Paying vacation pay on vacation pay

It's one of payroll's little quirks: Vacation pay is often a vacationable earning on which vacation pay must be paid

Vacation pay is pretty straight-forward. Employees work, they get paid wages for that work and on those wages, vacation pay must be paid.

But like many other aspects of payroll, it's not always that simple. One of payroll's little quirks is that vacation pay is often a vacationable earning on which vacation pay must itself be paid.

Don't get me wrong — whether employers should have to pay vacation pay on top of vacation pay is well beyond the scope of this article. Here, the purpose is just to demonstrate what the applicable employment standards require.

Vacation pay is a vacationable earning in British Columbia, Alberta, Saskatchewan, Newfoundland and Labrador, the Yukon, the Northwest Territories and Nunavut, as well as under the Canada Labour Code. How this works is simple. First, vacation pay is calculated based on employee wages. Second, vacation pay is itself a “wage” included in this definition.

Vacation pay is based on employee vacationable earnings, as paid in vacation years. Vacation years are 12-month periods, either based on the anniversary of employee hire or are common to all employees. Vacation pay is paid as a percentage of these vacationable earnings, with the exception of Saskatchewan, where instead of a percentage, a fraction is used — either 3/52 or 4/52.

The following example illustrates how this works:

Mark's vacation pay is subject to B.C.’s employment standards. He is paid vacation pay based on the anniversary of his hire date, March 12. In the 12 months between March 12, 2011, and March 11, 2012, inclusive, he was paid the following wages:

•regular wages: $37,280

•overtime: $5,372

•statutory holiday pay: $1,975

•vacation pay: $2,677.

Mark's vacationable earnings in the year ending March 11, 2012, total $47,304. Mark is owed vacation pay at six per cent. For these vacationable earnings, Mark must be paid $2,838.24, as vacation pay. When paid, this amount must be included in his vacationable earnings for the vacation year ending March 11, 2013. (To see how this works out over a seven-year period, holding Mark’s other vacationable earnings at a constant $50,000 and vacation pay at a constant six per cent, see the table below.)

The number sin the chart seem counter intuitive. You would think that vacation pay on vacation pay would compound each year, meaning each year there would be a larger and larger increase. However, that's not what happens.
As you can see, initially the increase in vacation pay is noticeable, then stabilizes. The reason for this stabilization is that over time the additional six per cent, owing on the increase in the prior year's vacation pay, falls to less than a penny. When it does, there is no longer an annual increase in the amount of vacation pay owing.

As always, there are exceptions.

In Alberta, vacation pay is only a vacationable earning where the payroll frequency is not monthly. For employees paid on a monthly basis, a week's vacation pay is the total wages that would be paid for normal work hours in a month, divided by 4 and 1/3. Note, it's the payroll frequency that matters, not how gross pay is defined or calculated.

Also, in Alberta, vacation pay may not always be a vacationable earning, on termination. To be included in vacationable earnings, vacation pay has to be paid within a completed vacation year.

For example, assume the vacation year for an Alberta employee ends May 31. If vacation pay is paid to this employee on June 30, and then the person is terminated Aug. 1, the vacationable earnings from the start of the current vacation year to termination do not include the vacation pay paid on June 30.

In Newfoundland and Labrador, employees only qualify for vacation time if they have worked at least 90 per cent of the normal work hours in the applicable vacation year. For example, this threshold would be 1,757 hours for an employee who normally works eight hours a day, five days a week. This assumes a 52 week year, the employee takes both the six statutory holidays available and a two week annual vacation — (8 x 5 x 52) - (6 x 8) - (10 x 8) x 90 per cent. Employees who don't meet this test are only entitled to vacation pay on wages for hours actually worked in the vacation year.

This effectively excludes vacation pay from vacationable earnings, since this is not direct wages for hours worked.
The last exception relates to employees who are paid vacation pay each pay period. Where employees are paid vacation pay with every pay, it's obviously not possible to treat the vacation pay calculated in each pay period as an input to that calculation itself. This would trigger a looping from which there could be no escape. For example, if an employee's other vacationable earnings are $1,000, and the vacation rate is four per cent, the vacation pay owing is $40.

Using simple mathematics, it would be impossible to then include this $40 as a vacationable earning in the same period, since the period's vacationable earnings would become $1,040, which would mean vacation pay owing of $41.60, triggering vacationable earnings of $1,041.60, in the next loop and so on.

Alan McEwen is a Burlington, Ont.-based payroll consultant. He can be reached at armcewen@cogeco.ca or visit www.
alanrmcewen.com
for more information.

Vacation year

Other vacationable earnings

Vacation pay paid

Total vacationable earnings

Vacation rate

Vacation pay owing

Year 1

$50,000

$50,000

6%

$3,000

Year 2

$50,000

$3,000

$53,000

6%

$3,180

Year 3

$50,000

$3,180

$53,180

6%

$3,190.80

Year 4

$50,000

$3,190.80

$53,190.80

6%

$3,191.45

Year 5

$50,000

$3,191.45

$53,191.45

6%

$3,191.49

Year 6

$50,000

$3,191.49

$53,191.49

6%

$3,191.49

Year 7

$50,000

$3,191.49

$53,191.49

6%

$3,191.49

Latest stories