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Every employer knows to expect a certain amount of turnover among their team. Whatever the circumstances, when there is a break in active service or employment ends, an essential payroll task is to ensure employees are properly paid and a Record of Employment issued. Meeting all of the related employment standards, withholding and reporting requirements is no easy task.
Let’s start with the information needed before payroll can begin this work. Above all else, payroll must understand the circumstances behind the leaving.
Has the employee quit or resigned? If so, it would be helpful, but not mandatory to know whether the person is returning to school, has taken another job or is voluntarily retiring. The employee may simply not have communicated any such reasons to the employer.
If the leaving is employer initiated, payroll must know whether the person is entitled to notice. In other words is the person being terminated for misconduct or is the person being let go for lack of work or for any other reason that isn’t the person’s own fault. If notice is required, has notice been given, is the person working the notice or was there some combination of notice and wages in lieu of notice?
Alternatively, the employee may not be capable of working due to illness or injury or may be taking one of the leaves for which EI benefits are payable (maternity, parental, compassionate care).
Payroll must also know if payments continued after the last day physically worked. This also impacts when the Record of Employment (ROE) has to be issued. An ROE does not have to be issued just because a person has stopped working. Nor does an ROE have to be issued just because a person is no longer being paid. Rather, an ROE is required if both of the following are true:
- There is a change in the employment status (to leave, layoff, terminated or retired); and
- No salary, wages or other earnings are payable.
For example, if an employee takes 3 weeks of paid vacation, prior to starting a parental leave, the ROE has to be issued at the end of the paid vacation, with that date reported in Block 11. Issuing the ROE at the start of the vacation and wrongly reporting that date in Block 11 will cause difficulties with the EI parental benefits otherwise payable.
With this information in hand, now let’s look at the payments that may be required. Such payments have a variety of different source deduction and reporting treatments. The important point is that payroll must be able to properly classify any such payments, according to the following categories. To ensure the correct treatment, sometimes this may mean breaking down a single payment into several different pay codes.
The first payment type is regular salary and wages. On leaving, an employee may be owed wages for work in the current pay period. These are subject to all the normal source deductions for income tax, CPP and EI.
The second payment type is statutory holiday pay for any holidays that fall shortly after the end of employment (see this blog entry). For source deduction and reporting purposes, this is the same as regular salary or wages, with the exception that any such statutory holiday pay must be reported in Block 17B on the ROE.
The third type of payment is any form of banked time, such as accrued vacation pay, banked overtime or deferred statutory holidays. These too are subject to income tax, CPP and EI source deductions, but for income tax purposes the bonus method may be used, with no basic exemption in calculating any CPP owing. Any accrued vacation pay must be reported in Block 17A on the ROE; any other payments of this type must be reported in Block 17C.
The next payment type is wages in lieu of notice. Once you know how many weeks the person is entitled to, payroll may be required to calculate an average weekly rate, based on prior earnings. The rules vary from jurisdiction to jurisdiction, but in Ontario, for employees paid partly or wholly by commission, piece work or other incentive basis, payroll must calculate an average of any salary, wages or incentive earnings in the weeks worked in the 12 weeks prior. If the person only worked in 9 of the prior 12 weeks, the average is the earnings in those weeks divided by 9.
Any such wages in lieu of notice are subject to income tax, CPP and EI source deductions, using the bonus tax method, with no CPP basic exemption. Wages in lieu of notice must be reported in Block 17C on the ROE.
All of the above payments are reportable on the T4 in Box A. The two final payment types, death benefits and retiring allowances are reported differently. Death benefits are reported in the “Other Information” area on the T4A, using code 106. Retiring allowances are reported on the T4, but in the “Other Information” area using codes 66 or 67. Code 66 relates to service prior to 1996; code 67 for service in 1996 and after. See the T4001 guide for the rules that apply.
The simplest way of explaining it is that death benefits and retiring allowances are anything paid to an employee, over and above the other payment types described in this article. In other words, if there is an agreement to pay a fixed amount on termination, all of the other payments described in this article must first be carved out. Anything left over is either a death benefit or a retiring allowance. A death benefit is a retiring allowance that would otherwise be payable to a person who dies while still employed. If a retiring allowance is owing to a person, who dies between the end of employment and its payment, the payment remains a retiring allowance.
Death benefits and retiring allowances are subject to income tax source deductions, using the lump-sum method. No CPP or EI applies, even though such payments must be reported on the ROE in Block 17C. Unlike any other ROE-reportable payment, death benefits and retiring allowances are not included in the earnings reported on the ROE in Blocks 15B and 15C.
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at email@example.com, (250) 228-5280 or visit www.alanrmcewen.com for more information.