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Legislative Compliance

How to Calculate Vacation Pay

Facts and myths about calculating vacation pay 

Our experts have plenty of experience answering questions about vacation pay, and these answers often involve dispelling common myths. The most prevalent myth is that employee vacation entitlements exist on a “use it or lose it” basis. Handbooks or policies tell employees that unused vacation expires at the end of the vacation year, and they’ll forfeit it. This myth is so ingrained that each December many employers experience a rush of employees submitting requests to use up earned vacation before it’s lost. 

Let’s explore the “use it or lose it” myth, the facts, and some best practices to ensure compliance. 

Vacation pay standards and legislation 

Each jurisdiction sets minimum employee vacation entitlements in its employment standards legislation. For example, in Ontario, it’s the Employment Standards Act, 2000. Federally regulated businesses’ vacation entitlements are specified in the Canada Labour Code. 

Whatever the jurisdiction, the applicable employment standards legislation requires that all employees receive vacation pay and vacation time. Vacation time and vacation pay are related but calculated and accrued differently, so it’s important to understand them as distinct entitlements. 

How much vacation time do employees get? 

Each jurisdiction is different. For example, in Ontario, employees with less than five years of employment get two weeks of vacation time after each 12-month vacation entitlement year. Employees with five or more years of accrued service get three weeks. Ordinarily, a vacation entitlement year is a recurring 12-month period beginning at an employee’s hire date, or it may be a common year the organization picks, such as the calendar year or a fiscal year. Refer to the legislation specific to your jurisdiction to ensure you’re observing the vacation entitlement year applicable to your business. 

Employment standards legislation also specifies a minimum period in which the employer must ensure employees take their earned vacation. For example, in Ontario, an employee must take their vacation time within 10 months of completing that year; in British Columbia, the period is 12 months. 

The most important aspect of any vacation policy is to be legislatively compliant. Depending on the jurisdiction, unused vacation time can only be forfeited if an employee has had the full opportunity to take their vacation time within their vacation entitlement period. While there are limited jurisdictions and situations where vacation time may be forfeited, statutory minimum entitlements to vacation pay can never be forfeited. Vacation pay is considered part of an employee’s earned wages. 

How much is vacation pay? 

Vacation pay is a payment issued to employees, providing a sum they can draw upon during their scheduled vacation time. Some employment standards legislation allows vacation pay to be calculated and paid to employees within each pay period if the employee and employer agree. It’s important to note that even with such an agreement, employees are still entitled to the vacation time; it’ll just be unpaid when they take it. 

Vacation pay is calculated as a percentage of an employee’s gross wages during the applicable vacation entitlement year. In Ontario, vacation pay accrues at a rate of: 

  • Four percent of wages (excluding vacation pay) for employees with less than five years of employment, where the vacation time entitlement is two weeks; and 
  • Six percent of wages (excluding vacation pay) after five years of employment, with a vacation time entitlement of three weeks. 

Again, it’s important to ensure you understand the vacation pay rate that applies to your organization under your jurisdiction’s employment standards legislation. The earnings or wages included in the calculation can also vary across jurisdictions. In Ontario, “wages” include payments like salary, commissions, overtime pay, public holiday pay, and termination pay. They do not include expenses, discretionary bonuses, or severance pay. Of note, under Alberta’s Employment Standards Code, vacation pay is not earned on overtime pay or general holiday pay. 

Do employees accrue vacation entitlements while on vacation or protected leaves? 

It’s important to note that employees continue to accrue vacation time when they’re away from work because of a temporary layoff, sickness or injury, or any protected leave that doesn’t result in a break in service (for example, pregnancy leave, parental leave, or family responsibility leave). In other words, vacation time accrues during both active and inactive service. Depending on the jurisdiction, vacation pay may accrue during leaves, too, such as in Ontario, where the employee continues to earn wages during the leave. If a leave is unpaid, the employee accrues a percentage of zero wages, which is still zero vacation pay. 

Is vacation time mandatory? 

The purpose of vacation time is to ensure employees take time off work. Employers must ensure that employees take their vacation time and receive their vacation pay. In limited circumstances, employment standards legislation permits an employee to forgo their vacation time. However, doing so doesn’t affect the employee’s right to vacation pay. 

In Ontario, for example, an employee can forgo some or all of their earned vacation time. This can only happen with the employer’s electronic or written agreement and the approval of the director of employment standards. This approval doesn’t affect the employer’s obligation to pay the employee vacation pay. Employees may give up vacation time, but not the right to statutory minimum vacation pay. 

Debunking vacation pay myths 

Myth: Part-time and casual employees are not entitled to vacation time. 

Fact: All employees under employment standards legislation are entitled to earn both vacation time and vacation pay, regardless of their employment status. 

Myth: Employees can’t be forced to take vacation; they have earned the vacation, so it’s their right to decide whether they wish to use it. 

Fact: While employees may request to take their vacation time any time after it’s earned, you have the final say on when they can take that time. In most jurisdictions, you must also ensure employees use their statutory vacation entitlements within the allotted period. Depending on the jurisdiction, you may have notice requirements when scheduling an employee’s vacation time. 

Myth: When a worker’s employment ends, they give up any outstanding vacation pay. 

Fact: Vacation pay is money earned based on a percentage of earnings. Any earned but unused vacation pay must be paid at the end of employment in accordance with the timeframes outlined in the employment standards legislation. 

Myth: Vacation time must be used by December 31 each year. 

Fact: Under employment standards legislation in all jurisdictions, employees must take their vacation within the allotted timeframe after it’s earned, allowing for exceptions where an employee may be on an extended, protected leave. 

Myth: If you offer your employees more vacation time and pay than the employment standards minimum, you can pay an employee for unused vacation time only up to the employment standards minimum if they resign from their employment. 

Fact: Vacation pay is considered wages earned. You cannot reduce or require an employee to forfeit wages earned, so you cannot “fall back” to the legislative minimums if you commit to more in your policy. 

Tips for managing employee vacations 

To ensure compliance with jurisdictional vacation requirements, consider the following best practices. 

Set out vacation entitlements and obligations in writing 

Clearly address employee vacation rights and obligations in writing. By taking this step, either in a written employment agreement or a policy (brought to the employee’s attention), you can set parameters for taking vacation and minimize the risk of later disputes. 

Use a written policy to address the following aspects of employee vacation rights and requirements: 

  • The employee’s annual entitlement to vacation time and vacation pay; 
  • How and when vacation pay is calculated and paid; 
  • The steps an employee must take to request vacation time; 
  • How far in advance vacation time must be requested; 
  • Any period when vacation is prohibited (for example, if your business is particularly busy during April each year, you may refuse vacation requests during that time); and 
  • Your discretion to refuse a vacation request based on operational needs. 

Report and record vacation accrual clearly 

Having a clear vacation policy is only half an employer’s responsibility. It’s critical to track vacation entitlements consistently and accurately (eligible vacation time and pay versus actual vacation time and pay used). This is necessary to establish transparency and ensure compliance with employment standards legislation. An employer’s inability to show that vacation pay has been properly accrued and paid may result in statutory or contractual liability. 

Caution: All the above information presumes there is no contract with the employee containing specific rights regarding vacation. All the above information represents minimum standards, but some employment contracts may provide more than the minimum standards. For example, some contracts provide more vacation time than the minimum requirement. Others may have more generous terms for when and how vacation can be taken. Check your employees’ contracts to understand your rights and obligations regarding vacation time and pay to any employee. 

Vacation pay and employer responsibilities 

  • If you allow an employee to use more vacation time than they’ve earned, and the employee resigns from their employment before earning all the vacation time they used, you must follow the applicable employment standards legislation on whether, when, and how you can deduct from their wages. This may include getting a written or electronic consent from the employee to deduct money owing from their last payroll. 
  • The key to managing employees’ vacation entitlements is to have a process in place to schedule them. You could also establish a window of opportunity when employees must request vacation periods for the year (for example, by January 31 of each year). Advise employees that if they don’t specify preferred vacation dates, you’ll assign vacation periods to them. 

Still have questions about how vacation pay is calculated?  

We can help. At Citation Canada, we understand the importance of concise vacation reporting and recordkeeping. We offer clients tailored solutions for: 

  • Live HR advice when you need it, with professional consulting support for your biggest projects and tightest deadlines. 

Schedule a demo or explore our conveniently priced packages today. See how we can streamline your HR strategy with our industry-leading support, services, and secure, Canadian-made HRIS, Atlas. Partner with Citation Canada and experience the difference that comes from having a trusted HR leader by your side. 

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