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Payroll and Its Compliance
Environment
Learning Objectives:
Upon completion of this chapter, you should be able to:
- Describe payroll’s objectives.
- Describe who payroll’s stakeholders are.
- Differentiate between federal and provincial/territorial jurisdictions.
- Explain how each stakeholder affects payroll processes and procedures.
- Apply the Canada Revenue Agency’s factors for determining whether an individual is an employee or self-employed.
Communication Objective:
Upon completing this chapter, you should be able to explain how the employee- employer relationship is determined.
Payroll and Its Compliance Environment
- Introduction 1- Chapter Contents
- Payroll Objectives and Definitions 1-
- Requirements of a Payroll Professional 1-
- Technical Skills 1-
- Personal and Professional Skills 1-
- Behavioural and Ethical Standards 1-
- The National Payroll Institute’s Code of Professional Conduct 1-
- Content Review............................................................................................................ 1-
- Payroll Stakeholders 1-
- Government Stakeholders 1-
- Federal Government..................................................................................................... 1-
- Provincial/Territorial Governments 1-
- Legislative Changes 1-
- Legislative Compliance 1-
- Self-Assessment 1-
- Internal Stakeholders 1-
- External Stakeholders 1-
- Content Review............................................................................................................ 1-
- The Employee-Employer Relationship 1-
- Contract of Service 1-
- Contract for Service 1-
- Factors used to determine the type of contract 1-
- Control 1-
- Tools and Equipment 1-
- Subcontracting Work or Hiring Assistants 1-
- Financial Risk 1-
- Responsibility for Investment and Management 1-
- Opportunity for Profit 1-
- Content Review............................................................................................................ 1-
- Common Situations.......................................................................................................... 1-
Payroll and Its Compliance Environment
Payroll Objectives and Definitions
The primary objective of the payroll function in every organization is to pay employees accurately and on time, in compliance with legislative requirements, for a full annual payroll cycle.
Every employee expects to receive their pay on the day it is due in the manner arranged with their employer, usually by cheque or direct deposit. In addition to ensuring that employees have been paid, payroll professionals must also be able to communicate payroll information to all stakeholders.
Payroll Compliance Legislation refers to the following concepts.
Payroll is the process of paying employees in exchange for the services they perform. The term payroll can refer to:
- The department that is responsible for processing payroll.
Example: The payroll department in Chambers Inc. has three full-time employees.
- The total number of people employed by an organization
Example: Chambers Inc. has 78 people on the payroll.
- The wages and salaries paid out in a year.
Example: For the current year, the total payroll for Chambers Inc. was $4,250,000.00.
- A list of employees to be paid and the amount due to each
Example: Chambers Inc. – December 20, 20XX payroll register – (partial details are provided in this example)
Adams, Fred $3,000. Berlin, Kelly $3,370. ………………… Matthews, James $1,360. Perley, Olive $2,415. Total Payroll $157,215.
Payroll and Its Compliance Environment
Legislation refers to laws enacted by a legislative body. In Canada, there are many legislative sources that payroll professionals must comply with at two separate levels ─ the federal and the provincial/territorial governments. Later in the chapter, we will explore the compliance requirements for the various pieces of legislation from these sources.
Compliance is the observance of official requirements. This means performing payroll functions according to federal and provincial/territorial legislative and non-governmental stakeholder requirements for payroll professionals.
The legislative requirements are termed statutory. This means they are enacted, created, or regulated by statute, a law enacted by the legislative branch of a government. Fines and penalties can be imposed if an organization does not comply with the legislative requirements in each jurisdiction.
When dealing with federal and provincial/territorial government agencies, payroll professionals must know the many pieces of legislation that regulate their work and the compliance requirements associated with each. Payroll professionals are responsible for ensuring their organization is compliant with all payroll related legislation, thus eliminating the potential for any fines or penalties.
In payroll, there are also compliance requirements from other non-government stakeholders, for example, union collective agreements or group insurance policies. Therefore, Payroll professionals must ensure the organization complies with all stakeholder requirements.
Payroll and Its Compliance Environment
The payroll department in a large organization may have:
- Payroll administrators who are responsible for entering payroll data into the system and making required payroll remittances.
- Payroll coordinators who are responsible for preparing the payroll journal entries and reconciling the payroll related accounts.
- Payroll managers who manage the payroll function the payroll staff and represent payroll at the management level.
Payroll Content Knowledge
Payroll professionals should know the following to perform their duties effectively:
- Payroll Compliance Legislation: the Income Tax Act , the Employment Insurance Act , the Canada Pension Plan Act , Employment/Labour Standards, privacy legislation, Workers’ Compensation and provincial/territorial payroll-specific legislation
- Payroll Processes: the remuneration and deduction components of payroll and how to use these components to calculate a net pay in both regular and non-regular circumstances
- Payroll Reporting: calculating and remitting amounts due to government agencies, insurance companies, unions and other third parties. In addition, payroll reporting includes accounting for payroll expenses and accruals to internal financial systems and federal and provincial/territorial year-end reporting.
Technical Skills
The technical skills payroll professionals require include proficiency in computer programs such as payroll software and financial systems, spreadsheets, databases and word processing.
Organizations often change their payroll and business systems to meet new technology requirements and corporate reporting needs. Payroll personnel need to have the ability to be adaptable to changing systems. As a payroll professional, you must be prepared and willing to embrace continuous learning.
Payroll and Its Compliance Environment
Personal and Professional Skills
The following personal and professional skills will assist payroll professionals in dealing with the various stakeholders involved in the payroll process:
- written communication skills, such as preparing employee emails and memos, management reports, policies and procedures and correspondence with various levels of government
- verbal communication skills, to be able to respond to internal and external stakeholder inquiries
- the ability to read, understand and interpret legal terminology found in documents such as collective agreements, benefit contracts and government regulations
- excellent mathematical skills to perform various calculations
- problem solving, decision-making, time management and organizational skills
Behavioural and Ethical Standards
Behaviour and ethics are two areas that build on the skills that an effective payroll professional must have. Effective payroll professionals should be:
- trustworthy, as the potential for fraud is ever present
- conscientious, with keen attention to detail
- discreet due to the confidential nature of the information being handled
- tactful in dealing with employees who can be very sensitive when discussing their financial issues
- perceptive, able to understand all sides of an issue
- able to work under the pressures of absolute deadlines
- able to use common sense to recognize problems quickly and apply sound solutions
- able to remain objective and maintain a factual perspective when dealing with questions and inquiries
Payroll and Its Compliance Environment
Content Review
- The primary objective of the payroll function in every organization is to pay employees accurately and on time, in compliance with legislative requirements, for a full annual payroll cycle.
- Payroll is the process of paying employees in exchange for the services they perform.
- Legislation refers to laws enacted by a legislative body.
- Compliance is the observance of official requirements.
- A payroll professional’s knowledge includes information on payroll compliance legislation, payroll processes and reporting, and technical, personal and professional skills.
Payroll and Its Compliance Environment
Payroll Stakeholders
Stakeholders are the individuals, groups and agencies, both internal and external to the organization, who share an interest in the function and output of the payroll department. Stakeholders can be considered customers of the payroll department, and payroll professionals can take a proactive customer service approach to serve these individuals and groups.
Payroll management stakeholders are the federal and provincial/territorial governments, the internal and external stakeholders. Internal stakeholders include employees, employers and other departments within the organization. External stakeholders include benefit carriers, courts, unions, pension providers, charities, third party administrators, and outsource/software vendors. The stakeholders of the payroll function are illustrated in Diagram 1-2.
Diagram 1-2 – Payroll Management Stakeholders
Payroll and Its Compliance Environment
Federal Government
The Constitution Act of 1867 outlined the division of legislative power and authority between federal and provincial/territorial jurisdictional governments. The exclusive legislative authority of the Parliament of Canada extends to all matters regarding:
- regulation of trade and commerce
- Employment Insurance
- postal service
- fixing and providing salaries and allowances for civil and other officers of the Government of Canada
- navigation and shipping
- ferries between a province and any British or foreign country or between two provinces
- criminal law, except the Constitution of Courts of Criminal Jurisdiction, but including the Procedure in Criminal Matters
- anything not specifically assigned to the provinces under this Act
The Canada Labour Code is legislation that consolidates certain statutes respecting labour. Part I deals with Industrial Relations, Part II deals with Occupational Health and Safety, and Part III deals with Labour Standards. The primary objective of Part III is to establish and protect employees’ and employers’ rights to fair and equitable conditions of employment. Part III provisions establish minimum requirements concerning the working conditions of employees under federal jurisdiction in the following industries and organizations:
- industries and undertakings of inter-provincial/territorial, national, or international nature, that is, transportation, communications, radio and television broadcasting, banking, uranium mining, grain elevators, and flour and feed operations
- organizations whose operations have been declared for the general advantage of Canada or two or more provinces, and such Crown corporations as Canada Post Corporation and the Canadian Broadcasting Corporation (CBC)
Payroll and Its Compliance Environment
Provincial/Territorial Governments
Under the Constitution Act of 1867 , the exclusive legislative authority of the provinces and territories exists over:
- all laws regarding property and civil rights, which give the provinces/territories the authority to enact legislation to establish employment standards for working conditions
- employment in manufacturing, mining, construction, wholesale and retail trade, service industries, local businesses and any industry or occupation not specifically covered under federal jurisdiction
The existing divisions between federal and provincial/territorial control impact payroll when dealing with employment/labour standards. Employment/labour standards are rules legislated by each provincial/territorial jurisdiction that dictate issues such as hours of work, minimum wage, overtime, vacation pay and termination pay requirements.
Example:
The Gap is a retail business with stores across Canada. The workers in each store are governed under the employment/labour standards legislated in the jurisdiction in which they work. For example, Ontario's minimum general hourly wage is higher than Prince Edward Island's. An employee working in Ontario would receive a higher hourly minimum wage than an employee with the same position in Prince Edward Island.
Employers must follow the employment/labour standards legislated by the jurisdiction where their employees work unless they are governed by federal labour standards. Federal labour standards apply to certain industries and organizations, regardless of where the employees work.
The person or persons performing the payroll function must clearly understand under which employment/labour standards jurisdiction the organization's employees fall. Organizations may have some employees who fall under federal jurisdiction and another group of employees who fall under provincial/territorial legislation.
Example:
Shipping and navigation employees, including dockworkers, oil rig workers, etc., fall entirely within the federal jurisdiction. Only seamen working exclusively in one province/territory would be under provincial/territorial jurisdiction.
Payroll and Its Compliance Environment
- The National Payroll Institute offers a phone and email information service, Payroll InfoLine, for members’ payroll related questions. The Institute also has a website for members, www.payroll.ca, that contains guidelines, legislative updates and other useful payroll related information. As well the Institute is available on Twitter(@cdnpayroll), LinkedIn (The National Payroll Institute) and Facebook (@canadianpayroll),
- The Canada Revenue Agency (CRA) produces guides, publications, Income Tax Bulletins, Folios and Circulars, posts news bulletins and enables participation on an electronic mailing list with email alerts for new content to the Canada.ca website.
- The Revenu Québec (RQ) website provides guides, publications, bulletins, forms, online services and enables participation on an electronic mailing list with email notifications of tax news articles - https://www.revenuquebec.ca/en/
- Employment/labour standards (federal, provincial and territorial) publications and websites. Each jurisdiction has a website providing information on its employment/labour standards. For example, the websites for Alberta and Québec are: Alberta – https://www.alberta.ca/employment-standards.aspx Québec – https://www.cnesst.gouv.qc.ca/en
- Employment and Social Development Canada (ESDC) and Service Canada (SC) publications, including information regarding the Employment Insurance (EI) program and the Social Insurance Number – www.canada.ca
- CCH Canada Limited publishes a series of volumes on employment and labour law, pensions and benefits, etc., that supplies information on legislation with regular updates as changes become law – www.cch.ca
Copies of legislation are available through government websites and from the printing offices of the federal, provincial and territorial governments.
Legislative Compliance
In addition to payroll’s primary role of paying employees accurately and on time, payroll professionals are directly or indirectly responsible for supporting and ensuring compliance with the requirements of various government acts. Where legislation requires employer compliance (for example, remittance of payroll source deductions, Canada Pension Plan contributions, Employment Insurance premiums, and federal and provincial/territorial income tax deductions), there are financial penalties or the possibility of legal action to encourage compliance.
Fines, penalties and interest charges are typically a result of audits and legal action. These may result in the seizure of bank accounts or assets, fines of $1,000 to $25,000, and, in some cases, jail sentences of up to 12 months. The governmental departments and agencies responsible for administering legislation employ a variety of systems for tracking compliance. Some systems, such as the monitoring of source deduction remittances, are ongoing, with regimented reporting time frames that lay down a
Payroll and Its Compliance Environment
continual audit trail. Failure to meet the requirements of this legislation will incur a rapid response that may result in fines and penalties.
Reporting requirements that do not involve ongoing, regular reporting may not impose an immediate fine but may initiate a visit from an auditor or other official seeking compliance.
Example:
Record of Employment (ROE) issuance Failure to issue an ROE within the established deadlines may result in a visit from an investigative officer from Service Canada.
Some compliance systems operate quarterly or annually, and the observations raised by these systems will result in requests for additional information or explanation and, in some cases, a request for a supplementary payment or a fine.
Example:
The Canada Revenue Agency’s Pensionable and Insurable Earnings Review (PIER) is an annual compliance review system. This system utilizes the data provided on the T information slips issued at year-end to validate the amounts of CPP contributions and EI premiums deducted by employers and identifies any remittance deficiencies.
Payroll departments can establish internal controls to ensure all legislative requirements are met promptly. A checklist can be maintained to ensure compliance, showing all payments and reports due for the month and signed off by the individual responsible.
Self-Assessment
The federal and provincial/territorial tax systems are based on the principle of self- assessment. Taxpayers and their agents, including employers, are responsible for calculating, reporting and remitting their contributions and the amounts withheld within the prescribed deadlines.
As administrators of the tax system, the Canada Revenue Agency (CRA) and Revenu Québec (RQ) must ensure that each individual and organization is compliant and pays all of the amounts owing.
Payroll and Its Compliance Environment
Other departments – Many departments interact with payroll, either for information or reporting. Information such as general ledger posting, payroll and benefits costs and salary information must flow between payroll, human resources and finance in formats needed for their various requirements.
In addition, other departments, such as contracts and manufacturing, often need payroll information for budgeting, analytical and quality purposes.
Example:
Changes to the rates for Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums will affect departmental expenses and should be communicated to those responsible for the budget process.
External Stakeholders
External stakeholders are organizations that are neither government nor internal stakeholders yet have a close working relationship with the payroll function. Compliance with external stakeholder requirements is also a responsibility of the payroll department. In most cases, compliance will require that payroll request a cheque from accounts payable and send it to the external organization along with supporting documentation.
Benefit Carriers are insurance companies that provide benefit coverage to employees. Payroll is responsible for deducting and remitting premiums for the insurance coverage to the carriers and providing reports on employee enrolment and coverage levels.
Example:
Blossom Packaging provides its employees with group insurance coverage through Consensus Insurance Co. Blossom Packaging remits, every month, the employee and employer premiums and a listing of current employees covered under the plan with the amount of their coverage.
Courts and the CRA require payroll to deduct accurately and remit amounts ordered to be withheld through garnishments, third party demands, requirements to pay and support deduction orders.
Example:
Astor Resorts, an Ontario employer, is required to withhold 30% of James Robinson’s net pay under a Support Deduction Order issued by the court. According to the terms and schedule of the order, the organization remits this withholding to the Family Responsibility Office.
Payroll and Its Compliance Environment
Unions require that payroll accurately deduct and remit union dues and initiation fees and ensure that the terms of the collective agreement are followed. It is estimated that just under one-third of the workforce in Canada belongs to a trade union. Payroll professionals must be familiar with the role and activities of trade unions and the responsibilities of the employer and the payroll department in a unionized environment.
Trade unions negotiate with the employer, through collective bargaining, the wages, benefits, allowances and other terms and conditions of employment on behalf of their member employees. The outcome of negotiations is a collective agreement, a legally binding contract between the employer, the union and the employees.
Example:
Mesa Manufacturing must withhold $10.00 per pay for union dues from every employee who is a member of the union, as required under the collective bargaining agreement (CBA). The organization withholds the dues and remits them to the union according to the schedule in the CBA.
Pension Providers are third party pension plan providers that may require payroll to provide enrolment reports on participating employees and length of service calculations and to remit employee deductions and employer contributions.
Example:
Velars Corp. contributes an amount equal to 5% of each employee’s earnings to the organization’s registered pension plan. Each month, payroll prepares a list of employees enrolled in the plan, their eligible earnings and the organization’s 5% contribution. The detailed list is sent to the pension plan administrator, along with payment for the contributions to be allocated to each member's account.
Charities have arrangements with some organizations to facilitate employee donations through payroll deductions. Payroll is responsible for remitting these deductions to the charity.
Example:
A common charitable donation facilitated by payroll is to United Way/Centraide. Employees will sign up to donate a certain contribution per pay, and payroll will withhold and remit the contributions to the registered charitable organization regularly.
