We understand from recent articles in the press and statements made by representatives of the provincial government that retroactive pay equity cheques will soon be sent to eligible organizations. The 1998 survey was complicated and the wait has been long. The fun of distribution is about to begin.

Following are a number of issues and suggestions regarding distribution of retroactive pay equity amounts. If you have further questions or suggestions we would be pleased to hear from you.

Summary of the payment rules

Employers are required to make annual pay equity adjustments by distributing a minimum of 1% of the organization's previous year's payroll. The catch-up payment to be received by your organization is expected to be for the period 1995 through 1998 and should be equal to your annual requirements for those periods. This was the assumption at the time your pay equity funding survey was completed.

The retroactive payment must be distributed among all job classes entitled to a pay equity adjustment. Four basic rules must be followed:

1.      Every job class that requires a pay equity adjustment for any of the retroactive years must receive at least some of the retroactive amount for each of the years of entitlement.

2.      The lowest female job class in each pay equity plan must receive the largest per hour dollar value pay equity adjustment

3.      All employees in a same job class must get the same per hour dollar value adjustment.

4.      No pay equity adjustment should be made to male or gender neutral job classes.

Distribution calculation mechanics

The first three rules can make distribution of pay equity adjustments among staff somewhat problematic. We recommend you consider the following method of calculation to determine distribution of the retroactive amounts. We have attempted to present the steps in the order of calculation. Of course, if your organization has already paid out pay equity adjustments for the years represented by the retroactive funding then you need not perform any of the above calculations. You can just deposit the money in the bank and smile.

1. Perform a separate distribution calculation for each of the years covered by the retroactive payment.
2. Refer to your posted pay equity plan and determine which categories qualify (i.e. identify all staff categories for which the pay rate in the year in question was lower than the pay equity job rate for the job category).
3. Identify all employees, including males, working in each of the job categories who are entitled to a pay equity raise.
4. Determine the number of hours worked by each individual staff member for the particular year.
5. Add up the total number of hours worked by all the staff entitled to the pay equity adjustments.
6. Divide the retroactive pay equity distribution for the year by the number of hours calculated in "5" to obtain an amount per hour. (In our experience this amount is generally in the order of 20 cents per staff hour).
7. Set the increase for the lowest paid female job class.
8. Allocate increases to all other positions at amounts less than the increase allocated to the lowest paid female job class. For example, if the lowest paid female job class receives 20 cents per hour then all other job classes must receive an amount less than 20 cents per hour.
9. Calculate the amount to be allocated to each staff person by multiplying the hours that the person worked by their hourly allocated pay equity increase.
10. Check to ensure that you have calculated correctly and that the total amounts allocated to staff do not exceed the amount required to be paid.

Other Distribution Issues

There are several issues you should be aware of when performing the calculations and distributions:

Statutory benefits

The full amount of funding must be distributed to staff as an increase in gross salaries. No amount should be held back for employer portions of CPP, EI, WSIB premiums etc. In this respect the pay equity distribution calculation is different from that generally followed by organizations when calculating their direct operating and city grant allotments.

Employee releases

All employees who worked in the year are entitled to receive their share of the retroactive pay equity distribution. We suggest that, for each year in question, you prepare and send to all eligible recipients, whether currently employed by the organization or not, a letter confirming the amount they are to receive. Requiring signed releases prior to the distribution of the cheques will avoid your sending cheques to incorrect addresses. You will also obtain for your records acknowledgement from current and past employees of the amounts they are to receive.

On receipt of the confirmations, your organization should then prepare and mail out the pay equity distribution cheque. Consider having a lawyer review the releases before sending them.

Taxation of retroactive payments

Current employees

Retroactive payments are taxable in the year received by the employee. Payments are not taxable in the year earned. If amounts are mailed out in 1999 then they will be taxable to the person as employment income in 1999. Your organization must, consequently, include amounts distributed in 1999 in gross income of the 1999 T4s of employees currently working at the organization.

Please note that you must deduct appropriate amounts for employees' CPP and EI premiums and income tax at current rates. Retroactive payments should also be included in your EHT and WSIB premium calculations in the year that payments are made.

Former employees

A pay equity payment to a former employee is a "lump sum payment" in the eyes of Revenue Canada. As such it is reported on a T4A with income tax, if applicable, but without CPP or EI deductions. A T4A slip is only required if the payment is more than $500 or income tax was deducted from the payment.

Deduction rates for income tax on lump sum payments are:

• 10% for payments up to $5,000
• 20% for payments between $5,001 - $15,000
• 30% if the payment is more than $15,000 (very unlikely in this case).

Since these rates are only minimum requirements, former employees may have to pay additional tax on the amounts when they file their tax return.

Permanent salary increases

Pay equity adjustments are permanent salary increases. As such they must be added to the gross salary of each job category. For example, if a job category has received a pay equity adjustments of 20 cents per hour for 1995 through 1998 then 1999 base salary must be increased by 80 cents per hour (4 x 20 cents). Employees must receive this as a raise in their salary effective January 1, 1999 in addition to the retroactive entitlement amounts for 1995 through 1998.