Federal Government Publishes Proposed Regulations for the new federal Pay Equity Act

Long time Focus Alert readers will recall that in late 2018, the federal government tabled and passed Bill C-86, the Budget Implementation Act, 2018, No. 2 which, amongst other things, introduced the new Pay Equity Act (the “Act”) in an effort to ensure that all workers subject to its provisions receive equal pay for work of equal value, regardless of their gender. Briefly, the Act requires subject employers – or their pay equity committee, as applicable – to prepare and implement a proactive pay equity plan within three (3) years of its coming into force. Initially expected to take place sometime this year, the coming into force of the Act is now instead supposed to occur later in 2021.

Despite this delay in implementation, the federal Minister of Labour announced in November 2020 the publication of the proposed Pay Equity Regulations (the “Regulations”) in the Canada Gazette, Part I. The Regulations, which are required in order to support the implementation of the Act, will be subject to an extended comment period of 60 days – to January 13, 2021 – before they are finalized and published in the Canada Gazette, Part II. It is expected that the Regulations will come into force on the same date as the Act or upon registration, whichever is later.

Overview of the Act

Before delving into the substance of the proposed Regulations, a brief review of the Act and of its requirements is useful.

The Act applies to federally regulated public and private sector employers – some of which are unionized – who are considered to have between 10 and 99 employees, or 100 or more employees. Subject employers or the pay equity committee, as applicable, are responsible for developing a pay equity plan for employees that identifies any pay equity gaps that exist between predominantly male and female job classes in order to determine what the employer must pay to close those gaps.

Under the Act, the creation of a pay equity committee made up of employer and employee representatives will be mandatory in many circumstances, including in all non-unionized workplaces of over 100 employees and in all unionized workplaces of over 10 employees. However, even where a pay equity committee is not mandated, subject employers can choose to create one. Further, once an initial plan is developed in accordance with the provisions of the Act, subject employers must also form a pay equity committee within five (5) years in order to make sure that pay equity was maintained and to update the plan.

Once in effect, the Act, as well as all regulations made under it, will be administered by a Pay Equity Commissioner (“Commissioner”) at the Canadian Human Rights Commission who will bear a broad range of enforcement powers, from investigations and proactive audits to order-making powers and the authority to implement administrative monetary penalties. Any orders or decisions of the Commissioner will remain subject to judicial review or appeals to the Canadian Human Rights Tribunal.

Establishing a Pay Equity Plan under the Act

Briefly, the major steps involved in the establishment of a pay equity plan are the following:

1. Identification of job classes found within the workplace, being groups of positions that have similar duties, responsibilities and qualifications, are part of the same compensation plan and are within the same range of salary rates.
2. Determination of gender predominance (i.e., female- or male-predominant, or gender neutral) of each of those job classes. In order for gender predominance to be found, one of the following must apply:

• • At least 60% of the positions in the job class are occupied by one gender,
  • Historically, at least 60% of the positions in the job class were occupied by one gender, or
  • The job class is one that is commonly associated with women or men due to gender-based occupational stereotyping.

3. Determination of the value of work and calculation of the compensation associated with each gender predominant job class based on a composite of the skill, effort and responsibility required to perform the work and the conditions under which the work is performed, including any form of remuneration payable for the work performed by an employee (e.g., salaries, commissions, vacation pay, severance pay, bonuses, benefits and employer contributions to pension funds).
4. Comparison of the compensation associated with female-predominant and male-predominant job classes of similar value in order to determine which female-predominant job classes require an increase in compensation using either the equal average method, the equal line method or, if neither of those methods can be used, another method appropriate to compare compensation and approved by the Commissioner within the Canadian Human Rights Commission. Briefly:

• • The equal average method involves dividing up all predominantly male and female job classes into “bands” (i.e., ranges of job classes that are of equal or comparable value) and then comparing the average compensation of all predominantly female job classes within a band with the average compensation of all predominantly male job classes within that band, or a neighbouring band or bands, as the case made be. A predominantly female job class will be owed an increase in compensation if the average compensation of all the predominantly female job classes in a band is less than the average compensation of the male job classes they are compared to, and the compensation of that particular predominantly female job class is below the male average.
  • The equal line method involves creating two (2) regression lines: one for all the predominantly female job classes and one for all the predominantly male job classes. Each line represents the relationship between the job values and hourly rates of compensation. When the female regression line falls below the male regression line, all predominantly female job classes whose compensation is below the male regression line will be owed an increase in compensation.

5. Setting out of when any increases in compensation will be due, and
6. Posting of a draft pay equity plan and allowing employees to provide comments before posting a final version.

Proposed Pay Equity Regulations

Before the Act can properly come into force, regulations are needed in order to prescribe the key elements necessary to allow all stakeholders – from employers to bargaining agents to employees – to fulfill their respective obligations under the new legislative framework. The proposed Pay Equity Regulations (or “Regulations”) are draft regulations that aim to do just that by providing clarification and/or direction as to the following matters:

1. Requirements regarding posting of documents in the workplace,
2. Time limits for applications and notices with the Commissioner,
3. The mathematical factor for each of the compensation comparison methods,
4. The steps to follow when regression lines cross under the equal lines method,
5. Methods for developing a pay equity plan when there are no predominantly male job classes, and
6. The process for updating pay equity plans (maintenance).

Below is a detailed summary of the specific contents of the Regulations as they relate to these matters.

a) Requirements regarding posting of documents in the workplace

Under the Act, employers must post a number of different types of documents in the workplace including notices, drafts and final versions of their initial and updated pay equity plans, documents issued by the Commissioner and the result of any Canadian Human Rights Tribunal inquiries into questions of law or jurisdiction.

With respect to the posting of documents in the workplace, the Regulations:

• Require employers to make all postings available in either printed form or electronically, and in a format that is accessible to all employees to whom the posting relates,
• Mandate that posting be clearly dated,
• Lay out requirements related to the posting of draft and of final pay equity plans, including that a draft pay equity plan must remain posted for at least 60 days, whereas a final pay equity plan must remain posted until an updated version is posted,
• Require that a notice be posted by an employer or group of employers stating their obligations under the Act be posted as soon as they become subject to it and remain posted until their pay equity plan (draft or final version) is posted or, in cases where they decide to join or leave a group of employers, until they post a notice setting out their new obligations,
• Require that decisions, orders, notices of violations or other documents issued by the Commissioner, as well as decisions issued by the Canadian Human Rights Tribunal, remain posted for the duration specified by either the Commission or the Tribunal, respectively, and
• Require that notices of an increase in compensation remain posted until the later of the sixtieth day after it is posted or the day on which the increases to which the notice relates are paid in full.

b) Time Limits for Applications and Notices with the Pay Equity Commissioner

The Act provides for a variety of applications and notices that must be submitted to the Commissioner throughout the pay equity process by employers and, in certain cases, by bargaining agents or employees.

The Regulations set time limits for the applications and notices provided for under the Act. Specifically, as it relates to applications:

• An employer filing an application to the Commissioner for authorization to phase in increases in compensation over a longer phase-in period than the one set out in the Act would have to do so no later than the day before the day on which the employer posts the notice of increases in compensation.
• An employer, bargaining agent or non-unionized employee who wishes to establish more than one pay equity plan for the same employer would have to apply to the Commissioner within 12 months of the employer becoming subject to the Act.

In addition, as it relates to notices:

• An employer or group of employers who wish to voluntarily establish a pay equity committee to develop or update a pay equity plan would be required to submit a notice to the Commissioner within 60 days of notifying employees of their intention to establish a committee.

c) Mathematical Factors for Comparing Compensation

The Act requires that employers or the pay equity committee, as applicable, compare the average compensations between predominantly female and male job classes to identify and address any existing pay equity gaps in the workplace.

The Regulations set out the formulae for both the equal average method and the equal line method such that:

• The size of the increase in compensation owed to each eligible female-predominant job class can be determined, and
• Proportional adjustments can be made so that female job classes further below the average male compensation in a band (for the equal average method) or below the male regression line for a given job value (for the equal line method) would receive larger increases in compensation.

The prescribed formulae accomplish this by generating a factor with a value between 0 and 1 with which to calculate each female job class increase. A factor of 1 would result in a job class receiving an increase equal to the full difference in compensation identified, while factors of between 0 and 0.99 would result in a job class receiving an increase equal to a percentage of that difference. For example:

A factor of 0.6 = Increase equal to 60% of the difference for the job class

A factor of closer to 1 would be generated for a female job class further below the average male compensation in a band or male regression line, whereas female job classes above the average male compensation in a band or above the male regression line would not receive an increase in compensation whatsoever. Of note, compensation may not be decreased under any circumstances for any job class under the pretext of achieving pay equity.

d) Steps to Follow when Regression Lines Cross under the Equal Line Method

In some cases, the use of the equal line method during the compensation comparison analysis can yield a result where part of the female regression line rests higher than part of the male regression line. When this occurs, the Act requires the employer or pay equity committee, as applicable, to use the methods set out in the Regulations.

The Regulations lay out the steps to be followed in cases where regression lines cross under the equal lines method as follows:

1. If the calculation and application of increases in compensation through the use of the equal line method does not result in the male and female regression lines crossing, all of the steps required to establish or update a pay equity plan will be complete.
2. If, however, the calculation and application of increases in compensation through the use of the equal line method does result in the male and female regression lines crossing, the employer or pay equity committee must choose one of the following three (3) methods set out in the Regulations:

• • The equal average method, applied as set out in section 49 of the Act,
  • The segmented line approach, which sees the employer or pay equity committee divide all of the job classes that were used to draw the initial male and female regression lines into two segments, using the point where the lines cross as the dividing line. The employer or pay equity committee would then apply the equal line method to the job classes in each segment separately to draw and compare two new sets of male and female regression lines, or
  • The sum of differences approach¸ which determines increases owed to female job classes below the male regression line by multiplying the differences in compensation between the compensation of these job classes and the compensation these job classes would have received if they were on the male line (i.e., same job value but higher amount of compensation) by the factor determined using the prescribed formula so that the sum of those differences equals the sum of the differences for all the female job classes above the male line and the compensation those job classes would have received if they were on the male line (i.e., same job value but lower amount of compensation). Using this approach, pay equity is achieved when the average compensation of all female job classes is equal to what their average compensation would be if they were on the male regression line. This means that just as female job classes in a band will not receive increases in compensation where the female average is above the male average using the equal average method, when using the sum of differences method, female job classes will not be eligible for an increase if the sum of the differences for female job classes above the male line is equal to or larger than the sum of differences for female job classes below the male wage.

Of note, where the segmented line approach results in either set of regression lines crossing again, the employer or pay equity committee will have no choice but to use one of the other two methods available to them, being the equal average or sum of differences.

e) Method for Developing a Pay Equity Plan when there are no Predominantly Male Job Classes

Because the concept of pay equity under the new legislative framework relies entirely on a comparison of compensation between predominantly male and predominantly female job classes of equal value, a male comparator is required.

Where there are no predominantly male job classes in a particular workplace, the Regulations allow employers without any such male comparators to choose, within applicable limits, between two methods for proceeding with the compensation comparison analysis:

• The proxy method, which requires the employer or pay equity committee to select three (3) or more predominantly male job classes from another organization or business covered by the Act and to develop “proxy” male job classes in their plan, or
• The typical job classes method, which requires the employer or pay equity committee to use three (3) fictional predominantly male job classes (maintenance worker, technician, and manager) set out in the Regulations to complete their plans.

As it relates to the proxy method specifically, the Regulations set out the requirements that must be met by both the employer of the proxy workplace and the employer or pay equity committee without a male comparator. In particular, to serve as a proxy workplace, the employer of that workplace would need to be subject to the Act, have identified at least three (3) predominantly male job classes, calculated the compensation associated with each of those job classes, and agreed to provide data regarding the value of work and the compensation of the predominantly male job classes selected by the employer or pay equity committee without a male comparator. The Regulations further set out the criteria that must be taken into account by the employer or workplace without a male comparator so as to ensure the selection of a proxy workplace that is similar to their own.

Once in receipt of the necessary information from the proxy workplace, the employer or pay equity committee without a male comparator will then be able to proceed with the establishment of a pay equity plan as required by the Act. More specifically, they will be required to value the work, to calculate the compensation of the proxy male job classes as if they were job classes within the employer’s business or organization, and then to compare the results of this exercise to the predominantly female job classes using either the equal average or equal line method to determine if any increases are owed.

For employers who instead elect to proceed using the typical job classes method, the Regulations:

• Include general job descriptions including duties and responsibilities, as well as employment requirements (e.g., certification, education, experience) for each typical job class,
• Include specific requirements regarding the determination of hourly salary and calculation of compensation (e.g., the need to include benefits) for each of the typical job classes, and
• Adapt the steps for establishing a plan that is set out in the Act in order to allow an employer to value the work and calculate the compensation of the fictional male comparators as if they were part of the employer’s business or organization.

Once an employer or pay equity committee has created their male comparators using the typical job classes method, they will be required to compare them to the predominantly female job classes using either the equal average or equal line method to determine if any increases are owed.

Of note, the Regulations also require the employer or pay equity committee to identify if they used either the proxy or typical job classes methods in their pay equity plan.

f) Process for Updating Pay Equity Plans (Maintenance)

In order to remain in compliance with the Act, the employer or the pay equity committee, as applicable, must update their pay equity plan at least once every (5) years.

The Regulations contain additional details on the proper conduct of a maintenance review, including the following requirements:

• That any pay equity gaps found during the maintenance process be closed by adjusting the compensation of the predominantly female job class that is paid less than the predominantly male job classes of equal or comparable value, and
• That employers make retroactive lump-sum payments for any pay equity gaps found, as well as any owing wage adjustments as needed, beginning once the updated pay equity plan is posted.

In addition, the Regulations set out in great detail the step-by-step process for updating pay equity plans:

1. Data Collection

The employer or pay equity committee must collect data in the form of “snapshots” – being point-in-time data sets (e.g., gender predominance of a job class, compensation of a job class) – that the Regulations would deem representative of the workplace for a one-year period and use these snapshots as the basis of the pay equity analysis.

Except for the final set (i.e., the last snapshot used to develop the pay equity plan), snapshots must be collected in the public sector by no later than every March 31, and in the private sector by no later than December 31 or the date of the employer’s fiscal year end.

The employer or pay equity committee is at liberty to choose the exact date on which the final set is to be collected but once chosen, the updated plan must be posted within one (1) year of the selected date.

2. Data Analysis

The employer or pay equity committee must then carry out a pay equity analysis using the data collected in each snapshot and identify any changes that are likely to have impacted pay equity since the posting of the initial or most recently updated plan, or the previous snapshot, whichever is most recent. In cases where new rates of pay come into effect retroactively within the same maintenance cycle, such as where a new collective agreement is given retroactive application, the new rates of pay are to be used in analyzing the snapshot.

The types of changes that must be identified during this analysis include:

• Changes to job class structure, including the creation or elimination of a gender-predominant job class or the merger or two or more gender-predominant job classes,
• Changes to gender predominance, including any of the following:
  • A gender-predominant job class that became non-gender-predominant,
  • A male-predominant job class that became female predominant,
  • A female-predominant job class that became male-predominant, or
  • A non-gender-predominant job class that became gender-predominant,
• Changes to duties, responsibilities and working conditions of a gender-predominant job class that are significant and that impact the majority of the positions in the job class for more than a temporary period (in order to determine if these led to any change in the value of the work performed), and
• Changes to compensation, on a percentage of compensation basis.

3. Compensation Comparison

Should any changes be noted during the pay equity analysis process, the employer or pay equity committee is then required to conduct a compensation comparison in order to identify and quantify any resulting pay equity gap.

In certain circumstances, employers will be permitted to phase in adjustments to the compensation of a female-predominant job class made under the initial plan. Where this occurs and overlaps with the maintenance cycle, the employer or pay equity must calculate compensation for the purposes of the compensation comparison as if all phased-in increases have already been made.

Where a workplace includes more than one bargaining unit, the Regulations provide two (2) default approaches to comparing compensation between job classes covered by a collective agreement that has not yet expired (i.e., “active”) and job classes affected by a statutory freeze under the Federal Public Sector Labour Relations Act or the Canada Labour Code due to the expiry of their collective agreement (i.e., “frozen”). When conducting a compensation comparison involving both types of job classes, the employer or pay equity committee will generally use the historical analysis approach, unless the criteria for the use of the “administrative rate approach” apply, as detailed below:

• The historical analysis approach requires that the employer or pay equity committee find the most recent year when 50% or less of the gender-predominant job classes that represent 50% or less of the population covered by the pay equity plan were subject to a statutory freeze, and then compare compensation based on rates of pay for that year, using the administrate rate approach (described below) to model a rate of pay for those “frozen” job classes.
• The administrative rate approach is only to be used by the employer or pay equity committee in situations where 50% or less of the gender-predominant job classes that represent 50% or less of the population covered by the are subject to a statutory freeze. In such cases, the employer or pay equity committee would model an administrative rate of pay for “frozen” job classes by applying an adjustment factor equal to the average of all wage increases negotiated by all job classes (including gender-neutral ones).

Though the Regulations allow a pay equity committee to agree by vote to opt-out of the above default approaches, they would nonetheless remain subject to a regulatory duty to negotiate reasonable measures to address the comparison between active and frozen rates of pay issue in doing so.

In Our View

Given the extensive work that they will face once the Act and Regulations do eventually come into force in order to ensure both initial and ongoing legislative compliance, subject employers should be mindful to familiarize themselves with their obligations under the new federal pay equity regime now so that they can better prepare for and manage them once they are actually required to do so.

For further questions related to the new federal pay equity regime or for more information on your rights and obligations as an employer subject to it, please contact Raquel Chisholm at 613-940-2755, Carole Piette at 613-940-2733 or Mélissa Lacroix at 613-940-2741.