Are there different ways employers can pay for EI?

A look at history of premiums, suggestions for future

Every fall, employers and payroll professionals await the federal government’s announcement on employment insurance (EI) premium rates and maximum insurable earnings.

While this year’s proclamation that rates would be frozen through 2016 was not a surprise — it was part of the 2014 federal budget — Finance Minister Joe Oliver’s announcement of a new tax credit for small business for 2015 and 2016 was unexpected.

The credit, for businesses whose employer EI premiums are no more than $15,000 in 2015 and 2016 will be calculated as the difference between premiums paid at the legislated rate of 1.88 per cent and a reduced rate of 1.6 per cent in those two years.

Since employers pay 1.4 times the legislated rate (unless they have a government-approved reduced rate), the move would reduce the employer premium rate (for employers outside of Quebec) from 2.632 per cent to 2.24 per cent for small businesses.

Whether a way to acknowledge the role small business plays in the economy or an attempt to win votes in an election year, the measure is a reminder the federal government can structure rates in different ways.

In fact, over the history of the EI system, business groups, think tanks and the government have looked at different options.

It has been almost 75 years since Canada passed legislation 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 fundamentally changed in over 40 years.

Today’s model of employers paying 1.4 times the employee rate dates back to the 1971 Unemployment Insurance Act. Before then, they contributed equally, with the federal government also paying a fixed percentage 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 distribution of covered workers in each of the classes," says the former department of Human Resources Development Canada (HRDC) in a historical overview of the system called The History of Unemployment Insurance.

With some amendments, governments 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 unemployment 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 maternity, parental and illness leaves).

In a submission in August to the House of Commons Standing Committee on Finance looking at suggestions for the 2015 federal budget, the Canadian Federation of Independent Business (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 submission to the federal Finance Department, the Calgary Chamber of Commerce wrote, "The rationale that employers should bear a higher overall share of program costs is not unwarranted, 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-unemployment 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 regions. Areas with higher unemployment would have higher premiums and those with lower levels would have lower EI rates.

Some business groups have also called for the federal government 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 employers’ 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 Standing Committee.

Another suggestion is experience rating, the idea being employers who have more layoffs or terminations pay higher premiums than those whose workforce is more stable. It is similar to the programs in most workers’ compensation boards in Canada.

In a 2010 submission to the federal government, the Canadian Chamber of Commerce recommended the gradual phase in of the experience rating system.

"Without employer-based experience rating, the EI system levies taxes on firms that minimize layoffs (for example, through smoothing of production and the use of work-sharing arrangements) and subsidizes businesses that readily resort to layoffs," the Chamber wrote.

The United States uses experience rating at the state level for its unemployment insurance program. State unemployment insurance (SUI) taxes, in conjunction with the federal unemployment 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 unemployment fund and the amount employees it has terminated have received from the fund.

Based on these factors, states issue employer experience ratings. The ratings determine the tax an employer pays. Low employee turnover generally 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 recommendation in the 1970 UI study.

"Employers would pay 1.4 times the basic employee rate. In addition, they would pay premiums based on their average yearly layoff experience. This ‘experience rating’ would apply to employers with an annual insurable payroll over $78,000," the study said.

The Commission never implemented it though and the regulations allowing for it were removed. Various studies — including government-commissioned reports — have come to different conclusions, with some advocating experience rating and others saying it would be too complex and costly to work.

Norma Nielson, a professor affiliated with the University of Calgary’s School of Public Policy, agrees with the latter conclusion. 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 rating to the employers, do you also change what you charge the employees 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 University 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 increased premiums in the form of reduced wages."

Nielson says while it is understandable employers may want lower rates, any decision to change the structure of premiums 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 announced 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 balanced at the end of that period.

Yearly changes to the EI rate will be limited to five cents, except for 2017 when the government will put no limit on how much it can go down. The Finance 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 indication it intends to do so in 2017. Employers (and payroll professionals) will have to await further announcements.

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