Calculation of Compensation – No. 2 Exclusions

Publication Type
Interpretations, policies and guidelines
Subject Matter
Pay Equity Committee

 

1. Purpose

This Interpretation, Policy and Guideline (IPG) provides guidance on the following:

  • Understanding what amounts may be excluded from the calculation of compensation; and,
  • Understanding what amounts must be excluded from the calculation of compensation.

This IPG is the second in a series that addresses the calculation of compensation. The other IPGs in this series are:

  • No. 1: Guidance Concerning the Definition of Compensation.
  • No. 3: An Interpretation of Salary and Determining the Highest Salary Rate.
  • No. 4: Guidance Concerning the Calculation of Different Types of Variable Pay.
  • No. 5: Guidance Concerning the Calculation of Different Types of Incentive Pay.
  • No. 6: Guidance Concerning the Calculation of Indirect Compensation Elements.

This document does not replace expert legal and/or compensation advice. This document is technical in nature and should not be used as a plain language resource. Plain language resources are available at https://www.payequitychrc.ca/en.

The term employer in this document can also refer to a group of employers that has been recognized by the Pay Equity Commissioner.i

2. Exclusions

Section 45 of the Pay Equity Act (the Act) outlines that certain amounts may be excluded from the calculation of total compensation for each predominantly male and predominantly female job class.
Section 46 of the Act outlines that certain amounts must be excluded from the calculation of total compensation for each predominantly male and predominantly female job class.

To exclude any amounts from the calculation of total compensation, the employer or pay equity committee should consider that:

  • The exemption factors should be given a restrictive and narrow interpretation;ii 
  • Only those amounts attributed to an exclusion should be left out from the calculation of total compensation;iii  and,
  • The type and reason why a form of compensation identified in section 46 of the Act was excluded from a job class must be indicated in the pay equity plan.iv 

The following sections provide further guidance on section 45 and section 46 of the Act.

2.1. Forms of compensation that may be excluded from the calculation of total compensation under section 45

Once an employer or pay equity committee has identified all of the compensation elements that are provided to the positions within a job class, they must determine whether they may be excluded from the calculation of total compensation.

Employers or pay equity committees may excludev  any form of compensation that is equally available and provided without discrimination on the basis of gender with respect to all predominantly male and predominantly female job class for which total compensation is being determined.

This means that to exclude any form of compensation under section 45 of the Act, it must be:

  • Equally available to all the job classes within the pay equity plan for which a calculation of compensation is being conducted; and,
  • Provided without discrimination on the basis of gender to all the job classes within the pay equity plan for which a calculation of compensation is being conducted.

If the form of compensation meets these two criteria, there is no need to include the amounts in the calculation of total compensation for any job class in the pay equity plan.

If the form of compensation does not meet these two criteria, the amounts must be included in the calculation of total compensation for all the job classes in the pay equity plan.

It is important to note that if a form of compensation is equally availablevi  and provided without discrimination on the basis of gender, it may be excluded from the calculation of total compensation even if some employees do not choose to use or acquire it.

Employers and pay equity committees may consider the following questions when trying to determine whether a form of compensation meets the section 45 criteria.

2.1.1. Criterion 1: Is the form of compensation equally available?

A form of compensation that is equally available could mean that:

  • Amounts or benefits available are alike, uniform or on the same plane or level with respect to efficiency, worth, value, amounts or rights;
  • Compensation policies and procedures are documented;
  • Compensation policies and procedures are clearly defined;
  • Compensation policies and procedures are transparent and understood by all employees; and,
  • Employees are aware of how compensation policies and procedures are applied.

2.1.2. Criterion 2: Is the form of compensation provided without discrimination on the basis of gender?

A form of compensation that is provided without discrimination on the basis of gender could mean that:

  • Employees of all genders have equal access to the form of compensation;
  • The form of compensation has not been offered or provided in a disadvantageous manner resulting in, for example, one gender benefiting from the form of compensation more than another or having access to a higher or lower value of compensation; and,
  • The form of compensation does not impose burdens or deny a benefit in a manner that has the effect of reinforcing, perpetuating or exacerbating disadvantage.vii 

Example

In creating a pay equity plan, Company A’s pay equity committee must calculate the total compensation for all predominantly male and all predominantly female job classes.

The pay equity committee begins by identifying all forms of compensation that are equally available and provided without discrimination on the basis of gender to all these predominantly male and predominantly female job classes. The pay equity committee finds that Company A applies the same contribution rates (for example, the same percentage of employee health insurance), regardless of the gender predominance of the job class.

As a result, the pay equity committee chooses to exclude health insurance amounts from the calculation of total compensation.

2.2. Forms of compensation that must be excluded from the calculation of total compensation under section 46

Once an employer or pay equity committee has identified all of the compensation elements that are provided to the positions within a job class, they must determine whether they may be excluded from the calculation of total compensation.

Employers and pay equity committees must exclude by subtracting, or in some cases by adding, the differences in compensation attributed to those factors of compensation identified in section 46 of the Act if those factors have been designed and are applied so as not to discriminate on the basis of gender with respect to all the job positions within a job class.

This means that to exclude any factor of compensation under section 46 of the Act, it must be:

  • Designed so as not to discriminate on the basis of gender; and,
  • Applied so as not to discriminate on the basis of gender. 

If the factor of compensation does not meet these two criteria, the amounts must be included in the calculation of total compensation for the job class.

The employer or pay equity committee must note the job class and the reasons why the amount was excluded in the pay equity plan.viii 

2.2.1. Factors of compensation

The differences in compensation that must be excludedix  by subtracting from the calculation of total compensation are amounts attributed to:

  • A system to compensate employees according to their seniority or the length of their service;
  • Temporarily maintaining an employee’s compensation after their reclassification or demotion to a position with a lower compensation rate until the rate for the position is the same or greater than the rate the employee received right before the reclassification or demotion (for example, “red circling”);
  • A temporary increase in compensation (or market premium) that an employer implemented because a shortage of workers made it difficult to recruit or retain employees with the required skills for the positions in a job class;
  • The geographic area where an employee works, which could include such things as isolation pay or cost-of-living supplements;
  • A merit- or performance-based compensation plan that is predicated on a system of formal measurement ratings and that has been brought to the attention of and consistently applied to all employees; or,
  • Extra-duty services, including overtime, shift work, being on call, being called back to work and working or travelling on a day that is not a working day.

When excluding any of the six factors listed above, the employer or pay equity committee must remove, by subtracting, the amount of the difference in compensation to ensure the amounts are not part of the calculation and comparison of total compensation for the job class.

Example: A system to compensate employees according to their seniority or the length of their service

Company A has a seniority-based pay scale where employees are paid a base salary and awarded a $1.00 per hour increase for each full year of service at regularly scheduled intervals. No differentiation is made based on how well a person performs a job; increases are awarded on the basis of how long the person has been in the job.

Compensation Year 1 Year 2 Year 3 Year 4 Year 5
Base salary ($/hour) 20.00 21.00 22.00 23.00 24.00
Length of service pay ($/hour) 0.00 1.00 1.00 1.00 1.00
Total ($/hour) 20.00 22.00 23.00 24.00 25.00

Employee Y in job class A has just been hired and is paid at the bottom of the salary scale at $20.00 per hour. Employee Z in job class A who has worked in the company for five years is paid at the top of the salary scale at $25.00 per hour.

Based on this example, as employee Y’s seniority increases, they should expect to move up the salary scale at a rate of $1.00 per hour more each year until they earn the maximum job rate after five years of service, unless there are other non–pay equity issues.

For the purpose of pay equity, the amount received for length of service of $1.00 per hour must be excluded by subtracting the amount from the calculation of compensation for the job class should the policy be designed and applied so as not to discriminate on the basis of gender.

The pay equity committee makes note of the exclusion and the reason why the amount has been subtracted from the calculation of compensation in the pay equity plan.x 

The employer or pay equity committee must also exclude,xi  by adding rather than subtracting, as they would for the six factors listed above, any differences in compensation based on:

  • Paying an employee in a development or training program at a different rate than employees who do the same work but are not in this type of program; or,
  • Temporary, casual or seasonal employees being paid a different rate or not receiving an element of compensation, such as benefits, because of the nature of their employment status.

The employer or pay equity committee must exclude, by adding, the amount of the difference in compensation for the two factors above to ensure the comparison of total compensation between job classes is equitable.

Example: Temporary, casual or seasonal employees not receiving compensation in the form of benefits because of the nature of their employment status

Company A has a pension plan for permanent employees. Job class B is composed of positions that are filled by casual employees. These casual employees are not members of the pension plan but are being compensated $2.50 per hour in lieu.

Section 46(f) outlines that the employer or pay equity committee must exclude, by adding, “the non-receipt of compensation — in the form of benefits that have a monetary value – due to the temporary, casual or seasonal nature of a position.”

The pay equity committee notes that this factor is designed and applied so as not to discriminate on the basis of gender.

For the purposes of pay equity, the $2.50 per hour must be added to the hourly rate for job class B.

The pay equity committee makes note of the exclusion factor and the reason why the amount has been added to the calculation of compensation in the pay equity plan.xii 

2.3. Principles to consider

The factors outlined in section 46 of the Act must be excluded if they have been designed and are applied so as not to discriminate on the basis of gender.

2.3.1. Designed so as not to discriminate on the basis of gender

Designed so as not to discriminate on the basis of gender could mean that the form of compensation that is being considered for an exclusion is:

  • Based on formal policies, procedures and reviews;xiii  and,
  • Provided in a transparent manner so that employees have access to information about the requirements to obtain it.xiv 

2.3.2. Applied so as not to discriminate on the basis of gender

Applied so as not to discriminate on the basis of gender could mean that the form of compensation that is being considered for an exclusion is:

  • Equally accessible to all employees, not just within job classes, but also across job classes of comparable value;xv  and,
  • Gender-neutral in its impact, meaning that the use of policies, procedures or reviews do not benefit one gender more than another.xvi 

2.3.3. Temporary

Of the factors that must be excluded from the calculation of compensation, those listed in sections 46(b) and 46(c) of the Act note that the difference in compensation must be temporary:

  • The practice of temporarily maintaining an employee’s compensation following their reclassification or demotion to a position that has a lower rate of compensation until the rate of compensation for the position is equivalent to or greater than the rate of compensation payable to the employee immediately before the reclassification or demotion.xvii 
  • A shortage of skilled workers that causes an employer to temporarily increase compensation due to its difficulty in recruiting or retaining employees with the requisite skills for positions in a job class.xviii 

Temporary means that which is to last for a limited time only, as distinguished from that which is perpetual, or indefinite, in its duration.

This means that the employer or pay equity committee must ensure that the practice of either temporarily maintaining an employee’s compensation after their reclassification or demotion to a position with a lower compensation ratexix  or providing a temporary increase in compensation due to a shortage of skilled workersxx  is not a permanent compensation policy or procedure.

Example: A shortage of skilled workers that causes an employer to temporarily increase compensation due to its difficulty in recruiting or retaining employees with the requisite skills for positions in a job classxxi 

Based on the current labour market, there is a great demand for interprovincial truck drivers.xxii Company A has encountered significant difficulties recruiting and retaining employees with the skills needed for this job position.

To address the situation, Company A temporarily increases the compensation for positions in the interprovincial truck drivers’ job class.

For the purposes of pay equity, Company A excludes the amount of the temporary increase from the calculation of total compensation.

Company A includes information in the pay equity plan that demonstrates that economic and labour market conditions are the source of the temporarily increased compensation and that these rates are above what is normally paid to other job classes of comparable value within the employer’s establishment.xxiii 

2.3.4. Merit-based compensation

Section 46(g) of the Act outlines that amounts received from a merit-based compensation plan that is based on a system of formal performance ratings and that has been brought to the attention of the employees can be excluded from the calculation of total compensation for a job class.

This means that in addition to the other two section 46 exclusion criteria, amounts removed from the calculation of total compensation in this regard must also be:

  • Based on established performance management practices; and,
  • Brought to the attention of employees.

For the purposes of pay equity, there is a need to distinguish between compensation amounts that an employee can expect to receive for meeting target levels of performance and those amounts that they may receive for exceeding target levels of performance:

  • Any amounts that an employee expects to receive—for example, by meeting satisfactory target performance standards—should be included in the calculation of total compensation.
  • Any amounts that an employee is eligible to receive based on established management practices for above-target performance should be included in the calculation of total compensation should they not meet the criteria for the exclusions outlined in section 46 of the Act.

Example: A merit-based compensation plan that is based on a system of formal performance ratings and that has been brought to the attention of the employees

Company A is calculating the total compensation for the human resources executive job class.
Each position in the job class is part of the same compensation plan. They receive base pay in addition to compensation amounts received for meeting target performance levels and compensation amounts for exceeding target performance levels.

Company A’s pay equity committee makes note of the amounts received for meeting target performance levels and those received for exceeding target performance levels for each position in the job class.

Company A’s pay equity committee considers whether the amounts received for exceeding target performance levels should be excluded as per section 46(g) of the Pay Equity Act. To do so, they review the exclusion criteria.

Criterion 1: Designed so as not to discriminate on the basis of gender:

  • Company A has formal policies, procedures and reviews in place for the amounts received for the target level–based compensation component for the job class.
  • All of the employees in the job class are part of the same compensation plan and are aware of and have access to the same information on how to obtain amounts for target levels.

Criterion 2: Applied so as not to discriminate on the basis of gender:

  • The target level–based compensation component is available equally to all the job positions within the job class and those job classes of comparable value.
  • The policies, procedures, reviews and target levels are gender-neutral, meaning they are offered in the same way to each position, regardless of the gender of the individual holding the position. No one position benefits more based on gender.

Criterion 3: Based on established performance management practices:

  • Company A’s target level compensation plan is detailed and it sets goals.
  • Performance evaluation is formalized through defined criteria and is ongoing and documented.

Criterion 4: Brought to the attention of employees:

  • All of the employees are aware of the compensation plan and how they will be assessed and compensated.

Based on its assessment, Company A’s pay equity committee determines that amounts received for exceeding target performance levels meet the exclusion criteria. Therefore, they note the difference in compensation and the reasons why it has been excluded in the pay equity plan. 

For more information, see Calculation of Compensation – No. 3: An Interpretation of Salary and Determining the Highest Salary Rate: https://www.payequitychrc.ca/en/publications.

For more information, see Calculation of Compensation – No. 4: Guidance Concerning the Calculation of Different Types of Variable Pay: https://www.payequitychrc.ca/en/publications.

For more information, see Calculation of Compensation – No. 5: Guidance Concerning the Calculation of Different Types of Incentive Pay: https://www.payequitychrc.ca/en/publications.

3. Referenced Pay Equity Act provisions

3(1)

compensation means any form of remuneration payable for work performed by an employee and includes

  1. salaries, commissions, vacation pay, severance pay and bonuses;
  2. payments in kind;
  3. employer contributions to pension funds or plans, long-term disability plans and all forms of health insurance plans; and
  4. any other advantage received directly or indirectly from the employer. (rémunération)

Calculation

44 (1) An employer — or, if a pay equity committee has been established, that committee — must calculate the compensation, expressed in dollars per hour, associated with each job class for which it has determined, under section 41, the value of the work performed.

Group of job classes

(2) If an employer or pay equity committee, as the case may be, treats a group of job classes as a predominantly female job class in accordance with section 38, the compensation associated with that job class is considered to be the compensation associated with the individual predominantly female job class within the group that has the greatest number of employees.

Salary

(3) For the purpose of determining salary in the calculation of the compensation associated with a job class, the salary at the highest rate in the range of salary rates for positions in the job class is to be used.

Exclusions from compensation

45 An employer — or, if a pay equity committee has been established, that committee — may exclude from the calculation of compensation, with respect to each job class in respect of which compensation is required to be calculated, any form of compensation that is equally available, and provided without discrimination on the basis of gender, in respect of all of those job classes.

Differences in compensation excluded

46 An employer — or, if a pay equity committee has been established, that committee — must exclude from the calculation of compensation associated with a job class any differences in compensation that either increase or decrease compensation in any or all positions in that job class as compared with the compensation that would otherwise be associated with the position, if the differences are based on any one or more of the following factors and those factors have been designed and are applied so as not to discriminate on the basis of gender:

  1. the existence of a system of compensation that is based on seniority or length of service;
  2. the practice of temporarily maintaining an employee’s compensation following their reclassification or demotion to a position that has a lower rate of compensation until the rate of compensation for the position is equivalent to or greater than the rate of compensation payable to the employee immediately before the reclassification or demotion;
  3. a shortage of skilled workers that causes an employer to temporarily increase compensation due to its difficulty in recruiting or retaining employees with the requisite skills for positions in a job class;
  4. the geographic area in which an employee works;
  5. the fact that an employee is in an employee development or training program and receives compensation at a rate different than that of an employee doing the same work in a position outside the program;
  6. the non-receipt of compensation — in the form of benefits that have a monetary value — due to the temporary, casual or seasonal nature of a position;
  7. the existence of a merit-based compensation plan that is based on a system of formal performance ratings and that has been brought to the attention of the employees; or,
  8. the provision of compensation for extra-duty services, including compensation for overtime, shift work, being on call, being called back to work and working or travelling on a day that is not a working day.

Contents of plan

51 A pay equity plan must

  1. indicate the number of pay equity plans required to be established in respect of the employer’s employees or, if the employer is in a group of employers, in respect of the employees of the employers in the group; 
  2. indicate the number of employees that the employer — or, in the case of a group of employers, each employer in the group — was considered to have for the purpose of determining whether a pay equity committee was required to be established in respect of the pay equity plan;
  3. quirements set out in subsection 19(1) or, if not, whether the employer or group of employers, as the case may be, obtained the authorization of the Pay Equity Commissioner to establish a pay equity committee with different requirements;
  4. set out a list of the job classes that have been identified to be job classes of positions occupied or that may be occupied by employees to whom the pay equity plan relates;
  5. indicate whether any job classes referred to in paragraph (d) were determined to be predominantly female job classes and, if so, set out a list of those job classes;
  6. indicate whether any job classes referred to in paragraph (d) were determined to be predominantly male job classes and, if so, set out a list of those job classes;
  7. indicate whether a group of job classes has been treated as a single predominantly female job class and, if so, set out a list of the job classes referred to in paragraph (d) that are included in the group of job classes and identify the individual predominantly female job class within the group that was used for the purpose of subsections 41(3) and 44(2);
  8. if there was a determination of the value of work performed in certain job classes, then, for each of those job classes, describe the method of valuation that was used and set out the results of the valuation;
  9. indicate any job classes in which differences in compensation have been excluded from the calculation of compensation under section 46 and give the reasons why;
  10. if a comparison of compensation was made, indicate which of the methods referred to in subsection 48(1) was used to make the comparison — or, if neither was used, explain why not and describe the method that was used — and set out the results of the comparison;
  11. identify each predominantly female job class that requires an increase in compensation under this Act and describe how the employer — or, in the case of a group of employers, each employer in the group — will increase the compensation in that job class and the amount, in dollars per hour, of the increase;
  12. set out the date on which the increase in compensation, or the first increase, as the case may be, is payable under this Act; and
  13. provide information on the dispute resolution procedures that are available under Part 8 to employees to whom the pay equity plan relates, including any timelines.