Human Resources – Chapter 10: Employee Benefits
Employee benefits – part of an organization’s total compensation package and include both
mandatory government-sponsored benefits and voluntary benefits such as life and disability
insurance, extended health coverage, additional vacation pay and a range of other options. Both
cost and behavioral objectives are important. Benefits adds an average 44% to every dollar of
payroll. Controlling labor costs is not possible without controlling benefits costs.
Flexible benefits plan – a benefits plan design that provides employees with the chance to
choose (within limits) among benefits offered by the employer to help ensure the plan will more
effectively meet the needs of all employees and to help the employer contain costs.
Some benefits, like CPP and EI are mandated by law. Benefits are institutionalized
Reasons for Benefits Growth
After the WWII, wage and price controls were put in place, so employers used benefits to attract
and retain employees. The tax treatment of benefits programs is more favorable for employees
than the tax treatment of wages and salaries; thus a dollar on benefits has the potential to
generate more value for the employees than the same dollar spent on wages and salaries.
Marginal tax rate – the percentage of an additional dollar of earnings that goes to taxes.
Employers also have to pay on salaries, but generally not benefits. Deferring compensation until
retirement allows the employee to receive cash, but at a time (retirement) when the employee’s
tax rate is sometimes lower because of a lower income level.Another factor is the cost advantage
that groups typically realize over individuals, for insurance.Also, a factor influencing the growth
of benefits was the growth of organized labor in Canada from 1930-50.
Most benefits fall into one of these categories: mandatory government-sponsored benefits,
voluntary employer-sponsored benefits, retirement, pay for time not worked, and family-friendly
Mandatory Government-Sponsored Benefits
Canada/Quebec Pension Plan (CPP/QPP) – a mandatory government sponsored pension plan
funded by employers and employees that provides a basic level of income security for working
Canadians when they retire or become disabled. 1966.
This replaces about 25% of a person’s earning from employment to a max amount of $960 per
month. Self-employed workers can also have a CPP if they contribute the employer and
employee amount. People now have the option to receive this between age 60-70.
The CPP also provides disability benefits for contributors or their children. Employer and
employee pay 4.95%, total of 9.9.
Employment Insurance (EI) – a mandatory, government sponsored plan funded by employee
and employer contributions that offsets lost income to eligible employees for reasons of job loss,
illness or compassionate leave and that provides maternity and parental benefits and a variety of
other employment initiatives. It is established under the Employment InsuranceAct. It is a
federal plan. It is financed through federal and provincial funding. Employees paid 1.78% and
Unemployed workers are eligible for benefits if they 1) have prior attachment to the workforce
(have been without work for at least 7 consecutive days), 2) are available and willing to work
each day, 3) are actively seeking work, 4) were not discharged for cause, did not quit voluntarily
and are not out of work because of a labor dispute. Benefit are administered by Service Canada on behalf of HR and Skills Development Canada
(HRSDC), which manages EI. EI benefits are usually 55% of avg eligible insurance weekly
earnings. Maternity benefits are paid for 15 weeks. This can be combined with parental leave of
up to another 35 weeks, a total of 50.
This cover job related injuries and death. Before this, workers had to sue for damages.
Employers receive immunity from lawsuits. Employees are not covered when injuries are self-
inflicted or stem from intoxication or obvious disregard for safety rules.
Workers’compensation – mandatory government sponsored insurance plan funded by
employers that provide wage-loss benefits, health care, survivor benefits and rehabilitative
services to eligible employees with work-related injuries or diseases.
Disability income, or wage-loss benefits are typically 80-90% of net pre-disability earnings. EI
and disability benefits are tax-free. The system is financed by employers who pay premiums,
based on the nature of the occupations and the risk attached to each, the province where work is
located and the employer’s experience rating. The experience rating system provides an incentive
for employers to make their workplaces safer. Back strain is the most expensive benign health
Voluntary Employer-Sponsored Benefits
Private Group Insurance - Two major types: medical and disability insurance. These are not
Extended Medical Insurance - 3 main types of insurance: medical, dental and life/ disability.
2 basic types of disability coverage exist – ST and LT. Short-term disability plan – benefits
plans that provide income security to employees for short periods of absence from work due to
non-work-related illness or injury. LT disability plan – a form of income for longer periods of
absence from work due to non-work-related chronic illness or disability. ST plans typically
provide benefits for 6 months or less, usually 22 weeks. Read more in book.
Employers have no legal obligation to offer private retirement plans. If a private retirement plan
is provided, it must be a registered pension plan – retirement plan sponsored by employers that
are registered according to the Income TaxAct and subject to federal and provincial pension
The main types of registered pension plans offered include defined benefit, money-purchase or
defined contribution and hybrid mixed plans, which are a combo of both defined-benefit and
defined-contribution plans. Employers have been shifting away from defined-benefit plans in
Defined-benefit pension plan – an employer-sponsored and registered pension plan that
guarantees (defines) a specified retirement benefit level to employees typically based on a
combination of years of service and age as well as employee’s earnings level (usually the 5
highest earnings years). Usually 70%. It can also be a guaranteed flat rate.
Defined-benefit plans insulate employees from investment risk. Wage Earner Protection Program
Act (WEPPA) and the Bankruptcy InsolvencyAct (BIA) grant employees priority over all other
creditors for claims of outstand wages, up to a max of 3250.Amounts will be paid by Service
Canada or the company estate. However, the bill does nothing to reimburse an employee’s
pension. Defined-contribution pension plan – an employer-sponsored and r