The Reckoning to Come: Employment Insurance Reform
In the wake of the COVID-19 pandemic, there are going to be a number of areas of our infrastructure that will undergo close scrutiny. One of the casualties of the pandemic will be our EI framework.
EI has never been perfect. Indeed, for several months, I've had a draft blog entry on the go where I argue that EI and CPP contributions are regressive taxes. (In a nutshell, the point is this: On your first 50-something thousand dollars of income, you and your employer both pay a pretty penny into EI and CPP. After that, you don't. Which means that, within certain income classes - that vary from Province to Province - higher earners get to keep a higher proportion of their gross income.)
And that whole "employee versus independent contractor" perennial controversy? In Canada, the most common measurable benefit to an employer (/payor) under such an arrangement is the avoidance of EI and CPP contributions (though the CPP portion generally just gets downloaded onto the worker).
And it was never really a proper insurance, anyways, with no consideration of risk or prior claims in the premium calculation - it ended up getting used in certain seasonal industries as a regular boost to the income of workers during the off season. (Which no insurance company in the world would allow to become a commercial reality.)
But in recent weeks, the defects of the EI system have been laid bare, as the Federal government has had to build a completely new social assistance framework from the ground up, in a hurry, to fill the gaps left by EI coverage.
The Flawed Emergency Benefit Rollout
By and large, I tend to be forgiving of the Federal government's minor issues in how they rolled out CERB and other relief plans. The delay, to an extent, is understandable. Some oversights are predictable.
But one place where they completely misstepped is by making CERB supplant EI entitlements altogether. (Okay, details are important: If you claim CERB, and get the full 16 weeks of CERB benefits, you can seek EI after. For employees who end up out of work for a period longer than their EI benefit period - usually 45 weeks - that means that CERB hasn't really displaced anything. But for EI-eligible employees who are out of work for less than the EI benefit period, it's fair to say that they're getting CERB instead of EI. Also, certain classes of EI benefits remain intact, including work-sharing and parental benefits, but I'm primarily dealing with their 'regular benefits' here.)
All of this has changed significantly and rapidly, and will continue to change. And that's really part of the problem, because employers and workers are making decisions in real time. One of the governing paradigms of rolling out emergency measures during a crisis has to be that, once a benefit is rolled out, it's guaranteed. That goes double for established benefit programs. Given the government's handling of CEWS (originally implementing a broad 10% subsidy, then increasing to a 75% subsidy with different eligibility criteria...but leaving the 10% intact for those who qualified for the original subsidy), I thought they understood this principle.
People make decisions in reliance on the supports and programs that are available at the time of the decision. If you later add something new that provides better results or better options, that's fine. (Sure, we might prefer that we'd had the information about those better options earlier, but in a crisis, there are allowances to be made.) But when you start changing the supports and programs that people are already relying on, that's when people start to get hurt, and really start to lose faith in the government.
The Disconnect between CERB and EI
CERB is a simpler system. Simpler eligibility criteria, simpler calculation of payouts - it's a fixed $500 per week for 16 weeks. While the point of CERB was originally to fill in the gaps, providing benefits to people not eligible for EI who lost work in the pandemic, it quickly grew into a streamlining mechanism to alleviate the burden on an overstressed EI system.
However, while simpler, that doesn't mean the CERB's eligibility criteria are easier to satisfy, or that the benefits are better. They often aren't. Which means that this procedural streamlining has the effect of denying substantive benefits to EI-eligible employees.
CERB eligibility is still in flux, but one of the newer developments seems to be that you can earn up to $1000 per month and still be eligible for the whole amount. EI eligibility, however, turns on a reduction in income - it is very much possible for a person to be eligible for EI while still earning more than $1000 per month, which would disqualify them for CERB.
For many employees, as well, EI benefits are better - up to a maximum of $573 per week. And while that difference may not seem like a big deal at first glance, cutting the benefits of an EI-eligible worker by more than $300 per month will impose some unnecessary hardship.
More importantly, the EI program includes Supplemental Unemployment Benefits Plans (SUB Plans), where an employer can register to top up an employee's income (within certain limits) without affecting EI eligibility or benefits. As of this particular moment, CERB has no such equivalent. If the employer pays the employee more than $1000 per month - under a SUB Plan or otherwise - then the employee is not eligible for CERB.
So there are a variety of scenarios in which an employee might be eligible for EI, but not for CERB, in which case they can't presently get anything. That is, quite frankly, absurd.
And the difficulty here is compounded by the slow and uncertain rollout of these programs. Before CERB and CEWS were announced and developed, many employment lawyers, HR professionals, and unions were advocating SUB Plans as a useful mechanism to be able to lay off employees while still getting them paid and maintaining the connection between employer and employee. Large numbers of employers applied for SUB Plans and started rolling those out...and now are pulling them back, as they find that suddenly these employees aren't actually going to be able to collect EI benefits after all, and that a payment under the SUB Plan appears to render the employee ineligible for any government assistance at all.
I can't emphasize this enough: In real time, laid off workers are losing money and facing unnecessary financial hardship because of CERB overriding EI.
Consider the following example - which is basically a true story, if slightly modified and simplified: An employee makes $60,000 per year. He was laid off earlier in the pandemic, and told that he would get a 30% top-up of his salary over his EI benefits - which means that, instead of his usual gross of about $1150 per week, he'll gross about $919 per week. ($573 from the government; $346 from his employer.) He figures he can make a go of it.
Then the government tells him, "No, you're not going to get EI benefits of $573; instead, we're going to give you CERB benefits of $500 per week. You're welcome." And the employer realizes that he's getting CERB benefits instead of EI benefits, and tells him "We're cancelling our payments to you under the SUB Plan, because we're concerned that they'll prevent you from getting the CERB benefits."
So instead of getting $919 per week, as he would on EI, he's only getting $500 per week. And he's only figuring that out NOW, weeks into his layoff.
That is a problem. And it's not like we can just change it back so that he, and people like him, can get the EI benefits to which they are entitled instead. With so many EI-eligible applicants already in the CERB system, the closest thing to a fix would be to:
Interplay with the Wage Subsidy
Now that CEWS appears to be mostly ironed out, it looks like that might have been the better way to go for the employer: Keeping him on payroll and collecting the CEWS subsidy is actually better for everyone than even the EI + SUB Plan option would have been. But that assumes that the employer qualifies for CEWS, assumes that the employer has the cash flow to make payroll for the period of time before CEWS subsidies actually start paying out, and assumes that a qualifying employer will have the confidence in that eligibility to incur significant payroll expenses up front in reliance on these government programs.
(It's also not entirely clear whether or not the retroactivity of CEWS means that an employer could rescind a layoff, pay an employee back pay, and get the subsidy for that period. My review of the statute would suggest that this should be possible, but there's a lot of uncertainty here. It would certainly generate an overpayment of CERB benefits already received.)
In my view, the policy goal of relieving the burden on EI would have been accomplished by allowing EI-eligible employees to 'opt in' to CERB - so if you'll get less on EI than CERB, or you're worried about being unemployed for over 45 weeks, take the CERB instead - and by allowing and encouraging employers to keep employees off of EI or CERB altogether with CEWS.
The Reckoning
When CERB was announced, a thought in the back of my head was that it highlights an inequity of taxation: Employees and employers have paid a very large amount of money into EI in exchange for that benefit; now, we're concerned about the gaps in that framework, and we want to make sure that people are covered regardless of whether or not they've paid in.
I agree with the instinct to want everyone covered. But you can't fault an EI-eligible employee for being a little bitter about the thousands and thousands of dollars that she and her employer have paid into the system over the years for the income security that we're now saying we think everyone should get.
This is compounded when even the EI-eligible employees get forced into (sometimes) inferior CERB benefits, and lose the SUB Plans that their employers may have made available to them - so even though they've paid those EI premiums for years and years, they don't even get access to the established features of the EI program. "Wait a second, what was I paying for?"
Consider this: The individual above, who made $60,000 per year and paid the maximum EI benefit, likely paid proportionally more to the government than the independent contractor who made $70,000 per year. And now that they've both lost their jobs, even though one of them paid an 'insurance' premium against job loss and the other one didn't (and the latter had a greater capability to do so), we both think that they should get the same income security.
It's not so different from universal healthcare. When two people need the same life-saving surgery, we don't think that one should get it and the other should be denied based on employment status, financial means, or insurance status.
And the solution is not so different, either: Broaden the availability of benefits, generally and on an ongoing basis, and finance it out of general government coffers, allocating the burden on a more efficient and/or means-based calculation across the tax base (i.e. through progressive income taxes and/or value added taxes).
We're talking about the elimination of the EI framework altogether, and replacing it with something more akin to the CERB, where everyone gets covered regardless of whether they're employees, contractors, sole proprietors, etc. (In the long term, calculation of benefit thresholds and entitlements will have to get a bit more nuanced, of course.) No more 'premiums', but the cost of the program gets rolled into other tax programs - for which contractors are just as liable as employees.
I've seen a lot of talk lately about turning CERB into a permanent UBI. That would be one way of implementing this change, but that's not necessarily what I'm talking about. I'd be interested to see cost estimates of reasonable UBI models (bearing in mind the offsets against other programs)...and there are also logistical issues in that social assistance programs have traditionally been funded and administered Provincially, but CERB and EI are Federal programs. (This should be fundamentally surmountable, and the collaboration between Doug Ford and Chrystia Freeland in recent weeks makes me optimistic...but I'm still not convinced that Jason Kenney would sit at that particular table in good faith.) This would be a broad and revolutionary reform to our social assistance infrastructure altogether, and while I don't think we can rule it out, I also don't think we have a good enough understanding of its costs or implications to jump in with both feet.
However, less revolutionary models would include something truer to the function of CERB and EI, being an income replacement benefit to provide financial security for a finite period of time following the loss of income. Eliminate arbitrary distinctions between employees and independent contractors, eliminate the regressive tax that finances the program, and turn the program into what it's really meant to be: A mechanism to provide everyone with a soft landing after losing their revenue streams.
Two Calls to Action
The purpose of this post is two-fold: To lay out the steps that need to be taken immediately to rectify the disconnect between the CERB and EI frameworks, and to lay out longer-term reforms for the 2021 tax year.
Immediate Action Required
The Federal government needs to announce and implement several steps immediately:
Later Action
EI has never been perfect. Indeed, for several months, I've had a draft blog entry on the go where I argue that EI and CPP contributions are regressive taxes. (In a nutshell, the point is this: On your first 50-something thousand dollars of income, you and your employer both pay a pretty penny into EI and CPP. After that, you don't. Which means that, within certain income classes - that vary from Province to Province - higher earners get to keep a higher proportion of their gross income.)
And that whole "employee versus independent contractor" perennial controversy? In Canada, the most common measurable benefit to an employer (/payor) under such an arrangement is the avoidance of EI and CPP contributions (though the CPP portion generally just gets downloaded onto the worker).
And it was never really a proper insurance, anyways, with no consideration of risk or prior claims in the premium calculation - it ended up getting used in certain seasonal industries as a regular boost to the income of workers during the off season. (Which no insurance company in the world would allow to become a commercial reality.)
But in recent weeks, the defects of the EI system have been laid bare, as the Federal government has had to build a completely new social assistance framework from the ground up, in a hurry, to fill the gaps left by EI coverage.
The Flawed Emergency Benefit Rollout
By and large, I tend to be forgiving of the Federal government's minor issues in how they rolled out CERB and other relief plans. The delay, to an extent, is understandable. Some oversights are predictable.
But one place where they completely misstepped is by making CERB supplant EI entitlements altogether. (Okay, details are important: If you claim CERB, and get the full 16 weeks of CERB benefits, you can seek EI after. For employees who end up out of work for a period longer than their EI benefit period - usually 45 weeks - that means that CERB hasn't really displaced anything. But for EI-eligible employees who are out of work for less than the EI benefit period, it's fair to say that they're getting CERB instead of EI. Also, certain classes of EI benefits remain intact, including work-sharing and parental benefits, but I'm primarily dealing with their 'regular benefits' here.)
All of this has changed significantly and rapidly, and will continue to change. And that's really part of the problem, because employers and workers are making decisions in real time. One of the governing paradigms of rolling out emergency measures during a crisis has to be that, once a benefit is rolled out, it's guaranteed. That goes double for established benefit programs. Given the government's handling of CEWS (originally implementing a broad 10% subsidy, then increasing to a 75% subsidy with different eligibility criteria...but leaving the 10% intact for those who qualified for the original subsidy), I thought they understood this principle.
People make decisions in reliance on the supports and programs that are available at the time of the decision. If you later add something new that provides better results or better options, that's fine. (Sure, we might prefer that we'd had the information about those better options earlier, but in a crisis, there are allowances to be made.) But when you start changing the supports and programs that people are already relying on, that's when people start to get hurt, and really start to lose faith in the government.
The Disconnect between CERB and EI
CERB is a simpler system. Simpler eligibility criteria, simpler calculation of payouts - it's a fixed $500 per week for 16 weeks. While the point of CERB was originally to fill in the gaps, providing benefits to people not eligible for EI who lost work in the pandemic, it quickly grew into a streamlining mechanism to alleviate the burden on an overstressed EI system.
However, while simpler, that doesn't mean the CERB's eligibility criteria are easier to satisfy, or that the benefits are better. They often aren't. Which means that this procedural streamlining has the effect of denying substantive benefits to EI-eligible employees.
CERB eligibility is still in flux, but one of the newer developments seems to be that you can earn up to $1000 per month and still be eligible for the whole amount. EI eligibility, however, turns on a reduction in income - it is very much possible for a person to be eligible for EI while still earning more than $1000 per month, which would disqualify them for CERB.
For many employees, as well, EI benefits are better - up to a maximum of $573 per week. And while that difference may not seem like a big deal at first glance, cutting the benefits of an EI-eligible worker by more than $300 per month will impose some unnecessary hardship.
More importantly, the EI program includes Supplemental Unemployment Benefits Plans (SUB Plans), where an employer can register to top up an employee's income (within certain limits) without affecting EI eligibility or benefits. As of this particular moment, CERB has no such equivalent. If the employer pays the employee more than $1000 per month - under a SUB Plan or otherwise - then the employee is not eligible for CERB.
So there are a variety of scenarios in which an employee might be eligible for EI, but not for CERB, in which case they can't presently get anything. That is, quite frankly, absurd.
And the difficulty here is compounded by the slow and uncertain rollout of these programs. Before CERB and CEWS were announced and developed, many employment lawyers, HR professionals, and unions were advocating SUB Plans as a useful mechanism to be able to lay off employees while still getting them paid and maintaining the connection between employer and employee. Large numbers of employers applied for SUB Plans and started rolling those out...and now are pulling them back, as they find that suddenly these employees aren't actually going to be able to collect EI benefits after all, and that a payment under the SUB Plan appears to render the employee ineligible for any government assistance at all.
I can't emphasize this enough: In real time, laid off workers are losing money and facing unnecessary financial hardship because of CERB overriding EI.
Consider the following example - which is basically a true story, if slightly modified and simplified: An employee makes $60,000 per year. He was laid off earlier in the pandemic, and told that he would get a 30% top-up of his salary over his EI benefits - which means that, instead of his usual gross of about $1150 per week, he'll gross about $919 per week. ($573 from the government; $346 from his employer.) He figures he can make a go of it.
Then the government tells him, "No, you're not going to get EI benefits of $573; instead, we're going to give you CERB benefits of $500 per week. You're welcome." And the employer realizes that he's getting CERB benefits instead of EI benefits, and tells him "We're cancelling our payments to you under the SUB Plan, because we're concerned that they'll prevent you from getting the CERB benefits."
So instead of getting $919 per week, as he would on EI, he's only getting $500 per week. And he's only figuring that out NOW, weeks into his layoff.
That is a problem. And it's not like we can just change it back so that he, and people like him, can get the EI benefits to which they are entitled instead. With so many EI-eligible applicants already in the CERB system, the closest thing to a fix would be to:
- Increase CERB to at least the max EI benefit, and
- Apply registered SUB Plans to CERB benefits.
Interplay with the Wage Subsidy
Now that CEWS appears to be mostly ironed out, it looks like that might have been the better way to go for the employer: Keeping him on payroll and collecting the CEWS subsidy is actually better for everyone than even the EI + SUB Plan option would have been. But that assumes that the employer qualifies for CEWS, assumes that the employer has the cash flow to make payroll for the period of time before CEWS subsidies actually start paying out, and assumes that a qualifying employer will have the confidence in that eligibility to incur significant payroll expenses up front in reliance on these government programs.
(It's also not entirely clear whether or not the retroactivity of CEWS means that an employer could rescind a layoff, pay an employee back pay, and get the subsidy for that period. My review of the statute would suggest that this should be possible, but there's a lot of uncertainty here. It would certainly generate an overpayment of CERB benefits already received.)
In my view, the policy goal of relieving the burden on EI would have been accomplished by allowing EI-eligible employees to 'opt in' to CERB - so if you'll get less on EI than CERB, or you're worried about being unemployed for over 45 weeks, take the CERB instead - and by allowing and encouraging employers to keep employees off of EI or CERB altogether with CEWS.
The Reckoning
When CERB was announced, a thought in the back of my head was that it highlights an inequity of taxation: Employees and employers have paid a very large amount of money into EI in exchange for that benefit; now, we're concerned about the gaps in that framework, and we want to make sure that people are covered regardless of whether or not they've paid in.
I agree with the instinct to want everyone covered. But you can't fault an EI-eligible employee for being a little bitter about the thousands and thousands of dollars that she and her employer have paid into the system over the years for the income security that we're now saying we think everyone should get.
This is compounded when even the EI-eligible employees get forced into (sometimes) inferior CERB benefits, and lose the SUB Plans that their employers may have made available to them - so even though they've paid those EI premiums for years and years, they don't even get access to the established features of the EI program. "Wait a second, what was I paying for?"
Consider this: The individual above, who made $60,000 per year and paid the maximum EI benefit, likely paid proportionally more to the government than the independent contractor who made $70,000 per year. And now that they've both lost their jobs, even though one of them paid an 'insurance' premium against job loss and the other one didn't (and the latter had a greater capability to do so), we both think that they should get the same income security.
It's not so different from universal healthcare. When two people need the same life-saving surgery, we don't think that one should get it and the other should be denied based on employment status, financial means, or insurance status.
And the solution is not so different, either: Broaden the availability of benefits, generally and on an ongoing basis, and finance it out of general government coffers, allocating the burden on a more efficient and/or means-based calculation across the tax base (i.e. through progressive income taxes and/or value added taxes).
We're talking about the elimination of the EI framework altogether, and replacing it with something more akin to the CERB, where everyone gets covered regardless of whether they're employees, contractors, sole proprietors, etc. (In the long term, calculation of benefit thresholds and entitlements will have to get a bit more nuanced, of course.) No more 'premiums', but the cost of the program gets rolled into other tax programs - for which contractors are just as liable as employees.
I've seen a lot of talk lately about turning CERB into a permanent UBI. That would be one way of implementing this change, but that's not necessarily what I'm talking about. I'd be interested to see cost estimates of reasonable UBI models (bearing in mind the offsets against other programs)...and there are also logistical issues in that social assistance programs have traditionally been funded and administered Provincially, but CERB and EI are Federal programs. (This should be fundamentally surmountable, and the collaboration between Doug Ford and Chrystia Freeland in recent weeks makes me optimistic...but I'm still not convinced that Jason Kenney would sit at that particular table in good faith.) This would be a broad and revolutionary reform to our social assistance infrastructure altogether, and while I don't think we can rule it out, I also don't think we have a good enough understanding of its costs or implications to jump in with both feet.
However, less revolutionary models would include something truer to the function of CERB and EI, being an income replacement benefit to provide financial security for a finite period of time following the loss of income. Eliminate arbitrary distinctions between employees and independent contractors, eliminate the regressive tax that finances the program, and turn the program into what it's really meant to be: A mechanism to provide everyone with a soft landing after losing their revenue streams.
Two Calls to Action
The purpose of this post is two-fold: To lay out the steps that need to be taken immediately to rectify the disconnect between the CERB and EI frameworks, and to lay out longer-term reforms for the 2021 tax year.
Immediate Action Required
The Federal government needs to announce and implement several steps immediately:
- Modify the CERB eligibility requirements to automatically encompass the EI eligibility requirements - anyone eligible for EI should, by virtue of that fact alone, be eligible for CERB. If you're going to make the actual EI program inaccessible, you have to make sure that you're not creating new holes in EI's existing coverage.
- Increase the CERB benefit to the maximum EI benefit. Give people entitled to the EI max benefit what they've paid for - and give everyone else who needs it the same thing.
- Integrate the EI SUB Plans into CERB - basically, tell employers that they can make their payments under their existing registered SUB Plans without affecting CERB eligibility or benefits.
Later Action
- Implement a tax reform program that removes EI premiums and increases marginal income taxes in a revenue-neutral way.
- Create a new income replacement program that effectively merges CERB and EI, which calculates eligibility based on a reduction in compensation, and establishes a fixed benefit period and an income-based clawback scale. This is complex, with a number of carve-outs and special treatments necessary to close off loopholes here and there, and I don't propose to embark upon a detailed development of the whole policy here.
- Study a UBI, and commence negotiation with Provincial leaders and stakeholders for terms of a UBI that will totally supplant EI, CPP, OAS, and Provincial welfare and disability programs.
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