, Jan. 14, in the pay period ending on Jan. 19 and paid on Jan. 24, 2013. After Jan. 14, Joan had no regular hours or earnings, other than the banked overtime. On the ROE issued for her lay-off, Block 11, the last day for which paid, is Jan. 14 and Block 12, the final pay period ending date is Jan. 19, 2013. In this scenario the six insurable overtime hours are still reported against the pay period ending Sept. 15, 2012, but the insurable earnings for these are allocated to the last pay period for which there are regular wages.
Even though the interruption of earnings occurred on Feb. 1, the first day that the two conditions for an interruption are met — layoff and a period of seven calendar days with no work or allocated earnings, the hours and earnings reported in Blocks 15A, B and C start backwards from the pay period ending on Jan. 19. The pay period paid on Feb. 7, 2013, does not appear on the ROE, since the days covered by this pay period fall after the dates in Blocks 11 and 12.
Scenario 4: Joan is not laid-off, but takes eight hours from the overtime bank, as paid time off, on Monday, Feb. 11, 2013. Remember, she worked six hours at time and a half. For this work, Joan has to be given nine hours paid time off, at straight-time, so one insurable hour remains in the bank. The collective agreement requires that she be paid at the regular hourly rate in effect at the time of payment. On Feb. 11, Joan's regular hourly rate was $16.50. Feb. 11 falls in the pay period ending Feb. 16 and paid on Feb. 21. On an ROE, the eight insurable hours and the $132 in earnings (eight hours at $16.50) are both reported against this pay period.
In this scenario, for EI purposes, the overtime hours worked in Sept. 2012 are not insurable. Instead, the paid time in lieu for those hours, taken on Feb. 11, are insurable.
Scenario 5: Joan takes nothing out of the bank and, as a result, the six-month limit on holding Joan's overtime hours expired March 15, 2013. For EI purposes, the six overtime hours worked are insurable against the pay period ending on Sept. 15, 2012, while the earnings are insurable in the pay period ending Saturday, March 16, for payment on March 21, 2013. This is like scenarios two and three, where there is a difference between the pay periods for reporting insurable hours versus earnings.
Who thinks this different treatment of hours versus earnings is reasonable? Maybe it's time to consider further simplication in ROE reporting.
Alan McEwen is a payroll consultant and freelance writer with 20 years' experience in all aspects of the industry. He can be reached at firstname.lastname@example.org, (905) 401-4052 or visit www.alanrmcewen.com for more information.