Cabinet didn’t have the right to set EI premiums in 2002, 2003, 2005
It makes for good headlines — “Supreme Court rules EI financing illegal” — but the top court’s ruling on employment insurance financing was mostly a technical issue, according to a Calgary-based lawyer, and the decision won’t alter the EI landscape.
But it’s still an important decision that reaffirms Parliament’s power to legislate employment insurance, said Will Cascadden, head of the employment and labour department at Fraser Milner Casgrain.
Here’s what happened: Last month, the Supreme Court of Canada ruled Ottawa had illegally collected EI premiums in three years — 2002, 2003 and 2005 — when premium rates where set by the cabinet rather than Parliament. The Confédération des syndicats nationaux (CSN), a Quebec labour organization, argued the notion of having cabinet set rates instead of parliament violated the constitutional principle of no taxation without representation, enshrined in the constitution.
To give a bit of background, the federal government restructured the EI system in 1996, changing its name from unemployment insurance and revising eligibility requirements. Premiums were designed to finance the system enough to cover its costs, plus accumulate a reserve to cover lean times. (By March 2008, that surplus — on paper — hit $57 billion.)
In 2001, the government amended the legislation to allow cabinet to directly set EI premium rates for 2002 and 2003. It was given the authority to set the rates again in 2005.
But the premiums collected from employers and employees could only be used to pay current expenditures of the system and establish a “reasonable reserve,” said CSN. And the surpluses from EI premiums were diverted to feed general revenues, so the billions of dollars should be returned to the EI system, it said.
Additionally, the federal government had the power to provide compensation to unemployed workers but not to provide training and work-sharing programs, claimed CSN. These programs, established in the 1996 legislation, should be provincial matters beyond the federal government’s jurisdiction, it argued.
Once EI revenues exceeded what the system required, the surplus premiums no longer had a connection with the operation of the system, found the court. They could no longer be considered a regulatory charge and became “a kind of payroll tax.”
Parliament had the right to delegate the imposition of a tax as long as it had already been approved by the legislature and it “expressly and clearly” authorized the delegation. However, the government didn’t indicate its intention to delegate its taxing authority in the 2001 amendments, said the court.
The court disagreed with CSN on the issue of active measures to reduce unemployment — such as training and work-sharing programs — saying the law should evolve with labour relations and those measures were consistent with the government’s objective to reduce unemployment.
Since the government didn’t clearly indicate its intention to assign taxing authority, the amendments giving the cabinet the power to set EI premiums for 2002, 2003 and 2005 were invalid and an “improper exercise of a power conferred on Parliament,” ruled the court. As a result, the government unlawfully collected premiums in those years.
However, the court declined to order any repayment of surpluses to the EI account and suspended its finding of invalidity for one year to allow the government to make legislative amendments to fix the problem.
The Conservative government under Prime Minister Stephen Harper adopted a “pay-as-you-go” EI system in its 2008 budget that restores premiums to a level necessary only to meet the system’s needs.
“The whole (EI) program was not intended to be a tax and when the government stopped tying premiums to the needs of the program, it became one,” said Cascadden. “It had to be done properly.”
It’s unlikely the surplus will be fed back to the EI system from general revenues, he said. The most probable result will be Parliament passing legislation that retroactively delegates taxing authority to cabinet for the years it set the premium.
“The court basically said ‘Fix it but you don’t have to pay anything,’” said Cascadden. “It’s an important decision and politically charged but it’s a technical decision that can be remedied easily.”
Jeffrey R. Smith is the editor of Canadian Employment Law Today, a sister publication to Canadian HR Reporter that looks at employment law from a business perspective. For more information, visit employmentlawtoday.com.
