VII. THE PRIMARY DISTRIBUTION OF INCOME ACCOUNT
B. Compensation of employees (D.1)
1. Introduction
| 7.21. | Compensation of employees is recorded under uses in the generation of income account and under resources in the allocation of primary income account. Compensation of employees is defined as:
the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period.
Compensation of employees is recorded on an accrual basis; i.e., it is measured by the value of the remuneration in cash or in kind which an employee becomes entitled to receive from an employer in respect of work done during the relevant period, whether paid in advance, simultaneously or in arrears of the work itself. No compensation of employees is payable in respect of unpaid work undertaken voluntarily, including the work done by members of a household within an unincorporated enterprise owned by the same household. Compensation of employees does not include any taxes payable by the employer on the wage and salary bill - for example, a payroll tax. Such taxes are treated as taxes on production in the same way as taxes on buildings, land or other assets used in production. |
| 7.22. | It is not always self-evident whether a worker is an employee or self-employed: for example, some workers paid by results may be employees while others may be self-employed. It is necessary, therefore, to clarify the nature of the employment relationship in order to fix the boundary between compensation of employees and other kinds of receipts. The boundary also affects the sub-sectoring of the household sector. |
The employment relationship
| 7.23. | In order to be classified as occupied - i.e., employed or self-employed - the person must be engaged in an activity that falls within the production boundary of the System. Unoccupied persons consist of the unemployed and persons not in the labour force. The relationship of employer to employee exists when there is an agreement, which may be formal or informal, between an enterprise and a person, normally entered into voluntarily by both parties, whereby the person works for the enterprise in return for remuneration in cash or in kind. The remuneration is normally based on either the time spent at work or some other objective indicator of the amount of work done. |
| 7.24. | Self-employed workers, on the other hand, are persons who are the sole owners, or joint owners, of the unincorporated enterprises in which they work, excluding those unincorporated enterprises that are classified as quasi-corporations. The self-employed are persons who work for themselves, when the enterprises they own are neither distinguished as separate legal entities nor separate institutional units in the System. Self-employed persons receive mixed incomes and not compensation of employees. It is useful to clarify the status of certain categories for whom it may not always be obvious as to whether they are employees, self-employed or unoccupied.
(a) Workers engaged in production undertaken entirely for their own final consumption or own capital formation, either individually or collectively, are self-employed. Although a value may be imputed for the output of own-account production based on costs, including estimated labour costs, no imputation is made for the wages of workers engaged in such production, even in the case of collective, or communal, projects undertaken by groups of persons working together. The surplus of the imputed value of the output over any monetary costs or taxes on production explicitly incurred is treated as gross mixed income;
(b) Unpaid family workers, including those working in unincorporated enterprises engaged wholly or partly in market production, are also treated as self-employed;
(c) The whole of the equity of a corporation may be owned by a single shareholder or small group of shareholders. When those shareholders also work for the corporation and receive paid remuneration other than dividends, they are treated as employees of the corporation. The owners of quasi-corporations are also treated as employees when they work in those quasi-corporations;
(d) Outworkers may be either employees or self-employed depending on their exact status and circumstances. The treatment of outworkers is specified in more detail below;
(e) Students in their capacity as consumers of educational or training services are not employees. However, if students also have a formal commitment whereby they contribute some of their own labour as an input into the enterprise's process of production - for example, as apprentices or similar kinds of worker trainees, articled clerks, student nurses, research or teaching assistants, hospital interns, etc. - they are treated as employees, whether or not they receive any remuneration in cash for the work which they do. |
Employers and own-account workers
| 7.25. | Self-employed persons may be divided into two groups: those with and those without paid employees of their own. Those with paid employees are described as employers and those without paid employees are described as own-account workers. The distinction is used for purposes of sub-sectoring the household sector. Own-account workers may be further subdivided into outworkers who are under some kind of formal or informal contract to supply goods or services to a particular enterprise, and ordinary own-account workers who may be engaged in either market production or production for own final consumption or own capital formation. |
Outworkers
| 7.26. | An outworker is a person who agrees to work for a particular enterprise or to supply a certain quantity of goods or services to a particular enterprise, by prior arrangement or contract with that enterprise, but whose place of work is not within any of the establishments which make up that enterprise. The enterprise does not control the time spent at work by an outworkeR&Does not assume responsibility for the conditions in which that work is carried out, although it may carry out checks on the quality of work. Most outworkers work at home but may use other premises of their own choice. Some outworkers are provided by an enterprise with the equipment or materials, or both, on which they work, but other outworkers may purchase their own equipment or materials, or both. In any case, outworkers have to meet some production costs themselves: for example, the actual or imputed rent on the buildings in which they work; heating, lighting and power; storage or transportation; etc. |
| 7.27. | Outworkers have some of the characteristics of employees and some of the characteristics of self-employed workers. The way in which they are to be classified is determined primarily by the basis on which they are remunerated. A distinction can be drawn between two cases which, in principle, are quite different from one another:
(a) The person is remunerated directly, or indirectly, on the basis of the amount of work done-i.e., by the amount of labour that is contributed as an input into some process of production, irrespective of the value of the output produced or the profitability of the production process. This kind of remuneration implies that the worker is an employee; or
(b) The income received by the person is a function of the value of the outputs from some process of production for which that person is responsible, however much or little work was put in. This kind of remuneration implies that the worker is self-employed. |
| 7.28. | In practice it may not always be so easy to distinguish between employees and self-employed on the basis of these criteria. Outworkers who employ and pay others to do the same kind of work must be treated as the self-employed owners of unincorporated enterprises: i.e., as employers. The issue, therefore, is to distinguish own-account workers from employees. |
| 7.29. | An outworker is considered an employee when there exists an employment relationship between the enterprise and the outworker of the kind described in paragraph 7.22 above. This implies the existence of an implicit or explicit contract or agreement whereby it is agreed that the outworker is remunerated on the basis of the work done. Conversely, an outworker is considered to be an own-account worker when there is no such implicit or explicit contract or agreement and the income earned by the outworker depends on the value of the goods or services supplied to the enterprise. This suggests that decisions on markets, scale of operations and finance are likely to be in the hands of outworkers who are also likely to own, or rent, the machinery or equipment on which they work. |
| 7.30. | The status of an outworker has important implications for the accounts. When the outworker is an own-account worker, the payment from the enterprise to the outworker constitutes a purchase of intermediate goods or services. When the outworker is an employee, the payment constitutes compensation of employees and is therefore paid out of the value added of the enterprise. Thus, the outworker's status affects the distribution of value added between enterprises as well as the distribution of incomes between compensation of employees and net mixed income. |
The components of compensation of employees
| 7.31. | Compensation of employees has two main components:
(a) Wages and salaries payable in cash or in kind;
(b) The value of the social contributions payable by employers: these may be actual social contributions payable by employers to social security schemes or to private funded social insurance schemes to secure social benefits for their employees; or imputed social contributions by employers providing unfunded social benefits. |
Wages and salaries (D.11)
| 7.32. | Wages and salaries include the values of any social contributions, income taxes, etc., payable by the employee even if they are actually withheld by the employer for administrative convenience or other reasons and paid directly to social insurance schemes, tax authorities, etc., on behalf of the employee. Wages and salaries may be paid in various ways, including goods or services provided to employees as remuneration in kind instead of, or in addition to, remuneration in cash. |
Wages and salaries in cash
| 7.33. | Wages and salaries in cash include the following kinds of remuneration:
(a) Wages or salaries payable at regular weekly, monthly or other intervals, including payments by results and piecework payments; enhanced payments or special allowances for working overtime, at nights, at weekends or other unsocial hours; allowances for working away from home or in disagreeable or hazardous circumstances; expatriation allowances for working abroad; etc.;
(b) Supplementary allowances payable regularly, such as housing allowances or allowances to cover the costs of travel to and from work, but excluding social benefits (see below);
(c) Wages or salaries payable to employees away from work for short periods, e.g., on holiday or as a result of a temporary halt to production, except during absences due to sickness, injury, etc. (see below);
(d) Ad hoc bonuses or other exceptional payments linked to the overall performance of the enterprise made under incentive schemes;
(e) Commissions, gratuities and tips received by employees: these should be treated as payments for services rendered by the enterprise employing the worker, and should therefore also be included in the output and gross value added of the employing enterprise when they are paid directly to the employee by a third party. |
| 7.34. | Wages and salaries in cash do not include the reimbursement by employers of expenditures made by employees in order to enable them to take up their jobs or to carry out their work. For example:
(a) The reimbursement of travel, removal or related expenses made by employees when they take up new jobs or are required by their employers to move their homes to different parts of the country or to another country;
(b) The reimbursement of expenditures by employees on tools, equipment, special clothing or other items that are needed exclusively, or primarily, to enable them to carry out their work.
The amounts reimbursed are treated as intermediate consumption by employers. To the extent that employees who are required by their contract of employment to purchase tools, equipment, special clothing, etc., are not fully reimbursed, the remaining expenses they incur should be deducted from the amounts they receive in wages and salaries and the employers' intermediate consumption increased accordingly. Expenditures on items needed exclusively, or primarily, for work do not form part of household final consumption expenditures, whether reimbursed or not. |
| 7.35. | Wages and salaries in cash also do not include unfunded employee social benefits (see chapter VIII, paragraphs 8.80) paid by employers in the form of:
(a) Children's, spouse's, family, education or other allowances in respect of dependants;
(b) Payments made at full, or reduced, wage or salary rates to workers absent from work because of illness, accidental injury, maternity leave, etc.;
(c) Severance payments to workers or their survivors who lose their jobs because of redundancy, incapacity, accidental death, etc.
In practice, it may be difficult to separate payments of wages or salaries during short periods of absence due to sickness, accidents, etc., from other payments of wages and salaries, in which case they have to be grouped with the latter. |
| 7.36. | Unfunded employee social benefits are not a form of remuneration because they are paid selectively to individual employees when certain events occur, or certain conditions exist, that are unrelated to the amount of work done by the employee. However, as explained below, an amount equal to the value of the additional contingent liabilities that employers incur by undertaking to provide such benefits to their employees out of their own resources, should the need arise, must be treated as a form of compensation made collectively to their employees. |
Wages and salaries in kind
| 7.37. | Employers may remunerate their employees in kind for various reasons. For example:
(a) There may be tax advantages for the employer, the employee, or both by avoiding payments in cash;
(b) The employer may wish to dispose of outputs which are periodically in excess supply;
(c) The nature of the work may require frequent, or prolonged, absence from home so that the employee has to be provided with accommodation, travel, etc. |
| 7.38. | Income in kind may bring less satisfaction than income in cash because employees are not free to choose how to spend it. Some of the goods or services provided to employees may be of a type or quality which the employee would not normally buy. Nevertheless, they must be valued consistently with other goods and services. When the goods or services have been purchased by the employer, they should be valued at purchasers' prices. When produced by the employer, they should be valued at producers' prices. When provided free, the value of the wages and salaries in kind is given by the full value of the goods and services in question. When provided at reduced prices, the value of the wages and salaries in kind is given by the difference between the full value of the goods and services and the amount paid by the employees. |
| 7.39. | Goods or services that employers are obliged to provide to their employees in order for them to be able to carry out their work are treated as intermediate consumption by the employer: for example, special protective clothing. A list of such items is given in paragraph 6.162 of chapter VI. Remuneration in kind, on the other hand, consists of goods and services that are not necessary for work and can be used by employees in their own time, and at their own discretion, for the satisfaction of their own needs or wants or those of other members of their households. |
| 7.40. | Almost any kind of consumption good or service may be provided as remuneration in kind. The following includes some of the most common types of goods and services provided without charge, or at reduced prices, by employers to their employees:
(a) Meals and drinks, including those consumed when travelling on business;
(b) Housing services or accommodation of a type that can be used by all members of the household to which the employee belongs;
(c) Uniforms or other forms of special clothing which employees choose to wear frequently outside of the workplace as well as at work;
(d) The services of vehicles or other durables provided for the personal use of employees;
(e) Goods and services produced as outputs from the employer's own processes of production, such as free travel for the employees of railways or airlines, or free coal for miners;
(f) Sports, recreation or holiday facilities for employees and their families;
(g) Transportation to and from work, car parking;
(h) Creches for the children of employees. |
| 7.41. | Some of the services provided by employers, such as transportation to and from work, car parking and creches have some of the characteristics of intermediate consumption. However, employers are obliged to provide these facilities to attract and retain labour, and not because of the nature of the production process or the physical conditions under which employees have to work. On balance, they are more like other forms of compensation of employees than intermediate consumption. Many workers have to pay for transportation to and from work, car parking and creches out of their own incomes, the relevant expenditures being recorded as final consumption expenditures. |
| 7.42. | Remuneration in kind may also include the value of the interest foregone by employers when they provide loans to employees at reduced, or even zero rates of interest for purposes of buying houses, furniture or other goods or services. Its value may be estimated as the amount the employee would have to pay if average mortgage, or consumer loan, interest rates were charged less the amount of interest actually paid. The sums involved could be large when nominal interest rates are very high because of inflation but otherwise they may be too small and too uncertain to be worth estimating. |
Employers' social contributions (D.12)
| 7.43. | An amount equal to the value of the social contributions incurred by employers in order to obtain social benefits for their employees needs to be recorded as compensation of employees. Employers' social contributions may be either actual or imputed. They are intended to secure for their employees the entitlement to social benefits should certain events occur, or certain circumstances exist, that may adversely affect their employees' income or welfare - sickness, accidents, redundancy, retirement, etc. Social benefits are described in chapter VIII, and also in annex IV at the end of this manual. |
Employers' actual social contributions (D.121)
| 7.44. | These consist of social contributions payable by employers for the benefit of their employees to social security funds, insurance enterprises or other institutional units responsible for the administration and management of social insurance schemes. Although they are paid by the employer directly to the social security fund or other scheme, the payments are made for the benefit of the employees. Accordingly, employees should be treated as being remunerated by an amount equal to the value of the social contributions payable. This imputed remuneration is recorded in the generation of income account as a component of compensation of employees. Employees are then recorded as paying social contributions of equal value as current transfers to social security funds, other schemes, etc., in the secondary distribution of income account. |
Employers' imputed social contributions (D.122)
| 7.45. | Some employers provide social benefits themselves directly to their employees, former employees or dependants out of their own resources without involving an insurance enterprise or autonomous pension fund, and without creating a special fund or segregated reserve for the purpose. In this situation, existing employees may be considered as being protected against various specified needs or circumstances, even though no payments are being made to cover them. Remuneration should therefore be imputed for such employees equal in value to the amount of social contributions that would be needed to secure the de facto entitlements to the social benefits they accumulate. These amounts depend not only on the levels of the benefits currently payable but also on the ways in which employers' liabilities under such schemes are likely to evolve in the future as a result of factors such as expected changes in the numbers, age distribution and life expectancies of their present and previous employees. Thus, the values that should be imputed for the contributions ought, in principle, to be based on the same kind of actuarial considerations that determine the levels of premiums charged by insurance enterprises. |
| 7.46. | In practice, however, it may be difficult to decide how large such imputed contributions should be. The enterprise may make estimates itself, perhaps on the basis of the contributions paid into similar funded schemes, in order to calculate its likely liabilities in the future, and such estimates may be used when available. Otherwise, the only practical alternative may be to use the unfunded social benefits payable by the enterprise during the same accounting period as an estimate of the imputed remuneration that would be needed to cover the imputed contributions. While there are obviously many reasons why the value of the imputed contributions that would be needed may diverge from the unfunded social benefits actually paid in the same period, such as the changing composition and age structure of the enterprise's labour force, the benefits actually paid in the current period may nevertheless provide the best available estimates of the contributions and associated imputed remuneration. |
| 7.47. | The two steps involved may be summarized as follows:
(a) Employers are recorded, in the generation of income account, as paying to their existing employees as a component of their compensation an amount, described as imputed social contributions, equal in value to the estimated social contributions that would be needed to provide for the unfunded social benefits to which they become entitled;
(b) Employees are recorded, in the secondary distribution of income account, as paying back to their employers the same amount of imputed social contributions (as current transfers) as if they were paying them to a separate social insurance scheme. |
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