The federal government is running out of time to clear the backlog of public service pay transactions under the old Phoenix system, if it wants to avoid infecting the new payroll system with similar errors, Canada’s auditor general said in a new report on Monday.
The federal government is working to replace the error-prone Phoenix with a new system, Dayforce, and all departments and agencies are expected to move to the new platform by March 2031.
A new report from the Office of the Auditor General of Canada released Monday said the government has made “limited progress” on eliminating a backlog of pay transactions that stood at more than 233,000 and affected at least 133,000 employees as of Sept. 30, 2025.
The backlog includes all transactions that were not processed within service standards.
“This is very important because if the backlog is not cleared before the transition to Dayforce, there is a risk that existing errors will carry over and undermine the effectiveness of the new system,” said the report.
The report said the government earlier this year shortened the timeline for bringing departments and agencies under Dayforce by about three years, which “significantly” reduced the time available to clear the backlog.
It said this was done in part to mitigate the “complexities and costs” of operating two pay systems at the same time for several years.
“It will be important for Public Services and Procurement Canada to identify early on, monitor regularly, and mitigate the risks that a shortened schedule could create so as to avoid pay issues similar to the ones experienced from the deployment of Phoenix,” the report said.
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The Phoenix pay system, introduced in 2016, centralized pay services for most federal employees. Some public servants have since faced significant delays in receiving payments, while others have been underpaid, overpaid, or not paid at all.
The report concluded that the Treasury Board of Canada Secretariat had made “slow progress” on simplifying pay rules.
The report said Public Services and Procurement Canada has been customizing Dayforce to work without simplified pay rules. It said the government has asked Dayforce to develop three custom applications that would cost Ottawa about $4 million per year.
“Officials told us this was done so that the slow progress in simplification would not hinder the implementation of the new pay system,” the report said.
The report also said that while the government has estimated replacing Phoenix with Dayforce will cost more than $4.2 billion, preliminary estimates did not include costs for departments and agencies to transition to the new system.
The report added that in 2025, Public Services and Procurement Canada received $565.9 million in funding for two years to configure and test Dayforce for implementation.
The report said that as of September 2025, the government was developing detailed cost estimates.
At a news conference on Monday, Auditor General Karen Hogan said the $4.2 billion cost estimate to transition to Dayforce is “rough” and she expects the actual cost to be higher.
“I think this is an opportunity for the government to really think differently here and not just think in silos,” Hogan said.
“Think about the fact that every single department and agency will have to change the way they work, change their processes and onboard, and that comes at a cost.”
Joël Lightbound, minister of government transformation, public works and procurement, told reporters Monday that from 2018 until 2023, the government has invested $280 million to replace Phoenix with a new system, with $566 million budgeted into 2027.
“As for the detailed costing of the transition, this is being worked on at the officials level right now,” said Lightbound, who added that he accepted the auditor general’s findings.
He said it’s clear the system needs to be free of errors before the transition and there is still work to do.
In early 2023, the auditor’s report said, Public Services and Procurement Canada set a target of eliminating the backlog of all pay transactions that were one year old or older by March 2026. The auditor reports that, since then, the department’s internal reports through September 2025 have indicated it won’t meet the target.
More recently, the report said, the federal government has changed its approach from eliminating transactions older than a year to balancing three priorities.
They are: eliminating the backlog for the first departments and agencies to adopt Dayforce; processing all new transactions within service standards; and gradually eliminating the backlog for all other departments and agencies, starting with the oldest transactions that have the most financial impact.
The first departments and agencies expected to take on Dayforce in 2027 include the Canadian Nuclear Safety Commission, Shared Services Canada and Public Services and Procurement Canada.
The report said the government didn’t fully assess the potential downside of its plan to eliminate the overall backlog, starting with the first departments to adopt Dayforce.
It said the government should assess how the departments that are taking on Dayforce later will be affected and consider how future events — like a drop in the number of federal public servants — could affect the number of new pay transactions.
© 2026 The Canadian Press