A mix of supplemental bonusing and differentials can be crucial to retaining or attracting talent to your company, but it is easy to run afoul of fairness and equity rules, Canada Pension Plan and Employment Insurance rules, and other legislation — not to mention any “collective agreements” in your workplace. The total rewards picture becomes an essential measure of equity.
There are many reasons for differentials and bonuses, not least of which is competition. You don’t want your best talent “hired away” — and, conversely, you want to “lure away” the best talent from your competitors. Keeping track of your offers, managing your differentials, bonuses and special arrangements can be daunting for a Payroll Manager.
Then, there are issues of law, equity and taxation. Even non-monetary incentives can be subject to tax. They can also be a factor in determining the equity in the workplace.
The first and most important precaution for any Payroll Manager is to have “bullet-proof” records of all “irregular” pay (and non-pay) incentives, bonuses, and shift adjustments.
- Do you have a question on how to manage “supplementary pay practices”? Ask the Payroll Management experts at Pivotal Solutions>>
Being “safe” won’t attract the top talent.
The safest course, of course, is no special arrangements for anyone, but this doesn’t take into account the realities of your business:
- Competitors trying to “steal” your team members: you have to retain.
- You are trying to “steal” your competitor’s team members.
- Differentials necessitated by inconvenient shift work.
- Differentials taking into account the stress of leadership.
- Danger pay — hazard pay — for dangerous occupations.
- Differentials for knowledge: expertise, an critical spoken language skill, or conceptual/creative ability.
- On-Call situations: bonusing team members who must be on call at all times.
- Incentives for “unpopular” work or for “last minute substitutions.”
- Rewarding necessary non-exempt travel time (non-commute time, in other words).
- Rewarding milestones with “spot bonuses.”
- Retention bonuses during challenging production cycles — for example, retaining employees during organizational changes or take-over situations.
For this feature, we’ll put aside the “safety” aspects, since the goal of all of these supplementary pay practices is to attract and keep top talent — but we urge you to research the rules (some of which we highlight below.)
NOTE: It is advisable to run your supplementary pay practices through your legal counsel, or to research the laws and rules. This is outside the scope of this feature. Please also check “current” rules, as they may have changed since this was written, or your advisor last gave you advice. This is another good reason to outsource Payroll Management — to make sure the rules are followed.
Ultimately, there are no guidelines, but you can be “guided” by industry practice. Particularly for things such as “shift differentials” for the unpopular second and third shifts, there are some “averages” to be aware of:
- Always on call pay: provincial and federal laws may govern this, so always check, but according to the Economic Research Institute, employees “always on call” can vary from $25 to $250 per day — depending on competitiveness. Rules governing emergency and mandatory “on calls” vary.
- Hazard and danger pay (see definition below): can be part of overall compensation when hired, or can be temporary for one-off situations. Obviously, this varies very widely. For instance, in Japan, after the Nuclear accident, hazard pay increased to $200 per day from the average 20% premium. 
- Shift differentials: on average, according to the Economic Research Institute, the extra pay is 5-15% of either hourly wage or salary — higher for less popular shifts. Obviously, if you are trying to retain or lure, higher is likely 
- Lead differentials: on average, are similar to shift differentials at 5-10%. The more senior the leading role, or the more significant the responsibility — for example, the bad news roles of terminating other employees — the higher the percentage would be. 
- Language pay: often a factor in call centres, sales positions, or International company management, employees fluent in multiple languages receive “language pay.” For example, call centres typically pay 10% more. 
Hazard Pay Note: “Hazard pay means additional pay for performing a hazardous duty or work involving physical hardship. Work duty that causes extreme physical discomfort and distress, which is not adequately alleviated by protective devices is deemed to impose a physical hardship. The Fair Labor Standards Act (FLSA) does not address the subject of hazard pay, except to require that it be included as part of a federal employee’s regular rate of pay in computing the employee’s overtime pay.” — U.S. Department of Labour. 
Managing payroll and the complexity of bonuses
Sometimes the joy of the bonus is tempered by the hit on taxes, but this doesn’t diminish the role of supplementary incentives in the workplace. It does, however, highlight the importance of the Payroll Manager — and good records.
First, let’s make one thing clear. Check with Revenue Canada and Ontario rules on the latest CPP and EI mandatory deductions. As of this writing, on bonuses (or the value of bonuses, in the case of free trips, etc.) income tax IS payable — unless the bonuses are directly allocated to an RSP.
Periodic versus Bonus
Another reason to work with a qualified outsourced Payroll Manager is to determine the best way to manage these supplementary pay practices. Allocating on the “Periodic” method (the default, generally) versus the “bonus method” can change the tax calculations. This is according to Darlene Huntley of Wagepoint :
“The periodic method determines the federal and provincial or territorial tax deductions on total salary, wages, taxable benefits, pension income, commissions, and other periodic payments. The periodic method is the default when no other method applies and is used for earnings paid on a regular pay period basis.
The bonus method uses the periodic method, only it calculates the tax twice – once with the bonus and once without the bonus. The bonus method may also be used for exception earnings, meaning those paid on an irregular basis, including:
Sales commissions paid on an irregular basis.
The cash-out of banked overtime, without taking time in lieu.
Accrued vacation pay, paid without taking time.
The taxable benefit from stock (“security”) options.”
Then, there are pages of rules regarding EI and CPP and Income tax, which change from time to time. To review the latest rules, reference the Canada Revenue site>>
Laws and fairness
Whether you are a unionized workforce or note, fairness comes into play. Secretive supplementary practices are not a good idea. When researching what you can and cannot offer to incent your employees, always refer to:
Labour laws of your jurisdiction (in Ontario, please pay special attention to Bill 148)