Important role for payroll in terminations

When businesses cut costs by cutting staff, payroll’s role shouldn’t be overlooked

In tough economic times, businesses are faced with shrinking budgets and the need to cut costs. For many, this means temporary layoffs or terminations. HR departments must tackle the difficult task of planning terminations, but payroll departments have an equally important role to play. HR usually plans and negotiates termination settlements, but payroll makes the adjustments and executes them.

Employers are legally required to give reasonable notice of termination. Each Canadian jurisdiction has employment standards legislation setting the minimum requirements for individual terminations, group terminations and temporary layoffs. Unionized workplaces can also have collective agreements with dismissal terms.

The period of notice depends on where the employee worked and how long he was employed with the company. The employer can have the employee work the notice period or pay him wages in lieu of notice. The Canada Revenue Agency (CRA) also has regulations on the treatment of statutory deductions and year end reporting for termination pay. In Québec, payment in lieu of notice requires different rules for deductions and year end reporting.

Employers are required to issue a Record of Employment (ROE) within five calendar days after an employee’s interruption of earnings — a dismissal, layoff or separation of employment — for seven consecutive calendar days during which the employee does not work and is not paid. If payroll is responsible for producing an ROE then it would need to know in advance from HR to meet these critical deadlines.
Payroll duties in a termination

There are misconceptions about payroll’s responsibility when dealing with terminations. Often, HR will prepare the paperwork after negotiating promises of the payment with the employee, how to treat the payment and when to process it without realizing the impact it has on payroll. Sometimes, payroll can receive complex requests from the company that have not been included in the termination agreements or it doesn’t receive all the necessary information.

Reporting termination packages

Employers can offer different types of termination packages and payroll must determine what the payment represents to CRA or the Minister of Revenu Quèbec (MRQ) in order to process it correctly. Also, depending on what the payment represents, the reporting requirements may differ. The most common types of termination payments, in addition to wages in lieu of notice, are salary continuance and retiring allowance.

When salary continuance is used, a relationship continues to exist between the employer and employee and all monies are considered employment income. The employee remains subject to regular deductions at source, reported on a T4/RL-1, and he continues to accrue pension and maintain benefits. As there is no interruption of earnings, the ROE should be issued only when salary continuance stops.

A retiring allowance is a sum of money paid, on or after termination of employment, in recognition of long service or as compensation for loss of office. Court fees and damages awarded from a court settlement, unused accumulated sick pay credits, severance payments — and compensatory indemnities in Québec — all qualify as a retiring allowance.

Payments can only be classified as a retiring allowance if the employment relationship no longer exists and pension payments and benefits have stopped. It is usually a single payment, but may be paid in instalments. Continued participation in the employee benefit package will not necessarily disqualify the payment as a retiring allowance, unless the employee is allowed to accrue pension credits. If participation in the plan is limited to employees only, the company would need to have a plan specifically for non-employees or the payment would be disqualified as a retiring allowance.

Retiring allowances are not subject to Canada/Québec Pension Plan contributions, EI or Québec Parental Insurance Plan deductions. The amount is taxable at the lump sum tax rates, unless the employee transfers the retiring allowance, tax-free, to a Registered Pension Plan (RPP) or a Registered Retirement Savings Plan (RRSP).

The formula for calculating the “eligible” amount of a retiring allowance an employee may transfer to an RPP or to an RRSP is legislated under the federal Income Tax Act. An employee is permitted to transfer the non-eligible portion of a retiring allowance tax-free to his RRSP provided it does not exceed his RRSP deduction limit.

According to CRA, an employer must have “reasonable grounds” to believe the contribution can be deducted by the employee. This can be a written confirmation from the employee or a copy of the employee’s RRSP deduction limit statement. Such amounts may also be transferred to a spousal or common-law partner’s RRSP where sufficient room exists.

The law requires timely termination payments

All jurisdictions specifically give a time frame within which termination pay must be paid. For example, wages in lieu of notice are due on termination in Québec and vacation pay must be paid at the same time as an employee’s final pay in New Brunswick.

Deferring processing of the employee’s pay until the employee returns company property is not advisable. Although the termination business process does not seem to address the issue of returning company property, the terminated employee’s legislative entitlement under employment standards legislation cannot be neglected.

Employers should also avoid stopping benefits and pension plan deductions immediately while processing wages in lieu of notice, vacation pay and a lump sum payment. In Ontario, the Employment Standards Act, 2000 requires the employer to maintain all company benefits for the time equivalent of the wages in lieu of notice.

Annie Chong is manager of the payroll consulting group at Carswell, a Thomson Reuters business, which publishes the Canadian Payroll Manual and operates the Carswell Payroll Hotline. She can be reached at [email protected] or (416) 298-5085.

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