Unemployment insurance in Canada

Concluding an employment relationship does not always mark the end of an employer’s responsibilities. In Canada, former employees may be eligible for unemployment benefits, known as Employment Insurance (EI), which employers help fund through payroll contributions. Managing unemployment claims can be challenging and tedious. Without expert support and a clear understanding of who pays for unemployment and the rules surrounding claims, employers risk potential financial consequences.

What is unemployment insurance?

In Canada, unemployment insurance is called Employment Insurance, or EI . EI is a federal program that provides temporary financial support to eligible workers who lose their jobs through no fault of their own, such as layoffs, company restructuring or seasonal closures. EI benefits aim to help individuals cover basic expenses while they look for a new job or improve their skills.

How does employment insurance work?

To qualify for EI, individuals must have worked a specified number of insurable hours in the past year and be actively seeking employment. Once approved, recipients receive payments for a limited period based on their insurable earnings and the unemployment rate in their province or territory.

Applicants must also submit biweekly reports confirming they are available for work and actively searching for employment. Failure to meet these conditions could result in delayed or suspended payments. 

Who pays for unemployment benefits?

In Canada, both employers and employees contribute to EI through payroll deductions collected by the Canada Revenue Agency (CRA). Each year, the federal government sets the maximum annual insurable earnings and corresponding EI premium rates. Once an employee’s earnings reach the maximum for the year, no further EI contributions are deducted from their pay, and employers stop contributing for that employee as well. These maximums and rates are reviewed annually, so it’s important for employers to check the Government of Canada’s EI premium rates and maximums for current figures. 

Understanding various types of unemployment benefits

In addition to regular EI benefits, there are specialized benefit programs designed to support employees during key life events or unexpected challenges:
 

• Regular EI benefits provide temporary income support for individuals who are unemployed, while they look for new work.
• Sickness benefits offer short-term financial assistance to those who cannot work due to a medical condition.
• Maternity and parental benefits support new parents during the weeks surrounding childbirth or adoption. Maternity benefits are available for birth mothers, while parental benefits can be shared between parents and may be taken as standard or extended options.
• Fishing benefits are tailored for self-employed or seasonal workers in Canada’s fishing industry. These benefits provide income support during periods when work is not available due to the seasonal nature of the job.
• Compassionate care benefits support people who take time off to care for critically ill family members.

Why employees may be ineligible for EI

Understanding why a former employee may not qualify for EI can help you manage expectations and ensure accurate documentation. Common reasons for ineligibility include:

• Voluntary resignation without cause: If an employee quits without a valid reason, they may not be entitled to benefits.
• Termination due to misconduct: Employees dismissed for reasons such as theft, insubordination or policy violations may be denied EI.
• Insufficient insurable hours: If an employee hasn’t worked enough insurable hours during the qualifying period, their claim could be rejected.
• Failure to meet ongoing requirements: Employees must submit biweekly reports and actively look for work. Not doing so can result in a loss of benefits.

Employers should ensure that records of employment (ROEs) clearly and accurately explain the reason for separation, as those details are critical when Service Canada determines eligibility. 

Employer responsibilities

Employers are required to accurately calculate EI deductions on every pay cheque, issue ROEs promptly when employment ends and maintain detailed payroll records. Not meeting these obligations can lead to penalties or audits by the CRA. Beyond compliance, being proactive with training HR and payroll teams on EI requirements may significantly reduce errors and administrative stress.

An employer’s responsibility doesn’t stop at issuing an ROE. It includes guiding employees to official resources when they have questions, ensuring accuracy in all employment records and approaching the claims process with empathy.

How unemployment claims affect employers

Employers often wonder how unemployment claims influence their business, especially when considering who pays unemployment taxes. While EI premiums are set annually and are not directly affected by individual claims, the administrative impact can be significant. Issuing accurate ROEs, responding to Service Canada inquiries and maintaining compliance all require time and attention.

Providing inaccurate information can result in delays for employees, create disputes and harm your employer brand. By handling EI claims professionally and empathetically, you show current and former employees that your organization values people, even in difficult moments. 

What does an unemployment claim cost an employer?

Unlike other business expenses, the cost of EI is predictable because it is tied to payroll deductions rather than claim volume. Employers pay a fixed percentage of insurable earnings set by the government. While you don’t pay additional fees when an employee files a claim, the indirect costs, such as administrative time and potential legal consultations, can add up if your organization frequently deals with terminations. Proper workforce planning, accurate recordkeeping and strong HR policies can help minimize these costs.

What happens after an employee files an unemployment claim?

After an employee files for EI, Service Canada reviews the claim and the ROE. In some cases, they may contact the employer for additional details regarding the reason for separation. Payments to the employee generally begin within a few weeks, provided all information is accurate and complete.

For employers, this stage is about cooperation and clear communication. Promptly answering any follow-up questions and ensuring documentation is complete helps speed up the process for employees and can reduce administrative back-and-forth.

Navigate payroll taxes with confidence

Payroll taxes can feel complex, but the right knowledge makes compliance simpler. Read Payroll taxes: What they are and how they work to gain clarity and actionable insights. 

FAQs

This article is intended to be used as a starting point in analyzing how unemployment works and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and provides the understanding that ADP does not render legal or tax advice or other professional services.