Managing employee vacation entitlements requires diligence and good policies
When it comes to the HR and employment law compliance challenges that organizations face — and there are many — properly managing vacation time and vacation pay can be one of the most daunting. That’s because many organizations struggle to fully understand employee vacation entitlements, largely due to the plethora of common misconceptions surrounding provincial employment standards legislation. HR lawyer Joel Smith takes a look at best practices and pitfalls involved in managing vacation time and pay for employees.
While we all love to take time away from the office, business owners, managers and HR professionals must take care to ensure employees are provided with their legislated minimum vacation entitlements while also carefully tracking and documenting that time to avoid costly compliance issues that could result in everything from fines to legal challenges. In addition, policies and employment agreements should distinguish between vacation time and pay to avoid inadvertently granting vacation pay accrual to employees during unpaid leaves. Understanding how to deal with vacation accrual during leaves of absence is another priority area.
While managing employee vacation pay and time may seem like an administrative nightmare, in reality, it’s fully manageable with a proactive, strategic and well-organized approach. That’s important at a time when employee entitlements have emerged as a key factor in employee attraction, retention and engagement initiatives, particularly among organizations in fierce competition for top talent in their industry.
The discussion is even more relevant in the context of recent employee-friendly trends on the vacation front, such as an increase in statutory vacation entitlements for longer-service employees in provinces such as Ontario. The same is true at the federal level, where changes to the Canada Labour Code that came into effect on Sept. 1, 2019 extended employee vacation entitlements, among other employment standards enhancements.
Then there’s the emergence of a new entitlement trend, particularly among knowledge-economy businesses aiming to glean a competitive advantage by building appealing workplace cultures and benefit packages: unlimited vacation time.
A progressive (and risky) approach to employee vacation benefits
Although an appealing employee-friendly perk, unlimited paid vacation time presents several compliance challenges.
First, employers must be sure they still meet legislative requirements, such as record-keeping related to vacation time and pay, while also calculating vacation pay in the manner required by legislation, even if unlimited vacation is offered. In addition, employers must ensure that employees take their minimum vacation time entitlement and receive their minimum vacation pay entitlements. Employers also can’t rely on offering unlimited vacation to avoid other legal obligations — even if the unlimited vacation is deemed to provide greater value than the entitlement they are seeking to contract out of. For example, employers generally can’t contract with their employees to provide unlimited vacation in lieu of paying overtime pay required by statute.
Beyond legislative requirements, employers must carefully consider whether unlimited holidays are practical and make sense based on the operational realities of their business model. A retailer or manufacturer requiring a consistent staff presence in the workplace at set hours to provide customer service or operate machinery, for example, will not be able to permit workers to come and go as they please. In contrast, a software development company may have greater flexibility in allowing employees to take vacation when and how they prefer.
Common misconceptions between vacation pay and vacation time
Employers must understand that vacation time and vacation pay are separate concepts under each Canadian jurisdiction’s employment standards legislation. Failing to understand and reflect that fact in policies and agreements can create significant exposures.
It’s common for employers to state in their workplace policies and agreements that employees are entitled to a certain amount of “paid vacation time” per year, rather than separating vacation time and pay. In many cases, those types of policies and agreements will result in the employer unintentionally guaranteeing that the employee will be entitled to that amount of paid vacation each year, regardless of whether they take unpaid leave. Why?
In Ontario, as in many other provinces, the Employment Standards Act, 2000 (ESA) provides that vacation time accrues during both active employment and while the employee is off work on an ESA-protected leave. However, vacation pay is only earned under the ESA when the employee is earning wages, because vacation pay is a function of the wages earned by the employee.
Practically, this means that an employee on an unpaid leave under the ESA (such as parental leave, for example) will continue to accrue vacation time throughout the leave, but they will not accrue vacation pay during that period. However, if an employer provides in its policies or employment agreements that its employees are entitled to a certain amount of paid vacation per year without differentiating between vacation time and pay, the employer may unintentionally be providing for vacation pay to accrue during unpaid leaves in excess of the ESA’s requirements. Employers can easily avoid this risk by ensuring policies and agreements are clear that vacation time and pay are separate entitlements that do not always accrue at the same time.
Vacation time is a right, not a privilege
As most employers in Ontario know, provincially regulated employees earn vacation time during each “vacation entitlement year” under the ESA, which is a recurring 12-month period. Many employers opt to align the vacation entitlement year with their fiscal year or the calendar year for ease of administration.
Employees are required to take — and employers are required to ensure employees take — their vacation time entitlement under the ESA for a given vacation entitlement year by 10 months after the end of the entitlement year in which the vacation time was earned. Many employers mistakenly believe that obligation means they must allow their employees to take the vacation any time before the end of that period — and can’t require the employee to take the vacation by an earlier date, say, through limits on vacation carryover.
However, Ontario’s ESA specifically permits employers to require employees to take vacation time at any time of the employer’s choosing. For example, under the ESA, employers could require all of their employees to take their statutory vacation entitlement at the exact same period every year. While employers generally don’t exercise that right given the potential negative impact on morale and the organization’s employer brand, doing so is legally permitted. This also means that employers can require their employees to take their vacation entitlement in the year it is earned. They don’t have to allow employees to take vacation time that accrues in a given vacation entitlement year until 10 months after the end of that year. Although employers must ensure vacation is taken by that time, they can require that the vacation be taken sooner.
It’s also very common for employers to provide vacation pay to hourly and part-time employees on every pay as it accrues, whereas salaried employees more commonly receive vacation pay when they take the corresponding vacation time. This is allowed under the ESA, as long as the employee agrees in writing to be paid accrued vacation pay in each pay period.
Many employers believe that since they pay part-time and hourly employees vacation pay in every pay period, those employees are not entitled to vacation time. They believe that as long as they are paying out the vacation pay, they’re satisfying their vacation-related obligations to those employees. However, this is another misconception. Part-time and hourly employees are entitled to vacation time, just as salaried employees are. The only difference is that employees who agree to receive vacation pay as it accrues are not paid when they take their vacation time, since it is paid throughout the year — they instead take their vacation time unpaid.
It’s worth noting that some employees who receive vacation pay in each pay period won’t want to take their vacation time. Some, such as those living “paycheque to paycheque,” may feel they can’t afford to take unpaid vacation time at all. However, the employer is nonetheless required under the ESA to ensure that employees use their entitlement, regardless of whether the employee wants to or not. That is unless they and the employee agree to go through the burdensome administrative process of applying to the Director of Employment Standards for approval for the employee not to take their vacation time.
When it comes to managing vacation time and pay, employers should be proactive in reviewing their policies and procedures to ensure full legislative compliance. They should also ensure that those policies align with the operational requirements of their business model, while still appealing to the talent they need to attract to remain competitive and grow.
It’s a relatively simple step that helps limit risk and avoids the threat of both legal challenges and administrative penalties.
About the Author
Joel Smith is a lawyer with Williams HR Law in Markham, Ont., where he practises management-side labour, employment and human rights law. He can be reached at (905) 205-0496 ext. 224 or [email protected]