Holidays granting employees time away means payroll has no time to play
While vacations are often a time for employees to unwind and relax away from work, vacation administration can create added stress for payroll professionals.
How much vacation pay is an employee owed? Is there a deadline for paying it? Which types of earnings are included when calculating vacation pay? These are just some of the questions payroll professionals must answer to ensure that their employer complies with legislated vacation pay rules.
While it is essential that payroll professionals comply with all employment standards vacation requirements, one of the most critical is ensuring that they pay employees the proper amount of vacation pay.
Canadian jurisdictions generally require employers to pay employees four per cent or six per cent of their earnings for vacation pay, depending on the employee’s length of employment. Knowing what earnings to include when calculating the vacation pay percentage is crucial, said Elle Stuart, a consultant with Carswell’s Payroll Consulting Group.
“It comes back to knowing what is the definition of wages in the employment standards act or code in a given jurisdiction. I find that a lot of payroll practitioners don’t know this. They think it is just salary, but normally (there are) a lot of different types of earnings that are subject to vacation pay,” she said.
Depending on the jurisdiction, employers must include earnings such as work-related bonuses, commissions, statutory holiday pay, shift premiums, and overtime pay when calculating vacation pay.
Group manager Annie Chong said while it is common for employers to pay hourly workers four or six per cent of their earnings for vacation pay (depending on their vacation entitlement), when it comes to salaried employees, many employers just continue to pay regular earnings during the vacation.
She added that while there is nothing wrong with that, payroll professionals must take steps to ensure that employees receive the full amount of the vacation pay they earned during the year.
“It’s one thing for an employee to be paid their regular salary, but at the end of the 12-month period — and an organization has to define what their reference period is — whatever earnings they earn may be subject to an additional four per cent or six per cent,” said Chong.
Many payroll and HR professionals do not realize that salaried employees’ vacation pay may be higher than their regular pay.
“When I teach this part of the program, I get people looking at me like I have six heads because they just cannot believe that this is a requirement,” she said.
To ensure that employers are paying salaried employees their full vacation pay, Chong recommended that payroll departments do an annual reconciliation of vacationable earnings.
“Employers need to clearly understand that reconciling vacation pay at the end of the 12-month period is critical because when you have employees who earn outside of their salaries, (whether a) bonus, overtime, commissions, the monies (may be) vacationable, as defined by the jurisdiction,” she said. “A reconciliation at the end of the year will recalculate what your four per cent looks like after adding in all of these additional earnings that are vacationable.”
If the reconciliation shows that an employee had other earnings during the year that should have been included when calculating vacation pay, Chong said the payroll department will have to pay the outstanding amount of vacation pay to the employee at the end of the year.
“That’s huge. That’s probably one of the biggest mistakes that employers make, not understanding the reconciliation process in dealing with vacationable earnings,” she said.
To ensure that all vacationable earnings are fully accounted for, Stuart advised that payroll departments regularly compare their policies and practices against legislated requirements.
“I always encourage internal audits and to cross reference it with the Ministry of Labour to see if you are in compliance,” she said. “Do your due diligence in ensuring that you are in compliance because things can change or sometimes we have payroll practitioners who may have never known that a particular type of earning is vacationable and they have been in the business for many years, so it’s important to keep yourself updated.”
Another important issue is when to pay vacation pay.
Many jurisdictions specify that employers must pay it by the day before an employee takes the vacation. Some allow employers to pay it on the next scheduled payday after an employee’s vacation begins. It is important to know the rules in the jurisdiction in which the employee works, especially if the employer operates in multiple provinces or territories.
Payroll professionals must also be aware of vacation pay requirements when there is an employee termination. If a worker’s employment ends before the employee receives all of the vacation pay earned, employers are required to pay the employee the outstanding amount. The time frame for paying it varies, depending on jurisdiction.
A tricky vacation pay issue can arise if employees take their vacation and then quit or are let go before they earn the time off.
“That creates a huge problem for payroll because now trying to claw back that money will be a challenge,” said Chong.
Many jurisdictions prohibit employers from deducting overpayments from an employee’s earnings without first obtaining the employee’s written consent. If an employee refuses to give consent or to pay back the extra vacation pay, there is often not a lot that the employer can do beyond possibly taking legal action.
Chong advised that employers either require employees to earn their vacation before taking it or have employees sign off on policies that allow employers to recoup vacation overpayments. Employees could sign the policy when they begin employment or at the time they request a vacation.
“I think a best practice would be to have that on the vacation request form, so when the employee requests to take the vacation, they sign off on any unused (amount) or overpayment to give payroll the authority to recover it,” she said.
Chong and Stuart said one of the most important things that payroll can do to help ensure that their employer complies with vacation rules is keep accurate, up-to-date records.
“The reason why it is important is because in the event of a dispute, if you don’t have employee records or a paper trail showing an employee has taken vacation, the employer could be penalized for not being in compliance with the employment standards act or code,” Stuart said.
Most jurisdictions require employers to keep records on employee vacations, including the amount of vacation taken and the amount of vacation pay paid. Some provinces also require employers to show vacation pay separately from regular earnings on pay statements.
Sometimes, despite payroll’s best efforts to keep on top of employee vacations, mistakes happen because no one notified the payroll department of an employee’s vacation.
“Payroll is the department that pays out employees’ wages, but payroll is not the one approving vacation time,” Chong said.
If no one informs payroll, the department is already at a disadvantage in complying with employment standards rules.
While electronic systems for requesting and tracking vacations can help, Chong noted that regardless of the system an employer uses, it is essential that managers throughout the organization understand all of the elements of the employer’s vacation policy and their role in it.
“I often advise payroll professionals to talk to their manager about the importance of why they need to bring HR into the discussion and why we need to send out communication to all of the managers or directors with employee responsibilities, because in order for us to do our job, everybody needs to know what their responsibilities are,” she said. “For us to do our job accurately, we have to know the information and if we are not getting the right information, we can’t do our job.”
In the June issue, Chong and Stuart discussed vacations for employees returning from a leave of absence, use-it-or-lose-it policies and forfeiting vacations.
