Vacation Time and Vacation Pay Made Simple for Employers

Many employers find that understanding their employees’ vacation entitlement is complicated and often discover that they are not compliant with the Employment Standards Act (ESA).

This article will help you understand the statutory entitlements as set out under the ESA for vacation time and vacation pay. The ESA entitles employees to both vacation time and vacation pay as follows:

• Two weeks of vacation time and vacation pay (4% of gross wages) if the period of employment is less than five years
• Three weeks of vacation time and vacation pay (6% of gross wages) for employees with more than five years of service

Vacation pay is not only calculated using base salary. In Ontario vacation pay includes base pay, non-discretionary bonuses, commissions, overtime pay, holiday pay, termination pay, etc. However, the calculation for vacation pay does not include tips and gratuities, discretionary bonuses, or expenses.

The Employment Standards Act requires that employers ensure that their employees take their vacation within 10 months after the end of the vacation entitlement year for which it is given (i.e., within 10 months after each 12-month period during which an employee earns their vacation). This means the statutory vacation entitlement mandated by the ESA cannot be carried over to the following year and employees who have not taken their vacation time in the 10-month period must be paid out for their vacation.

However, if an employment contract provides a greater entitlement than the minimums required by the ESA, then an employer has the option to set out their own vacation policy allowing the employee to carry over the extra vacation time.

Vacation pay is typically provided as a lump sum before an employee takes the vacation time they have earned. Exceptions to this rule occur when:

• The vacation time being taken is less than one week
• The employee has agreed electronically or in writing that their vacation pay will be paid on each pay cheque as it accrues
• The employee agrees electronically or in writing to an alternative payment schedule
• The employer pays the employee their wages by direct deposit into an account at a financial institution.
  • In this case, the employee must be paid vacation pay on or before the pay day for the period in which the vacation falls.

Can an employer mandate when an employee takes their vacation time?

As an employer you may mandate when an employee must take their vacation, but you must do so within the guidelines of the ESA. Vacation time must be scheduled in one-week blocks and multiple weeks may be scheduled back-to-back.

An employee may request to take shorter periods but must submit the request in writing. An employer has the discretion to agree or deny such a request.

Employers must pay out unused vacation time upon termination

The ESA requires that upon termination, employers must pay employees for earned but unused vacation time. Similarly, if an employer allows an employee to take vacation time and vacation pay before it is earned, the employee may have to pay back any such advance. If an employee is entitled to termination notice or termination pay, they are also entitled to any vacation pay that accumulates during the notice period.

This article provides an overview of the most significant aspects of the Employment Standards Act requirements in regard to vacation time and vacation pay for employees. If you need assistance understanding the requirements, diving into more specific elements, or developing a vacation policy for your company, please contact HR Enable. We provide legal and HR consulting services, and we can guide you through the vacation requirements as outlined in the Ontario Employment Standards Act.