Summer brings barbecues for some, payroll headaches for others

On the surface, handling vacation pay is pretty simple. But there are some important things employers should keep in mind to ensure it is taken care of properly.

Crack out the barbecues and the patio furniture — it’s that time of year again when many employees are starting to think about their upcoming vacation time. This means vacations are weighing heavily on the minds of employers and, particularly, payroll professionals.

On the surface, annual vacations are fairly simple. If you work in Ontario, an employee is generally entitled to at least two weeks off with pay. For employees paid by salary, this vacation pay usually means employees receive their normal pay while on vacation — nothing really changes. But for hourly and some other employees, it’s a little more complicated.

Employees who earn an hourly wage are entitled to at least four per cent of their earnings as vacation pay. This is where the complications start — because what qualifies as earnings?

In Ontario, almost all money paid to an employee for her work is subject to vacation pay. If an employee earns overtime, this must be taken into account when calculating the vacation pay owing to an employee. Similarly, most employees who earn commissions are also entitled to be paid vacation pay on any commissions earned.

Here’s a simple calculation of how this might work:

Take an hourly paid employee who normally works 40 hours per week. She sometimes works a substantial amount of overtime. Her regular rate of pay is $12.50 per hour and, since vacation pay was last paid, has earned $25,000 in regular wages (50 weeks, 40 hours per week at $12.50 per hour) and statutory holiday pay and $2,125 in overtime. What should she be paid for her two-week vacation this year? Eighty hours at $12.50? Or should she be paid four per cent of $27,125, the sum of her regular earnings plus overtime?

If an employer simply paid her 80 hours at $12.50, she wouldn’t be receiving everything she is entitled to. At her regular wage, that works out to $1,000. Four per cent of $27,125 is $1,085. Under Ontario law, she is entitled to be paid four per cent of her vacationable earnings as his vacation pay. In this example, vacation pay includes regular wages, statutory holiday pay and overtime.

One might wonder why the earnings above were based on 50 weeks, and not a full 52 weeks. The reason this example uses 50 weeks is that in Ontario vacation pay is not itself a vacationable earning. Next year, if she has no overtime and works a full year, her vacation pay will only be based on her regular earnings of $25,000. That’s not true in all provinces, though. In British Columbia, for example, her vacation for the next year would have to be calculated at four per cent of $25,000 plus the $1,085 in vacation pay for the current year. This means after her second year of employment in B.C., she would be entitled to $1,043.40 in vacation pay ($25,000 plus $1,085 multiplied by four per cent.)

What people sometimes fail to realize is that there are really two separate legal requirements in Ontario around giving employees an annual vacation: one related to time and another related to money.

Most employees in Ontario are entitled to two weeks annual vacation time. In some other provinces, such as Quebec and British Columbia, an employee may be entitled to three weeks annual vacation, if she has been employed with the same employer for at least five years. But employees who work in Ontario may not be subject to Ontario provincial law if they work for a federally regulated employer. The Canada Labour Code specifies that employment in a bank is federally regulated. Under the Canada Labour Code, a person is entitled to three weeks annual vacation, irrespective of the province where the person works. So an employee at the Bank of Montreal, in Mississauga, Ont., would be entitled to at least three weeks of annual vacation after the fifth year of employment.

Apart from the requirement to give employees at least two weeks off from work, employers are also required to pay employees vacation pay. In Ontario, this requirement is at least four per cent of employee vacationable earnings. Generally it is understood that if an employee is entitled to more time off than two weeks, the percentage used to calculate vacation pay similarly increases. Three weeks vacation pay corresponds to six per cent vacation pay and four weeks to eight per cent. This is especially true if an employee is being terminated. An employee entitled to four weeks vacation who was being let go would have to, by Ontario law, be paid vacation pay calculated at eight per cent instead of the standard four per cent rate.

What is vacationable earnings?

“Vactionable earnings” is shorthand for the earnings on which vacation pay must be calculated. In Ontario, provincial law requires that employers pay vacation on most amounts paid to employees for the work they perform. In Ontario, employers are not required to include the following in vacation pay calculations under provincial employment standards:

Tips. Tips that employees, such as waiters and waitresses would receive in a bar or restaurant, are not subject to vacation pay. This includes tips put on credit card slips and distributed to the employee by the employer.

Travelling allowances. Some firms will reimburse employees for travel expenses, such as pay 30 cents per kilometre when using a personal car for company business. This is not subject to vacation pay.

Expense reimbursement. Sales employees submit their expenses, which are reimbursed through payroll. The amounts paid are not subject to vacation pay.

Employee benefits paid directly by the employer. The employer has a formal sick leave plan, under which employees earn eligibility for sick leave at the rate of one eligible day for each full month of employment. Payments are made directly by the employer, not through an insurance company or benefit carrier. Such payments are not vacationable in Ontario.

Vacation pay already paid. Vacation pay already paid to an employee is not subject to vacation pay in Ontario.

If an employer pays bonuses, these may or may not be subject to vacation pay under Ontario provincial law. By default, bonuses are subject to vacation pay. To be exempt, a bonus has to meet both of the following conditions:

•the bonus is subject to employer discretion; and

•the amount paid is not calculated by reference to hours, production or efficiency.

The problem really is that people use the term bonus to describe different types of payments. An employer may, in a particularly good year, decide to give employees a Christmas bonus. Since the bonus is at the employer’s discretion, it is not vacationable. On the other hand, a salesperson may negotiate, as part of the conditions of employment on hiring, a bonus payable if a sales quota is met or exceeded. Since the employee has a legal right to the bonus, and since it is calculated based on the employee’s performance, the sales bonus is subject to vacation pay.

Other than the exceptions above, all payments from an employer to an employee are vacationable under Ontario law. This includes statutory holiday pay and payments on termination such as wages in lieu of notice and the severance pay required under the Ontario employment standards.

Alan McEwen is a payroll consultant in St. Catharines, Ont. He can be reached at [email protected].

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