Nine years after its launch, the federal government’s Phoenix Pay System remains plagued with errors, delays, and ballooning costs, leaving thousands of public servants struggling with financial uncertainty, according to a union representing federal workers.
What began as a $5.8 million contract with IBM has expanded to more than $650 million through over 50 contract amendments — yet public servants continue to report widespread payroll mistakes, incorrect T4s, and difficulties with tax agencies, according to a press release from the Professional Institute of the Public Service of Canada (PIPSC).
Labour groups warn that the federal government is repeating past mistakes by continuing to rely on private contractors for its payroll system rather than restoring in-house expertise.
“The government’s obsession with outsourcing has created a costly spiral of failure,” said Sean O’Reilly, PIPSC president. “After spending hundreds of millions on IBM for Phoenix, we’re now watching history repeat itself by once again choosing costly outsourcing for the new pay system, instead of leveraging in-house expertise.”
The backlog of unprocessed pay transactions has reached nearly 300,000 cases, with two-thirds lingering for more than a year, said O’Reilly. Meanwhile, federal budgets continue to allocate hundreds of millions to manage the crisis. The 2024 budget earmarked $135 million for HR improvements and the development of a new payroll system. This comes on top of the $517 million allocated in 2023 and $521 million in 2024 to maintain Pay Centre staffing, it said.
Nathan Prier, president of the Canadian Association of Professional Employees (CAPE), said the government ignored early warnings about the risks of outsourcing payroll services.
“From day one, we warned about the risks of outsourcing such a critical system,” Prier said. “A rush to find the cheapest option has now cost Canadians more than $3.5 billion and counting.”
Prier noted that 30 per cent of public servants still experience payroll errors, with some waiting years for corrections to promotions, transfers, and retirement benefits. CAPE is calling on the federal government to renew a damages agreement to compensate affected employees, accusing the Treasury Board of delaying action.
Public sector unions argue that the failure of Phoenix highlights the risks of outsourcing essential government functions. Prier pointed to the 2014 elimination of 1,200 experienced pay advisors in favour of a centralized system with 550 new positions—a move that, he said, contributed to ongoing payroll issues.
“The results speak for themselves,” he said. “Public servants have the expertise, dedication, and understanding of complex government operations that external contractors simply cannot match.”
As the federal government moves toward a next-generation payroll system, unions are urging it to rethink its approach and reinvest in internal payroll expertise to prevent another costly failure.
