Are better pensions coming to low-income workers in Ontario?

Will low-income workers get a chance to benefit from the Ontario Retirement Pension Plan, as intended? Or could Ontario employers find a way to string employees along on jobs paying less than $3,500 a year, thereby avoiding having to contribute to the ORPP on their behalf? The answer is likely not — at least not legally.

Employer opposition to the development of the Ontario Retirement Pension Plan (ORPP) has been organized and fierce. During public consultations over the ORPP, business groups and employers (some of whom sponsored defined-contribution [DC] plans for their employees) threatened that firms would terminate employee DC plans, group RRSPs, and participation in multi-employer pension plans (MEPPs) if the ORPP went ahead. One Ontario government-funded home health-care provider demanded that homecare nurses on a 7-month strike for a first contract agree to pay the employer share as well as the employee portion, despite the fact that the ORPP is a shared-contribution plan. Industry voices urged other employers to do the same, raising the spectre of concerted defiance in something akin to a capital strike.

Beyond employer evasion of this sort, another concern is that precarious workers employed in a succession of very low-paying jobs might be frozen out of the ORPP, with employers managing to avoid contributing to the pension plan on their behalf. However, this is unlikely to be possible, especially if the ORPP continues to be patterned on the CPP.

Under both the Ontario and national plans, no ORPP or CPP contributions are made on employment earnings under $3,500 (the Year’s Basic Exemption or YBE).  The $3,500 YBE is the maximum amount of initial employment income exempted from ORPP and CPP contributions.

So would employees working a series of stints paying, say, $3,000 each be left out of the ORPP?

Not if the ORPP mirrors the CPP in this respect (and there’s good reason to expect that it will, given the federal government’s offer of tax administrative support for the ORPP). Under the CPP, individual workers can reach or exceed the $3,500 YBE based on earnings from multiple sources. For instance, if an individual worked at 3 different jobs with 3 different employers in the course of a year, earning $2,000 at each job (for a total annual employment income of $6,000), that individual would still have $2,500 ($6,000-$3,500) in CPP pensionable earnings for that year. (Similarly, individuals with earnings from multiple income sources are still subject to the ceiling on pensionable earnings [the Yearly Maximum Pensionable Earnings, or YMPE], regardless of the number of employers they may have.)

Strictly speaking, the exemption is supposed to be applied to the first paycheque (although not the first dollar of earnings). The YBE is divided by the number of pay periods in the year to arrive at the pay-period exemption. In a bi-weekly pay system, for instance, the pay-period exemption would be $134.62 ($3,500 divided by 26). This amount is then deducted from the employee’s gross pay and taxable benefits and allowances for that pay period. Then 4.95% of this amount is deducted as the employee’s CPP contributions, matched by an equal amount from the employer.

Under the system, therefore, employers are required to contribute to CPP on behalf of an employee, well before the $3,500 annual earnings exemption is reached. If that same worker’s employment earnings never reach $3,500 over the course of the year, the employee’s CPP contributions will be refunded if/when the individual files his or her income tax return. Employers are not entitled to a refund. Incidentally, the same holds for employer and employee contributions in excess of the YMPE (e.g., when an employee changes jobs despite having contributed the maximum CPP contribution during the year).

In practice, employers with more sophisticated payroll systems commonly calculate employees’ annual deductions based on anticipated yearly pensionable incomes (i.e. incorporating the YBE), and prorate the deduction for each pay-period accordingly. Employment income and remitted CPP deductions are matched up by CRA at year-end. So — in theory — an employer remitting income tax deductions but not CPP contributions would risk being found to have violated the law.

Probably a more troubling evasion than this sort of dodge, however, is the exclusion under s.6(2)(b) of the Canada Pension Plan act, which exempts casual employment from CPP contributions if the employment is for a purpose other than an employer’s usual trade or business. If ORPP legislation adopts a similar exemption, precarious workers could indeed be left out in the cold.

 

Photo credit: “The Fast Food Employee” by Zhu via Flickr and Creative Commons

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