Ever since Germany introduced the first mandatory sickness and accident insurance schemes for employees in the 1870s, payroll departments have played a major role in delivering the social welfare systems of nations. And the employer’s role in social security has expanded significantly in the last 30 years: No longer limited to collecting insurance contributions from pay and passing the cash to the relevant authorities, payroll today is often responsible for creating the basic social security administration records, as well as paying mandated benefits to employees on behalf of the system.
The first task often assigned to payroll teams is the creation of the social security record itself, a requirement to record and report data that may play no part in the payroll calculation, but instead allows the social security system to allocate rights to individuals. An example of this would be the recording of NI-taxable earnings in the UK, which must be recorded and reported across three earnings bands in a format determined by the UK government’s computer system. In contrast, Ireland requires employers to record “Insurable Weeks” for each pay period processed, meaning that payroll systems have to allocate the number of weeks processed as part of the payroll calculation. These are recorded under a class and subclass of Social Insurance, which in turn are used to calculate benefits (the key threshold being at least 39 insurable weeks in a year). Failure to record and report this information correctly can impact an employee’s entitlement to benefit payments, an issue that may not be realized until after the salary payment has been made. Poland’s system goes one better and actually requires employers to keep all relevant data on the Platnik software issued for this purpose to act as a back up to the government’s own system for a minimum of 10 years (down from the previous requirement of 50 years!).
National social security schemes are designed to cover defined life event risks, such as:
- Accidents at work
- Maternity and parental leave
- Health insurance
- Long-term nursing care insurance
- Unemployment insurance
- Retirement pensions
Even employees in the best of health are likely to experience at least some of these events, and it is likely that the social security system of their home countries will step in to ensure they continue to receive an income. While coverage levels vary markedly from country to country, the basic aims of the systems are consistent – and it’s important for employers to understand their role in delivering these benefits. For global organizations with employees across multiple countries, understanding the employer responsibilities is essential. Here’s an overview of social security schemes across a handful of prominent locations and what they mean for employers.
Regardless of location, the most commonly experienced event is sickness, which can mean anything from a couple days off for a heavy cold to more serious long-term absences. In France, the entitlement to pay from the employer is determined by the national collective bargaining agreement that covers the employee. General minimums, however, are set by the national law:
- First three days: no entitlement to pay
- Next four days: social security funds a payment of 50% of pay, capped at €45.01 per day (half of 1.8 times the minimum wage)
- Next 30 days: employer pays 90% of pay, of which they may recover 50% of ordinary salary from the social security authorities, limited to €45.01 per day
- Next 6 months: employer pays 66% of pay, which is reimbursed by the social security authority to a maximum of €60.02 per day
- If still unable to return to work, the employer pays 50% of the employee’s salary for a maximum of three years total leave, which may be reimbursed by social security up to a maximum daily amount of €45.01
The employer must first verify that the employee has been certified sick by a doctor, then pay the employee the total amount due and claim reimbursement of the portion covered by social security through a regular declaration. The amounts owed are paid back to the employer by the social security authority; they cannot be deducted against contributions owned on other employees’ salaries. Note that the employee’s actual entitlement to sick pay may exceed the amount recoverable from social security because of entitlements due under a collective bargaining agreement. In such a case, the payroll function will need to be able to reckon the total entitlement versus the recoverable amount, initiate claims to obtain the reimbursement due, and allocate these funds to the correct cost center upon receipt.
Employers in France are lucky to be guaranteed a substantial reimbursement, as that’s not always the case. In some countries, employers must pay employees during sickness absence without any possibility of reimbursement. One example of this is the UK, where an employer is required to pay Statutory Sick Pay for up to 28 weeks for any employee who earns at least £116 per week. It is little comfort that the amount is relatively small (currently £92 per week), as the amount of administration involved is not insignificant. Employers must verify doctor’s evidence of the incapacity, check pay records in the eight weeks prior to the absence to confirm entitlement, and issue documentation at the end of the 28 weeks to allow the next stage of social security support to start.
Another country in which employers bear the cost of employee sick leave is the Netherlands. Employment law requires the employer to pay, on average, 70% of the regular salary for absences of up to two years. Only when that period has elapsed may the employer consider dismissing the employee on the grounds of ill health. And the employer’s responsibilities do not stop there. All absences longer than four weeks must be reported to the social security authority (UWV), at which point a reintegration plan must be created. The primary focus of the plan is to get the employee back to their old job, by making reasonable adjustments to working practice, environment, or hours, as necessary. If this is not possible, the company must try to source another job internally for the employee. If that doesn’t work, the employer must take steps to assist the employee in finding a job with another company (such as re-training). This stage must be commenced by the time the employee has been absent for one year. During the whole of the absence, the employer must submit regular progress reports to the UWV, which must be produced by suitably qualified occupational health practitioners. The point of all this administration is to determine the social security support available to the individual at the end of the two-year period of absence. Using the reports provided by the ex-employer, UWV look to see whether the individual is capable of earning at least 65% of their previous income before ill health struck. If yes, they are expected to take a job. If not, then an ill health pension is payable by the state.
Hong Kong and Singapore
Many countries take the approach of requiring employers to pay the costs of sick leave, similar to the UK, although this is most often done where employers do not contribute a specific social insurance payment. Examples include Hong Kong and Singapore, where support for sick leave is part of employment law. Hong Kong requires employers to accrue two paid sick leave days for each month of service in the first year of employment, increasing to four days per month thereafter, up to a maximum of 120 days of paid sick leave. The days are paid at the rate of 80% of average daily pay, so payroll systems will often act as the calculator for the accrued entitlement. The Singapore system allows employees with at least six months service to be paid for 14 days sick leave taken at home, with a further 60 days if the employee is hospitalized. Labour Inspectors, rather than a social security authority, are responsible for enforcing these rules.
The Irish approach is a complete contrast to that taken by the UK. On the Emerald Isle, all benefits provided to employees under the social security scheme, such as sick, maternity, and paternity benefit, are paid directly to the individual rather than via the employer. Furthermore, these benefits are exempt from Universal Social Charge and PRSI, although they are subject to income tax. This raises some important questions for employers who offer generous contractual provision for covered life events. Should the employer reduce any contractual payment by the amount of state support to ensure the employee is not better off during the absence? (Most Irish employers agree yes.) How will the employer verify the level of state support? And should they take into account that the replacement benefit is exempt from USC and PRSI whereas the ordinary salary is not?
Sometimes the employer has a choice to make concerning social security provision, as is the case with payment of Employment Insurance premiums in Canada. The law sets a basic premium of 1.62% of salary, up to a maximum of $53,100, for the employee to contribute, with the employer paying 1.4 times the employee’s premium. However, if the employer implements a paid sick leave plan, this multiplier could be reduced to between 1.274 and 1.163 times the employee’s premium, depending on the level of sick pay provided. The logic for providing the discount is that the employee receives sick pay from the employer, instead of Illness Benefits provided by the state under Employment Insurance coverage.
Another example of the state allowing an employer to supplement mandatory public provision with a private alternative can be found with medical insurance offerings in Japan. Any employer with at least five employees must enroll their employees in a health and nursing care insurance program, which is offered by the government for a premium of 4.96% of salary, paid by both the employee and employer, to cover at least 70% of medical and dental expenses. However, the employer may opt out of the standard government scheme once they have been in business for at least 12 months and provided they put an alternative in place which is at least as good.
Such schemes are often operated on an industry-wide basis, which allows for a lower premium as the risk pool is better defined. Consider the example of Kanto ITS, who provide health insurance for the IT industry. A quick look at the benefits offered by the Kanto scheme versus the government scheme shows the advantage of the private insurance:
|Benefits||Government Scheme||Kanto ITS|
|Medical expenses||70%||70% + monthly cap on employee payment of ¥20,000|
|Maternity grant||¥420,000||¥420,000 - 510,000|
|Additional||None||Discounts at hotels, resorts, sports facilities, and a yearly Disneyland ticket|
Maternity and parental leave is another critical area in which the employer may act as the state’s agent. Looking again to the UK and Netherlands, both countries place the burden of sick pay on the employer’s shoulders but allow the employer to recover most or all of any maternity pay from the social insurance authorities. The UK allows the employer to recover 92% of any Statutory Maternity, Adoption, or Paternity Pay by netting the recovery against monthly remittance of National Insurance – a task that will fall to the payroll department to perform. Additionally, the system allows for a further variant: Parents may now share maternity leave after an initial absence by the mother, and the father’s employer must give Shared Parental Pay and leave from work to comply. As the father’s employer does not typically employ the mother, the system is based on taking employee declarations on trust – although the employer is expected to undertake basic administration and gather evidence of the relationship between Mom and Dad and the circumstances for the leave claim before making recovery of 92% of the amounts paid out. Again, it’s a significant commitment to undertake.
It’s clear that social security administration is now a firm part of the payroll role around the world. If your company is moving into new territories, due diligence questions should be asked about the extent of your obligations, what costs might be placed on the company (and therefore possible accrual numbers required from payroll software for this liability), and whether there are options to opt out of state provision with alternative private arrangements. Employers must understand who is responsible for each of the process – and ensure that their global payroll team is prepared and equipped for the role it must play.