A look at some of the main challenges employers and payroll departments face
Employment standards rules can be a challenge for employers and payroll departments. One area that can test even the most seasoned payroll professional is vacations.
"We have lots of challenges," says Cheryl Ball, a payroll consultant with the Canadian Payroll Association (CPA), speaking about payroll professionals. She adds that the CPA handles queries about vacation requirements all year from payroll practitioners looking to better understand the rules.
Without a thorough understanding of the law and well-thought-out vacation policies, employers could face fines or penalties, says lawyer Karen Sargeant, a partner with Fasken Martineau in Toronto.
Although a vacation dispute on its own rarely ends up as an issue before the courts, she says, "that’s not to say it couldn’t be, particularly where employers have use-it-or-lose-it policies."
These policies require employees to take their vacation by a certain date or lose it. "Essentially, you can’t have these policies. They are not legal in Canada," says Sargeant.
Employment standards rules across Canada require that employees get a minimum amount of vacation time and vacation pay each year. In Ontario, for example, employees are entitled to at least two weeks’ vacation time each year after a full year of employment.
Employees also have a right to receive at least four per cent of the total wages they earned during the period of the vacation entitlement.
"If you simply have a use-it-or-lose-it policy (and) the employee has not received the vacation time or if they take no vacation, the result is they receive no vacation time or vacation pay," she says.
"If they made a claim (with Employment Standards) down the road, they would be successful," says Sargeant, adding, "That vacation pay continues to accrue even if you have a use-it-or-lose-it policy if the employee makes a claim for it. They truly can’t lose it."
Sargeant recommends that employers revise vacation policies to remove use-it-or-lose-it provisions. If employers really want to keep them, the policy must state that it is subject to the legislated minimums for vacation, she says.
"If you want to have a use-it-or-lose-it policy, make it clear that it is only the amount over and above the statutory minimums that you can lose," Sargeant says.
"For example, in Ontario, if you’ve got an employee who is entitled to four weeks’ vacation, you can say, ‘You lose the two weeks over and above the statutory minimums if you haven’t taken that.’"
The policy must also clearly distinguish between the amount the employer is required to provide and the amount the employer is actually providing.
"If you don’t distinguish between a statutory minimum and what the person is actually getting, what they are actually getting could become the minimum at the employment practices branch that various ministries of labour would enforce," Sargeant says.
Another challenge is making sure payroll pays employees the correct amount of vacation pay. All jurisdictions require that employees receive at least four per cent of their earnings for vacation pay. Most jurisdictions increase the minimum to six per cent after a specified number of years (for example, after five years in Alberta). Ontario and Yukon are the only two jurisdictions that do not.
Saskatchewan’s requirements are slightly different. Labour standards legislation there states employers must pay employees 3/52s of their total earnings in the previous year as vacation pay, with the minimum rising to 4/52s after 10 years.
The difficulty for payroll can come from not seeing vacation time as separate from vacation pay, as the law requires, and paying employees their regular earnings for the time they are on vacation.
Regular earnings may be less than the amount of vacation pay to which an employee is entitled, depending on the types of earnings the employer has paid the employee.
"Wages (for calculating vacation pay) are defined quite broadly and include more than just base pay," says Sargeant.
"It all depends on what the definition of wages are in that province. They need to go to the provincial legislation. Some types of bonuses are included in the definition of wages — for example, bonuses that are dependent on production. Other bonuses, completely discretionary bonuses, for example, may not be included in the definition of wages."
To avoid problems, Ball says payroll practitioners must learn what is included and what is excluded from vacation pay in each of their jurisdictions.
Once they know the rules, they must ensure their system for tracking vacation pay is set up to include the correct types of earnings.
She suggests payroll practitioners visualize using a bucket to collect the types of earnings to include when calculating vacation pay. Each time payroll pays earnings subject to vacation accrual to an employee, payroll should add the earnings to the employee’s bucket.
At the end of the year, the bucket should be full of earnings that payroll will use to calculate the amount of vacation pay.
Even if payroll knows which earnings to include, there must be a system in place to ensure vacation pay is actually paid to employees.
Legislation across Canada generally requires employers to pay vacation pay when employees take their vacation.
If employers continue to pay employees their regular earnings instead of vacation pay for the vacation time, they could have to balance everything out at the end of the year.
"The problem is making sure that you meet the minimum employment standards and making sure that the bucket actually does that. Sometimes people will just be merrily going along and putting money in the bucket and putting money in the bucket, never emptying the bucket out. At the end of the year, they will have paid them these paid (vacation) days and they will have not emptied the bucket and then they will have to compare what’s truly been paid with what’s truly in the bucket."
Sargeant recommends that even if payroll departments think they are paying the right amount of vacation pay, they should do reconciliation at the end of the year to ensure employees have received the proper amount of vacation time and pay.
"For every employee, they should be doing a calculation at the end of the year saying, ‘Here’s the vacation pay we paid this person. Here’s four per cent of their total earnings. Do the two match? Have we paid them at least four per cent of their total earnings or more? If not, we should be making up the difference.’"
Although some employers may feel that separating vacation time from vacation pay in their policies is an extra administrative challenge, Sargeant says it has benefits.
This is particularly the case with employees coming back to work after a long, unpaid leave.
"Let’s take a maternity leave, for example, where someone is off from January 1 to December 31 and you don’t pay them," she says.
"At the end of that year, yes, they would be entitled to their three or their four — whatever the case may be — weeks of vacation time, but it could be unpaid. There is no vacation pay that you owe them. Six per cent or eight per cent of zero is zero."
If employers want to do this, she advises that they make sure their vacation policies clearly state that vacation time is treated differently than vacation pay.
Ball says it is imperative that employers properly communicate vacation policies to employees.
Employers should strive for "clearly written vacation policies that are consistent and applied fairly, making sure they are available in an employee handbook, for instance. The employee should acknowledge in writing that they understand the policies," she says.
Clear communication should extend to pay statements and payroll records. Payroll practitioners should specifically refer to vacation pay on pay statements when it is paid to employees and ensure that the payment is properly recorded in the employer’s records, says Ball.
"You don’t want to ever have a situation where an employee gets a little confused if you have no other outside information on their vacation accruals and their time taken. Someone may say, ‘Well, I don’t see any vacation on my pay statement. I didn’t take any time this year.’ So, marrying the two together is important."
These are just some of the vacation issues facing employers and payroll departments. Future articles will look at other vacation-related topics.
