Vacation pay errors can lead to extra work for staff, fines for companies
With summer almost here, many employees will be taking vacations over the coming weeks — if they have not already started.
While vacation time can be relaxing for employees, paying them for the time off can cause headaches for payroll departments if not done correctly. Not only will employees complain if they do not think they were paid enough or on time, but vacation pay errors could lead to extra work for payroll staff or even employment standards fines or penalties.
Employment standards rules for vacation may seem straightforward at first glance. Employees earn a minimum amount of vacation time each year, usually two or three weeks, depending on their years of service and the jurisdiction in which they work.
Within a specified number of months of earning the vacation, employers must provide employees with the vacation time and pay them either four per cent or six per cent of their “vacationable” earnings, depending on their years of service and the jurisdiction in which they work.
However, it is in the details that vacation requirements can get complicated. Which earnings are included when calculating vacation pay? Is there a deadline for paying it? Can employees skip vacation? What happens if employees take an unpaid leave or their employment terminates?
For employers operating in more than one jurisdiction, it can be even more complicated.
Annie Chong and Elle Stuart are part of a four-member Payroll Consulting Group team that runs a telephone hotline for subscribers to Carswell’s payroll manuals at Thomson Reuters. The team also teaches courses for the Canadian Payroll Association.
Stuart said that while the consultants get calls about vacation rules throughout the year, they notice an increase in the spring and summer, which she suspects is due to more employees taking vacations then.
“I think a lot of practitioners get overwhelmed with the rules surrounding vacation,” she said.
One of the most common vacation questions concerns rules for providing vacation to employees who have returned to work after taking an unpaid leave of absence, said Stuart.
“We have payroll practitioners calling and asking us, ‘We have an employee who went on mat leave and just came back. What do we do with their vacation? What’s the law?’” she said.
“A lot of them think that even though you were on mat leave, we are supposed to pay you for the vacation that you have accrued for the year. I always say it depends on their contract of employment or their company policy.”
She said this is important because payroll departments have to ensure that vacation pay for employees returning from an unpaid leave complies with both employment standards minimum requirements and the employer’s vacation policy.
While employment standards laws in many jurisdictions require that employees continue to accrue vacation time during an unpaid leave, the fact that the employer is not paying them during the leave can affect the amount of vacation pay owing.
For example, an employee who is off work for eight months in a year will only have four months of vacationable earnings for that year. An employee who is on an unpaid leave for a full year will not have any vacationable earnings for the year.
“If you are not paying any vacationable earnings while they are on leave, four per cent of zero is going to be zero. The employee will still accrue the vacation time, but they are just not going to be paid for it,” said Stuart.
An important exception arises if a collective agreement, employment contract or company vacation policy states that employees be paid their regular salary while they are on vacation, rather than a percentage of their vacationable earnings.
“For salaried employees, it is very common for organizations to (pay) an employee’s regular salary when they go on vacation,” said Chong, manager of the group. “For example, next week, if I’m on vacation, Carswell will continue to pay my regular salary, as opposed to an hourly employee, where you would take what they’ve earned and calculate four per cent or six per cent, depending on their entitlement, and that’s what you pay them during that week that they are on vacation.”
“If your policy allows your employees to take vacation and be paid their regular salary, then the idea is that when you come back from your mat leave, if you are entitled to three weeks, you should provide that employee with three weeks’ time off with three weeks’ full salary.
“That’s a huge challenge in dealing with vacations. I hear that a lot when I teach courses. The hourly folks, the contract employees, those are easy to manage. They are pretty straightforward — if you don’t work, you don’t get money,” said Chong.
To avoid having to pay regular salary during vacation for an employee returning from an unpaid leave, Chong advised that company vacation policies, employment contracts or collective agreements clearly state that employees who take unpaid leaves will not accrue vacationable earnings while on the leave and will, therefore, not be paid their regular pay when they take vacation afterwards.
Another common question Stuart said she gets is whether employers can have a “use it or lose it” policy for vacations, meaning that if employees do not take their vacation by a certain date, they forfeit it for that year.
She said she always reminds callers that employees can never lose the legislated minimum amount of vacation to which they are entitled under employment standards.
Workers must take the vacation within a certain period after earning it. The time frame varies depending on the jurisdiction, but is commonly within 10 or 12 months of earning the vacation.
“The organization has to ensure that employees take their vacation. You are going to have people who are work keeners who don’t want to take any vacation time, but the employer has a responsibility to ensure that all employees take vacation,” said Chong.
Employers can do this by scheduling vacations for workers who are not taking them and informing them that they are required by law to take the time off.
If, for some reason, an employee does not take their vacation, the employer must still pay the minimum amount of vacation pay under employment standards.
“Anything legislated by employment standards is always protected and it’s not touchable by the employer,” said Stuart.
If employers provide employees with vacation that exceeds employment standards minimums, employers may be able to apply a use-it-or-lose-it policy to the excess vacation, depending on the wording of their collective agreement or vacation policy.
“Employers are definitely allowed to call the shots with respect to the excess vacation they grant to their employees; however, it has to be very clearly outlined in their company policy,” Stuart added.
She said a related question from some callers is whether employees have the right to forfeit their vacation for a given year.
“That would depend on the jurisdiction,” Stuart said. “Some jurisdictions are very strict and say absolutely not and this, again, pertains to the legislated vacation. Whereas other jurisdictions might give you a little more leeway and say that you are able to waive it, but you have to get permission from the director of employment standards.”
Even in jurisdictions that allow employees to waive their vacation entitlement, the waiver does not affect their right to be paid for the vacation. This means that employers must still follow vacation pay rules.
When it comes to vacation timing, Stuart said some employers are not aware that they can choose when an employee takes vacation, as long as it is within the time specified by employment standards and, where required, they give employees advance notice of the dates.
“If an employer wants to shut down their business for a week for Super Bowl, they can get their employees to take their vacation during that time,” said Stuart.
Note: A secondary article on this topic, to be published in an upcoming issue, will address vacation pay, the importance of doing annual vacation pay reconciliations, and keeping proper vacation records.