Navigating the Impact of Rising Interest Rates on Employee Salaries

Employee Salaries and the Impact of Rising Interest Rates


The recent decision by the Bank of Canada to raise interest rates has sent ripples of concern to employers and business owners across the country. As of 2021, according to a Statistics Canada consumer pricing report, inflation rose by 3.7% on a year-by-year basis in July. And in June of 2022, inflation within North America continued to rise by 9.1%, forcing companies and corporations to grapple with the potential financial strain that these interest rate and rising inflation hikes may impose. Among the many significant areas of particular concern, including modifying group benefits insurance plans, is how these changes will impact employee salaries. A salary budget survey by WorldatWork released in 2021 projected a 3.3% average and 3% median increase in salary budgets in 2022, demonstrating that businesses in Canada are required to maintain financial security while contending with these ever-growing rises in interest and hikes in salaries to align with the new cost of living. As businesses strive to sustain a competitive edge and retain their valuable workforce, finding solutions to address the challenges posed by rising interest rates becomes crucial.

Ascertain the specific ways in which these interest rate hikes affect employee salaries by examining the dilemma faced by employers who must balance the need to retain talented employees with the financial constraints imposed by inflation. Through careful exploration of the tax advantages, flexibility, affordability, and positive impact on employee well-being, businesses can navigate the challenges posed by rising interest rates while maintaining a motivated and loyal workforce.



Impact on Salaries

As interest rates increase, businesses often find themselves struggling to keep up with rising costs. This can result in a difficult decision for employers: how to balance the need to retain valuable employees while managing the financial strain caused by inflation. Increasing salaries to match inflation rates may not be feasible for some companies, as it attracts additional taxes, employment insurance (EI), and Canada Pension Plan (CPP) premiums.


Exploring Alternatives: Health Spending Account (HSA)

One potential solution to mitigate the negative impact on salaries is the introduction of a Health Spending Account (HSA). Unlike traditional salary increases, an HSA offers several benefits that can address the financial challenges faced by businesses and employees alike.


Tax Advantages

A significant advantage of implementing an HSA is its tax structure. Contributions made by employers toward an HSA are 100% tax-deductible for the company. Additionally, the funds allocated to an employee’s HSA are 100% tax-free for the employee. By using an HSA, employers can avoid additional taxes, EI, and CPP premiums associated with salary increases, thereby maximizing the value of the allocated funds.


Flexible Allotment

Unlike fixed salary scales, an HSA allows employers to determine the exact amount they can afford to contribute. This flexibility enables companies to adjust their financial commitments based on their current financial situation. Instead of increasing salaries uniformly, employers can allocate varying amounts to individual employees based on their needs and the company’s capabilities. This tailored approach ensures a fair distribution of benefits while considering the company’s financial constraints.



Implementing an HSA can be a more affordable option for businesses, especially smaller companies. By careful budgeting and determining the maximum contribution that aligns with their financial capacity, employers can provide valuable benefits to employees without incurring additional financial strain. This affordability aspect makes an HSA an attractive alternative to increasing salaries.


Employee Well-being

Apart from the financial advantages, an HSA can significantly contribute to employees’ well-being. Health expenses, such as medical treatments, dental care, or vision care, can be covered by the HSA funds. This provides employees with a greater sense of security and helps alleviate some financial burdens they may face in their personal lives. By promoting employees’ overall well-being, companies can enhance job satisfaction, productivity, and employee retention.



The Bank of Canada’s decision to raise interest rates undoubtedly poses challenges for businesses and corporations, particularly when it comes to modifying current group benefits insurance, in addition to raising employee salaries to accommodate rising inflation. However, alternatives like Health Spending Accounts offer a potential solution to mitigate the financial strain on both employers and employees. By leveraging the tax advantages, flexible allotment, and affordability of HSAs, businesses can provide meaningful benefits to their employees without incurring additional taxes, EI, and CPP premiums. Ultimately, adopting innovative approaches like HSAs can help businesses navigate the impact of rising interest rates while maintaining a healthy and motivated workforce.



At Health Risk Services, we help managers of benefits plans make strategic decisions to craft cost-effective personalized plans that can assist you and your organization in contending with the rising interest rates that are forcing companies to raise salaries and the viable solutions to this pressing issue. Whether the solution of preference for your company is adding additional support programs, renovating your existing coverage, or crafting intentional messaging, Health Risk is here to help!


To schedule your Complimentary Consultation with Health Risk Services, please call 403-236-9430 OR email: [email protected]