By Samantha Stepney.
It can be difficult for employers in certain industries to attract talent at a reasonable wage. Because of this, as an enticement, employers often agree to pay all, or part, of employee wages in cash “under the table” so that employees do not have to pay Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, or income tax on those wages. However, this is risky business as it potentially opens employers up to significant liability.
Two examples of such liability are detailed below.
Employee Claims for Unpaid Wages
Paying unrecorded cash will open up an employer to the risk that an employee (likely someone who has quit or who has been dismissed) will bring a complaint under the BC Employment Standards Act (ESA) for “unpaid wages”, claiming that they did not receive the cash portion of their remuneration. It is often very difficult for the employer to prove that these wages were actually paid since clear records have not been kept.
However, even if the employer is able prove that payment occurred, it will still be offside the ESA’s requirements. For example:
- Section 20 requires employers to pay all wages by cheque, draft or money order, or by deposit to the credit of an employee’s account in a savings institution;
- Section 27 requires employers to give each employee a written wage statement for each pay period stating several pieces of information, including the employee’s wage rate, any money the employee is entitled to, the amount of each deduction from the employee’s wages and the purpose of each deduction, and the employee’s gross and net wages; and
- Section 28 requires employers to keep accurate records of this information.
Further, Part 5 of the ESA requires employers to pay statutory holiday pay, and Part 7 requires employers to pay vacation pay. These two types of pay are often not paid on cash wages.
If an employer is found to have violated the ESA, it will be subject to a monetary administrative penalty for each contravention (i.e., each separate section of the ESA that has been contravened). The penalties are set out in s. 29 of the BC Employment Standards Regulation as follows:
- $500 for each first violation;
- $2,500 for each second violation within 3 years of the first violation;
- $10,000 for each subsequent violation within 3 years of the second violation.
These can add up quickly!
Penalties Imposed by the Canada Revenue Agency (the “CRA”)
Paying unrecorded cash can also get employers into hot water with the CRA.
Employers have an obligation to deduct, remit, and contribute to CPP contributions and EI premiums. They also have an obligation to deduct and remit income tax. All three are administered by the CRA.
If employers do not fulfill these obligations, the consequences can be quite severe. They may be assessed a penalty or interest, or incur other consequences. For example, if an employer does not comply with the deducting and remitting requirements, they may be prosecuted. They could be fined from $1,000 to $25,000, or they could be imprisoned for a term of up to 12 months.
Further, if an employer fails to deduct the required CPP contributions or EI premiums from the amounts they pay their employees, they are responsible for these amounts even if they cannot recover the amounts from the employees (however, employees remain ultimately responsible for paying their income tax).
There is a “voluntary disclosure” process by which the CRA may grant relief from penalties and prosecution. If you are an employer who has been paying cash to employees and wants to clean up any potential liability with the CRA, we recommend that you obtain advice from a lawyer who specialized in tax.
An Alternative to Cash: Independent Contractor Relationships
Rather than put themselves at risk, if possible, it is preferable for “employers” to engage workers as true independent contractors, rather than employees. Clients of true independent contractors are not required to remit CPP, EI or income tax on behalf of their worker. There are particular requirements when it comes to classifying a worker as an independent contractor, however, so be sure to speak to an employment lawyer about when it is appropriate to structure a working arrangement in this manner, and about how to draft an appropriate independent contractor agreement.
Have questions about employee compensation? Contact us!