Understanding Employment Insurance (EI) exemptions and reductions is critical for ensuring compliance and smooth payroll processing. For HR professionals and payroll specialists in Canada, it’s helpful to know when employees can be EI-exempt, and how to properly manage reduced EI contributions. In this blog, we’ll break down everything you need to know about EI exemptions and reduced EI, including when they apply, how to set them up, and how to avoid common pitfalls.
What is Employment Insurance (EI)?
Employment Insurance (EI) is a government program designed to provide temporary financial assistance to individuals who lose their job through no fault of their own (such as layoffs or terminations). It’s funded through contributions made by both employees and employers, which are deducted from wages.
There are two main types of EI benefits:
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Regular Benefits – For individuals who are unemployed and actively looking for work.
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Special Benefits – For individuals who cannot work because of illness, injury, pregnancy, parental leave, etc.
As a payroll professional, it’s your job to ensure that the correct EI deductions are made from employee wages. However, there are certain situations where employees may be exempt from EI or eligible for reduced EI contributions. Let’s break it down.
EI Exemptions: When Are Employees Exempt from EI Contributions?
Nearly all employment in Canada is known as insurable employment, meaning that employees and employers must pay EI premiums. There are few exemptions from EI deductions in Canada, however the following circumstances should be noted:
1. If you are self-employed, participation in the EI program is voluntary.
You are eligible to participate if all of the following apply:
- You do not work as a barber, hairdresser, fisher, taxi driver, or a driver of other passenger vehicles
- You hold Canadian citizenship or permanent residency in Canada.
- You either run your own business or own and control more than 40% of the voting shares in a corporation.
If you work as a fisher, barber, hairdresser, or drive a taxi or other passenger vehicle, you are not required to enroll in the self-employed program. Individuals in these occupations should apply for EI benefits as employees. For more information on the self-employed EI program click here.
2. Employees who are related to their employer
According to the Employment Insurance Act, employees who have a familial relationship with their employer (whether an individual or a corporation) may not be considered in insurable employment. Consequently, EI premiums would not be deducted from their wages, and they would not qualify for EI benefits. More information on hiring a family member and the impact on EI can be found here.
What is Reduced EI?
The Employment Insurance (EI) Premium Reduction Program allows employers to reduce their EI premiums if they provide employees with a short-term disability plan that meets specific criteria. This program is designed to help employers offset the costs of providing such benefits.
Eligibility Criteria for Premium Reduction
To qualify for a premium reduction, the employer's short-term disability plan must meet the following requirements:
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Benefit Duration: Provide at least 15 weeks of short-term disability benefits.
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Benefit Level: Offer benefits that match or exceed the level provided under EI.
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Payment Timing: Pay benefits to employees within 8 days of illness or injury, with an elimination period not exceeding 7 consecutive days.
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Accessibility: Be accessible to employees within 3 months of hiring.
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Coverage: Cover employees on a 24-hour-a-day basis.
Employers must also provide evidence of their commitment to offer the short-term disability plan and undertake to return five-twelfths of the savings from the premium reduction to the employees covered by the plan.
Categories of Qualified Plans and Corresponding Premium Reductions
The program recognizes four categories of qualified short-term disability plans, each associated with a distinct premium reduction rate:
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Category 1: Cumulative paid sick leave plan allowing a minimum monthly accumulation of 1 day, totaling at least 75 days.
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Category 2: Enhanced cumulative paid sick leave plan allowing a minimum monthly accumulation of 1.67 days, totaling at least 125 days.
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Category 3: Weekly indemnity plan with a benefit period of at least 15 weeks.
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Category 4: Weekly indemnity plan with a benefit period of at least 52 weeks (available only to public and para-public employers in a province).
The Canada Employment Insurance Commission's Senior Actuary calculates the annual premium reduction rates for each category in September, applicable for the following calendar year. Employers must receive an entitlement decision from Service Canada containing their individual assigned rate before applying the reduced rate.
Application Process
Employers interested in participating in the Premium Reduction Program must:
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Verify Eligibility: Ensure their short-term disability plan meets all the program requirements.
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Apply: Submit an application to Service Canada, providing all necessary documentation.
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Implement: Once approved, adjust payroll systems to apply the reduced EI premium rates as per the assigned category.
Whether you qualify or not, the CRA will notify you in writing to indicate either the approval of reduced EI and the rate for you to use, or notify you on a non-entitlement decision.
For detailed information on the application process and to access the application form, employers can refer to the EI Premium Reduction Guide available here.
Conclusion
By understanding the specific conditions under which employees may be exempt from EI contributions or eligible for reduced premiums, you can ensure compliance and optimize payroll processes. Whether dealing with self-employed individuals, family-related employment, or implementing a short-term disability plan, staying informed about the latest regulations and requirements is crucial. By leveraging the EI Premium Reduction Program, employers can not only reduce costs but also enhance employee benefits, fostering a more supportive work environment. As you continue to manage payroll responsibilities, keep these insights in mind to maintain accuracy and efficiency in your operations. To learn more about payroll deductions in Canada, check out our blog Understanding Payroll Deductions and Remittances in Canada.
