Employee Benefits Costs for Canadian Small Businesses: The Complete Guide
Providing employee benefits is a significant expense for employers that must be properly budgeted for. Benefits like health insurance, retirement contributions, paid time off, and other perks can add anywhere from 10-25% on top of an employee's base salary. With the average salary in Canada being around $54,630 in 2021, benefits for the average employee could cost an employer $5,463-$13,658 annually on top of wages paid.
Some of the major mandatory and voluntary benefits provided by Canadian employers include:
CPP contributions
EI premiums
Statutory leaves
Health insurance
Dental plans
Retirement contributions
Paid vacation and sick days
Parental leave top-ups
Wellness perks
Tuition assistance
With benefits representing such a substantial portion of total compensation, it's crucial for employers to understand these costs and budget accordingly.
Mandatory Benefits and Costs
There are several mandatory benefits that employers must provide to employees in Canada. These include:
Canada Pension Plan (CPP)
Both the employer and employee must contribute to CPP based on the employee's earnings. For 2023, employees and employers each contribute 5.95% on earnings up to $66,600, reduced by the basic exemption of $3,500 [1]. The maximum employer and employee contribution for 2023 is $3,754.45 each.
Employment Insurance (EI)
Employers must pay EI premiums of 1.95% of insurable earnings in 2023, up to a maximum of $60,300. The maximum annual EI premium per employee is $1,173.85.
Statutory Leaves
Employers must provide eligible employees with job-protected leaves including maternity leave, parental leave, compassionate care leave, and sick leave. While employers do not pay wages during leaves, they must continue benefit coverage and allow employees to return to their job.
Health Benefits and Typical Costs
Health benefits like extended health, dental, and vision coverage are some of the most common and impactful voluntary benefits Canadian employers provide. According to Canada Life, extended health plans cover things like prescription drugs, paramedical services, medical equipment, and travel insurance. Dental plans cover preventative, basic and major services. Vision benefits include prescription eyewear coverage.
On average, employer-sponsored extended health plans cost around 2.5% of payroll. Dental plans add another 1-1.5% and vision around 0.5-1%. In total, health benefits average around 4-5% of payroll costs for employers. However, costs vary significantly based on factors like industry, company size, demographics of the employee population, and specific plan design.
For example, Canada Life cites manufacturing and construction industries have above average benefit costs around 6-8% of payroll. Larger companies also tend to pay more than small businesses for health benefits. Customized plans that are more generous than average in coverage levels and features will also be more expensive for employers.
According to Benefits Canada, the average per employee cost of health benefits in 2022 was $3,096 for extended health, $1,212 for dental and $234 for vision. With base salaries averaging around $54,630, health benefits therefore represent 4.7% of total compensation.
Retirement Plans
Retirement plans are a key part of an employee benefits package. The two main types of retirement plans in Canada are defined benefit and defined contribution plans.
Defined benefit pension plans provide a fixed, pre-determined pension payment upon retirement based on factors like salary and years of service. The employer takes on the investment risk. As of 2022, there were 1.4 million active members in defined benefit plans in Canada, down from 1.6 million in 2021.
Defined contribution pension plans have the employee contribute a fixed amount, matched to some degree by the employer. The payment at retirement depends on the performance of the investments. There were 5.3 million active members in defined contribution plans in 2022, up from 5.1 million in 2021 (Statistics Canada).
The cost to employers for defined benefit plans is higher and more fixed, while defined contribution plans allow employers to have more control over their level of contribution. However, defined benefit plans tend to be more attractive for employee retention.
Paid Time Off
Paid time off (PTO) is a key benefit that allows employees to take vacation, deal with illnesses, attend appointments, and handle personal matters without losing pay. The amount of PTO provided is a major factor for job seekers in Canada.
For vacation time specifically, the legal minimum in Canada is 2 weeks per year for employees with more than 5 years of service. However, most employers offer substantially more than this. The average professional starting out gets around 15 days of paid vacation per year at larger companies, while senior employees can get over 25 days off. At smaller companies, vacation time is often around 10 days for new employees.
On top of vacation days, many employers provide additional allotments for sick time and personal days. The average professional receives around 10 total sick and personal days combined per year. Some progressive companies are shifting to unlimited flexible PTO policies.
Compared to other countries, vacation time in Canada is moderate. Workers in most European countries get over 20 paid days off minimum. However, Canada is still well ahead of the United States, where there is no statutory minimum and the average is only around 10 days.
Additional Perks
Beyond mandatory benefits and common offerings like health insurance and retirement plans, some employers provide additional perks to enhance the employee experience. These extra benefits help attract talent and improve satisfaction and loyalty.
Tuition reimbursement is an attractive benefit, especially for recent graduates with student debt. Employers may cover a certain amount of tuition per year for employees taking job-related courses or pursuing additional degrees. This supports continual learning and development.
To promote health and wellbeing, many companies offer fitness subsidies or corporate gym memberships. This encourages employees to be active and may lower healthcare costs over time. Onsite fitness facilities are a popular perk at large companies.
Transit benefits provide monthly funds for commuting costs like subway passes and parking fees. This can take a significant bite out of employees' paychecks, so subsidizing transit allows that money to be used elsewhere. Transit benefits are attractive for city jobs with limited parking.
While additional perks may not be cheap, they can pay off in happier, healthier and more loyal employees. The value of that should be factored in when weighing the costs and benefits of extra perks.
Benefits for Recruitment/Retention
Benefits play a major role in both attracting and retaining employees. Studies show that benefits are one of the top considerations for job seekers when evaluating a new role. According to research, 78% of employees say they are more likely to stay with an employer because of their benefits program.
Once employees are hired, comprehensive benefits also encourage loyalty and lower turnover. Employees who are satisfied with their benefits are much less likely to leave for another job. A report from Inflection found that 51% of employers believe benefits are useful for retaining talent.
Some of the key benefits that impact retention include health insurance, retirement plans, paid time off, parental leave, flexible schedules, professional development and tuition reimbursement. Employers that provide benefits that meet the needs of their workforce tend to have more engaged, productive employees who stay longer.
Controlling Benefit Costs for Small Businesses
Small businesses have some options to control the costs of providing benefits while still offering an appealing package to employees. Here are some strategies:
Plan design - Consider higher deductibles or co-pays to reduce premiums. Also look at eligibility waiting periods for new hires. According to American Express, even small tweaks can lead to savings.
Work with insurance brokers - Brokers can help find the most cost-effective plans and carriers for your needs. They may also know of discounts or subsidies available to small businesses.
Leverage tax advantages - Certain benefits like health premiums, retirement contributions, and transit passes offer tax deductions. Structure your offerings to maximize write-offs.
Offer voluntary benefits - Let employees choose and pay for additional coverage like pet insurance or critical illness. This gives them flexibility without big costs for employers.
Overall, balance cost control with competitiveness. Skimping too much on benefits could hurt recruitment and retention. But some adjustments should be possible while still providing a valuable package. Consult with experts like brokers and accountants to find the sweet spot.
Calculating the Total Cost Per Employee
Determining the full cost of an employee extends beyond just their base salary. To accurately budget, businesses need to calculate the total cost of compensation.
Here are some key per employee costs to factor in:
Base salary
Government payroll taxes - CPP, EI, etc.
Benefits premiums - health, dental, retirement contributions
Paid time off - vacation, sick days, holidays
Additional perks - tuition reimbursement, wellness stipends, etc.
Administrative costs - HR, payroll processing, technology
Cost of office space, equipment, etc.
According to research from Intuit QuickBooks, every $1 spent on base salary costs an additional $0.25-0.40 for the employer. This can add tens of thousands in extra costs per employee annually.
To calculate the true cost, add up the base salary plus all additional costs associated with that employee. There are online calculators that can help estimate the total cost of an employee based on their salary, location, and benefits selected.
Having an accurate understanding of total compensation costs per employee allows businesses to budget appropriately and build the expense into pricing models.
Key Takeaways and Action Steps for Employers
Providing a competitive and comprehensive benefits package is a key part of attracting and retaining top talent for your organization. While benefits represent a significant expense, they are an investment in your most valuable asset - your employees. By budgeting appropriately and designing an affordable plan, small businesses can balance benefits costs and employee satisfaction.
Here are the key takeaways for employers:
Understand mandatory benefits like CPP contributions and statutory leaves, and ensure compliance.
Research typical costs for supplemental health, dental, retirement and other perks in your industry.
Involve employees in selecting the benefits they value most.
Work with brokers and providers to design an affordable plan.
Consider plan design strategies like higher deductibles or co-pays to control premiums.
Take advantage of tax considerations by offering tax-free benefits.
Use formulas to calculate total compensation costs including benefits.
Set budgets and plan financing for benefits expenses.
By taking a strategic approach to employee benefits, small businesses can provide a package that helps them compete for talent while maintaining financial sustainability.