10 vacation time and pay myths

Employment standards legislation – particulary in Ontario – makes vacation more complicated than many employers appreciate

Stuart Rudner

By Stuart Rudner

This week, I address 10 myths and misunderstandings that exist regarding the entitlement to vacation time and pay.

Vacation time versus vacation pay

In some jurisdictions, vacation time and vacation pay are two distinct concepts. For example, in Ontario the two concepts are distinguished in the Employment Standards Act. Under that act, employees earn a minimum of two weeks of vacation time for every complete 12 month “vacation entitlement year.” Since the vacation time is only earned after completion of a 12-month period of work, an employee is not entitled, by statute, to vacation time during their first year of employment. However, the parties can negotiate a greater benefit. Under the same act, however, employees are entitled to receive a minimum of four per cent of the gross “wages” they earn in every vacation entitlement year. This applies even in the first year of employment.

More than just base salary

Vacation pay is not only calculated using base salary. In Ontario and other jurisdictions, “wages” on which vacation pay is to be calculated include base pay, commissions, non-discretionary bonuses, overtime pay, holiday pay, termination pay, allowances for room and board, et cetera. However, they do not include tips and gratuities, discretionary bonuses, and expenses.

Many employers make the mistake of not paying vacation pay when they pay out bonuses. This is a common practice, but does create a risk of liability.

First year of employment

There is no statutory entitlement to vacation in the first year, as set out above. According to the Employment Standards Act and similar legislation, vacation pay is earned after completion of the first year of employment.

Employers can pick vacation time

Employers are entitled to choose when employees take their vacation time. While they must do so reasonably, employers are entitled to designate the times in which employees will take their vacation (subject to regulations regarding minimum length, so that employers cannot order an employee to take 10 single days scattered throughout the year, for example). Furthermore, many employers encounter employees who refuse to take their vacation time, perhaps hoping they can bank it (see below). Employers can insist they take their vacation when it is accrued.

Accrual of vacation time

Many employers fall into the trap of allowing their employees to accrue vacation time year after year. The result is that what seems like a reasonable accommodation of workload ends up providing an employee with an extensive vacation entitlement which the employer cannot afford to provide. Employers should establish clear policies regarding accrual of vacation time.

‘Use it or lose it’ policies

Employers cannot adopt a “use it or lose it” policy regarding the statutorily required amount of vacation. While employers can compensate for time not taken, they cannot adopt a “use it or lose it” policy with respect to the statutory minimum amount of vacation. However, they can do so for any entitlement to vacation beyond the statutory minimum.

Options for paying vacation pay

Employers have a variety of options regarding how they will pay vacation pay. Some employers simply add the applicable percentage of earnings to every paycheque. Others pay their employees when they are taking vacation time. Still others simply pay a lump-sum amount at the completion of the vacation entitlement year. Employers should explore their options in order to confirm they are operating as efficiently as possible in this regard.

Termination of employment

If the employment relationship ends, employees are entitled to be compensated for any earned vacation pay that has not already been paid. This must be paid out within seven days of the termination of employment, or on the next regular pay day, whichever is later.

Statutory  holidays

If an employee is on vacation on a statutory holiday, they are entitled to a substitute day off with holiday pay, unless they agree otherwise.

Leaves of absence

Leaves of absence count as time employed for the purposes of accruing vacation.

The concept of an annual vacation seems simple. However, particularly in Ontario, the legislation makes the provision of vacation pay and vacation time more complicated than many employers appreciate. All organizations should review their practices in order to ensure they are both compliant with the applicable legislation and also acting in a way that is most efficient and cost effective when it comes to vacation.

Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or [email protected]. You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.

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