Fixing the Canada Emergency Wage Subsidy

Unconventional times call for unconventional measures. The Canada Emergency Wage Subsidy (CEWS) announced by the federal government certainly fits that description.

The CEWS is projected to provide employers with $73 billion over a 3- month period. That is equivalent to about the last three and a half years worth of Employment Insurance (EI) benefits. It is by far the largest piece of Canada’s economic support package. For the federal government’s economic rescue plan to work, CEWS needs to work.

The details of the wage subsidy have been a moving target. As an initial response to the economic crisis, the government announced on March 18^th a 10% wage subsidy for three months for small businesses and non-profits. This was followed by an announcement on March 27^th of CEWS which provides a much larger subsidy (75% of wages up to a maximum) to a much broader category of employers, as long as they can demonstrate a decline in revenue tied to COVID. Subsequent announcements have brought changes to eligibility rules to address gaps.

There are some early signs that the CEWS is working even before it takes effect — Air Canada for example, announced it would immediately rehire 16,000 workers. But, even after these continued updates, the CEWS retains some major blind spots that could undermine its outcomes. To ensure the wage subsidy works across the economy, the federal government should eliminate as much uncertainty as possible, smooth the sharp “cliffs” in design, and address businesses whose revenue picture doesn’t neatly fit the CEWS design.

How the CEWS works

At a basic level, the wage subsidy passed by Parliament over the Easter weekend works like this:

• Businesses or non-profits can qualify if they can show a 15% decline in revenues in March, 2020 or 30% in April or May. That can be compared against the same month last year or an average of January and February 2020.
• Employers qualify on a month-to-month basis, if they qualify in April but not March or May, they receive the subsidy for one month.
• A wide range of businesses and non-profits are eligible, regardless of size. Public sector organizations do not qualify. There is no maximum subsidy per employer – the rules and formula are the same for one employee or 50,000.
• The wage subsidy applies for existing or new employees. It provides a maximum of 75% of wages up to a maximum of $847 per week. This maximum is based on the maximum earnings covered by the Canada Pension Plan ($58,700 annually).
  • In the near-term, for an employee making more than approximately $35,000 annually, this means the wage subsidy will leave them with higher earnings than the Canada Emergency Response Benefit, in addition to keeping up other health and supplementary benefits.
• There is no requirement for employers to pay the remaining 25% of wages to keep employees at their pre-crisis income levels, however they are expected to make “best efforts.”

There is also a separate 10% wage subsidy available for small businesses only. This one is not tied to revenue decline and is worth up to $1,375 per employee. Employers cannot receive both at the same time.

Reducing uncertainty

The government’s goals for the CEWS are to have as many employers keep (or rehire) their employees on their payroll through the period of the crisis and maintain  the employment relationship with their employees, and allow operations to restart more quickly when lockdowns lift. This is no small task. Since March 15^th there have been a staggering 8.5 million applications for Employment Insurance or the new Canada Emergency Response Benefit.

To push against this current, and reverse existing layoffs, employers need absolute clarity that they will be covered. The application portal itself won’t be open for weeks, and it’s not clear how long after that dollars will flow.

But we are already one-third of the way through the period covered by the subsidy. That means for the wage subsidy to work at scale, it depends on employers being confident that they will be reimbursed. Otherwise, employers have little guidance as they make their own tough decisions, around whether they should draw on lines of credit or dwindling cash reserves to keep employees on payroll.

The good news: compared to many government supports, the CEWS is fairly clear and straightforward. The changes the government has made since the initial announcement have only expanded eligibility.

However, significant uncertainty remains. Perhaps most significant is – what happens in June? The program has been announced for 12 weeks, with the final qualifying period for subsidies ending on June 6^th. The government has authorization under the legislation to extend the program to September 30^th, but it is not clear what would trigger that decision.

Businesses are unlikely to rehire their workers for a few weeks during a time of cratered revenues if they are likely to have to lay them off again in a few weeks. It is unclear how long shelter-in-place orders will remain and to what extent different industries will be able to resume normal operations when they begin to lift – even assuming there are customers. As much as possible, businesses need to be able to plan more than one payroll run at a time.

The government should therefore set out in advance as clearly as possible what conditions would trigger an extension of the CEWS beyond June 6^th, or what would cause it to be reinstated during a second wave of infections. For example, the government could announce immediately that if significant shelter-in-place guidance is still in place, the CEWS will be extended through the summer.

This would give employers some comfort that if public health measures continue to stop them from operating normally they can budget for this support in keeping their staff on payroll.

There is also some unnecessary uncertainty about how the rules will be interpreted. On the surface, asking businesses to “make best efforts” to pay the remaining 25% (or more) of their employee’s salary is both the right thing to do and reasonably clear. No one wants to see businesses ending up with windfall profits from the wage subsidy while their employees bear the brunt of the crisis.

But what looks clear to a policy wonk looks less so to a small business bookkeeper. Just how will we measure what “best efforts” looks like? If a business ends the year with significant retained earnings, are those excess profits that have been withheld unfairly from employees? Or is it a prudent cash reserve to be able to weather the next wave of this storm or the storms to come – the kind of emergency fund we want businesses to have so that they don’t need emergency government support? How much profit is “fair” for small business owners to receive if it is their primary source of income for them and their families?

These aren’t abstract philosophical questions. Any risk of audit or exclusion based on later interpretations of the Canada Revenue Agency carries a financial risk —keeping or rehiring employees based on the subsidy — that will discourage take-up. There is good reason to expect that this will discourage small and medium businesses disproportionately, as they do not have the larger accounting and finance departments (or higher-priced accounting firms) to navigate these questions.

Stairs, not cliffs

As it stands, employer eligibility for the CEWS is an all-or-nothing proposition. If you can demonstrate the 15% revenue decline in March and/or 30% decline in April and May, you get support for your whole payroll. If your revenues only declined by 14.99%, many employers would get zero, while some small businesses and non-profits could receive the 10% Temporary Wage Subsidy.

This is the kind of tax cliff that governments try to avoid. In fact, many of the Trudeau government’s signature policy initiatives for individuals (e.g. the Canada Child Benefit, the Canada Workers Benefit) are designed to counter these effects.

It is unfair to treat two employers who have experienced such similar challenges so differently. Take two small businesses that each had $2 million in revenue last year and each have 10 employees earning $60,000.

• AAA Industries saw a 16% revenue drop in March and a 31% drop in April and May and they are eligible for the subsidy. They would receive $101,640 in total over the 12 weeks of the program.
• ZZZ Enterprises only saw a 14% revenue drop in March and a 29% drop in April and May – they aren’t eligible for the program at all and would receive zero.

These two companies have virtually identical cases for support. But in this case $10,000 in gross revenue spread over 3 months cost ZZZ Enterprises over $100,000 in government support. The threshold of 15% or 30% is relatively arbitrary and we shouldn’t pretend otherwise. Worse, it penalizes businesses for adapting their business models as much as they can safely do to maintain the ability to pay their fixed expenses like rent and to be prepared to survive if restrictions are lifted.

This can be improved by adding a more graduated set of thresholds of eligibility and support. For example, for April and May, businesses that see revenue reductions between 10% and 30% could be eligible for wage subsidies between 25% and 75% of the ceiling in the program, on a proportional basis. This would still create some sharp drops but would be more like a steep set of stairs than a cliff.

Closing coverage gaps

When the CEWS was first announced, concerns were raised from a number of fronts that the program would exclude a number of hard-hit businesses. More recent changes that allow employers some flexibility in how they measure a revenue drop will help to include many of those that were excluded, especially non-profits. But as currently designed, the program will still leave many on the sidelines.

Not all businesses have revenues that make sense to measure on a month-to-month basis. There is a big difference between selling consumer-facing goods or services that would be more steady and businesses that are paid for large projects or orders that could mean huge revenue swings between months depending on project and payment schedules. Whether those businesses will qualify for the CEWS does not depend on how hard hit they were as much as the luck of their calendar.

For these businesses, the government could allow them to compare revenue declines against a monthly average of the 12 months looking back from February 2020. To avoid excessive “calculation shopping” this could be limited to businesses with significant monthly swings in revenue.

Then there is the issue of high-growth businesses. Allowing businesses to compare their COVID situation against January and February 2020, as the government has now done, will include a greater number of these businesses. But we are still seeing layoffs, like the 131 cuts at TouchBistro (a restaurant technology provider) at companies that don’t qualify. Normal times do not call for subsidizing the wages of companies with growing revenues, but these aren’t normal times. If Canada’s economy is going to come out of the recession strong, we need to ensure the survival of growing sectors.

Finally, there’s the issue of smaller businesses and pre-revenue startups that may not qualify because they have no payroll or minimal payroll (for example because they pay themselves in dividends). It is true that paying yourself in dividends offers tax advantages in good times, which might make these cases seem less sympathetic. But there’s a matter of proportionality. This might save your typical small business owner paying herself in dividends rather than salary a percentage point or two on net in taxes – hardly the level of a Liberian-flagged cruise ship owner looking for a bailout after years of tax and regulatory avoidance.

There are other issues, too. Many of these same businesses are also excluded from the $40,000 emergency line of credit through the Canada Emergency Business Account. That program has its own set of criteria tied to having between $50,000 and $1,000,000 in annual payroll.  And employers need a stronger set of measures to address fixed business costs need a stronger set of measures (like a commercial rent abatement), so that businesses can prioritize their people over spends that generate no revenue.

Ultimately, the goal of these policies is to help as many businesses survive as possible and to keep those employment relationships intact. We want small barbershops to survive too, even if they don’t look like a traditional “employer” that pays regular wages. If we want to avoid losing a large number of small businesses to this shut down, we need to find ways to include them in programs designed for larger employers.

Adapting on the fly

The federal government has shown a strong willingness to adapt their economic response to this crisis quickly, and we have seen that already in the CEWS along with other programs. The legislation passed over the Easter weekend to make the wage subsidy possible gives flexibility to make further change without recalling Parliament.

They should move quickly to make further changes. We have seen massive job losses already. If we are going to reverse these, the program needs to have greater clarity for employers and fix the gaps that leave many small and growing businesses out.

Noah Zon is the co-founder of Springboard Policy, a public policy research and advisory firm based in Toronto. He has spent his career in public policy in the non-profit sector, think tanks and public service.