Key Components to Setting Up Payroll: Part 1 – Pay Frequencies
Key Components to Setting Up Payroll: Part 2 – Employee Payment Methods
Key Components to Setting Up Payroll: Part 3 – Process, Workflows and Approvals
Key Components to Setting Up Payroll: Part 4 – Payroll Journal
Key Components to Setting Up Payroll: Part 5.1 – Company Payroll Policies
Key Components to Setting Up Payroll: Part 5.2 – Payroll Policies, Full-Time Equivalency (FTE)
Key Components to Setting Up Payroll: Part 5.3 – Payroll Policies, Employment Type
Key Components to Setting Up Payroll: Part 5.4 – Payroll Policies, Pay Type
Key Components to Setting Up Payroll: Part 5.5 – Payroll Policies, Work Schedules
Key Components to Setting Up Payroll: Part 5.6 – Payroll Policies, Overtime & Banked Time
Key Components to Setting Up Payroll: Part 5.7 – Vacation
Key Components to Setting Up Payroll: Part 5.8 – Sick Days
Key Components to Setting Up Payroll: Part 5.9 – Personal Days
This article is written to provide the reader with an understanding of what the different Employment Types are and why it is important to have them defined when setting up your payroll.
In the previous article we discussed that FTE is one of the two components that defines an employee’s (or position’s) classification. In this article, we are going to discuss the second component which is the expected duration of their employment (“Classification”). It is important to note that Employee Classifications in practice should be determined on the position itself, as this ensures everyone who is employed in the same position are treated equally (i.e. Server, HR Analysts, Accountants, Warehouser, etc).
The Canadian Federal Government has 4 employment types defined which are Permanent, Temporary, Casual, and Contract. In some instances, companies have further defined another category called Term employment. Please keep in mind that these terminologies can vary between companies.
For purposes of being simple and clean, we are going to define these and recommend using them in your business when setting up your employee’s positions and company payroll.
There are various reasons why classifications are important, those reasons include:
- to confirm the employees expected duration of their employment
- confirm what company programs, policies, benefits, etc. they will be eligible to receive
- helps financial institutions (such as banks) determine if someone is eligible to take out a loan or mortgage and that the individual will have steady income coming in, so it’s important classifications are easy and clear to understand.
For example: When someone is employed as a “salary employee”, what does that mean? Does it mean they are employed with no expected end date or with an expected end date on a salary basis?
Most legal or benefit provider agreements use the term permanent to define which employees their contracts apply too. You want to make employment types as simple and easy to understand as possible, as not every external organization or new employee is going to know what your company’s administration practices are. Remember KISS, Keep it Short and Simple!
Permanent Employees are defined as Full Time/Part Time (FT/PT) employees who do not have an expected employment end date and are generally eligible to receive full company benefits and incentives. Permanent employees can either be paid a salary or hourly wage rate.
Term Employees are defined as FT/PT employees with an expected employment end date, generally 12 months or more. These employees receive the same types of benefits and incentives as permanent employees do, they can either be paid a salary or hourly wage rate.
Temporary Employees are defined as FT/PT employee who do have an expected employment end date, usually less than 12 months. These employees generally do not receive the same types of benefits and incentives as permanent/term employees do, as their employment is less than a year. Temporary employees are generally paid an hourly wage rate.
Casual Employees are defined as employees who do not have a set work schedule, who are neither FT/PT as they are generally employed on an as needed basis. This is common for employees who are retired or have another job. Casual employees do not receive any benefits or incentives that the other classifications receive, as they generally work less than part-time. They can either have an expected employment end date or not, usually paid an hourly wage rate or have a set daily pay rate.
Consultants/Contractors are defined as independent workers who are hired by the company by/under another third party company, meaning the individual is not hired directly by the company and are not covered under the company’s insurance plans. These workers can either be PT/FT and it is best practice to have a contract agreement with an end date signed, as the agreements generally protect the company and worker from any legal matters that would be normally covered under the company’s insurance plans. These employees are generally paid an hourly wage rate or daily pay rate and are not generally eligible to receive any company paid benefits or incentives since they are not employees hired by the company.
With that being said, Consultants/Contractors are still considered as part of the workforce, regardless of their classification and should be accounted for in the headcount as they are working for the company. It would be poor practice to not count them as part of the business’ headcount, which is common in some companies because they are not paid through the company’s payroll.
However, it is always best practice to keep track of Consultants/Contractors through contract management for your company, since they have a legal contractual obligation to the company to complete work for them.
Employee classifications are important to define, as it helps the company and HR/Payroll understand which employees/workers are eligible for company benefits and incentives. Below is a table that outlines what each classification generally is eligible to receive.
Please keep in mind that the table above is a general guideline, as each company administers their benefits and incentives differently and not all employee scenarios or company practices are accounted for.
You will notice the (*) next to some of the items in the table, this is because benefit and incentive eligibility is determined by an employee’s Full time Equivalent (FTE) or employment type with the company, every company administers their programs, policies, and agreements differently.
Now that we understand what employment types are, including FTE and why they should be defined, stay tuned for part 5.4 of this series when we discuss Salary and Hourly pay types, which is important to consider defining when setting up your payroll.
Download this resource article Key Components to Setting up Payroll: Part 5.3 – Payroll Policies, Employment Type (pdf).