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Entitlement to vacation pay
By Yosie Saint-Cyr, LL.B., Managing Editor, HRinfodesk.com---Canadian Payroll and Employment Law News, April/May 2009
Unlike in the United States, an annual paid vacation is a legislated right of almost every worker in Canada. The employment/labour standards legislation in the jurisdiction in which the employee lives will determine most of the rules regarding annual paid vacations. Employment/labour standards legislation has two parts: vacation time and vacation pay.
Vacation time is the time an employee is entitled to take off from work, while vacation pay provides employees with pay while absent during vacation. Unlike entitlement to vacation time, which can only be taken when an employee has completed one year of service (for more details, refer to article 29655), vacation pay, in general, begins to accrue on the first day of employment (there are variations depending on the jurisdiction) and continues to the day the employee leaves the company. In addition, each jurisdiction has its own method of calculating vacation pay. In general, employers calculate a minimum of four percent (except in Saskatchewan where it is six percent) of each paycheque (on the employee's gross earnings) toward vacation pay, unless they wish to give the employees more. In most jurisdictions, if an employee stays at their job long enough to earn more paid vacation time; they will also earn more vacation pay.
Because vacation pay is calculated from an employee's annual earnings, it does not matter if employees are paid a fixed salary or paid an hourly wage. Either way, a percentage of the employee's total annual gross wages is calculated to vacation pay.
However, many companies have implemented a business practice that allows salaried employees to continue receiving their regular weekly salary during vacation as vacation pay. The policy of most Employment/Labour Standards Branches across Canada is to deem employees who continue receiving their regular salary during their vacation to have received vacation pay, provided that the salary during the vacation pay is at least the set statutory percentage of their gross earnings. And, that is where it becomes complicated, because there is little consistency across Canada in regard to the types of earnings (e.g., salary, tips, public holiday pay, overtime pay, commissions, and bonuses) that are to be considered as wages. The definition of wages varies in the employment/labour standards legislation of each jurisdiction, as you will see later on in this article.
The last HRinfodesk poll wanted to know if employers paid vacation pay as required by legislation, or applied the common business practice explained above. Out of 245 respondents, 133 (54.29%) stated that they have implemented the business practice of continuing paying their employees' regular pay when they go on vacation; only 57 (23.27%) respondents still applied legislated rules; 49 (20%) apply a combination of both principles, which indicates that they make a difference based on their method of payment (salaried workers vs. hourly paid workers). Six respondents indicated that they do not apply the standard or the common business practice of paying vacation. That may be because the law in their jurisdiction allows them to pay employees vacation pay once a year (at the end of their fiscal year), or on each paycheque. Or, they may also have their own workplace policies that accrue vacation in days or hours.
Basic legal requirement recap
Let's start with the basics: every jurisdiction in Canada entitles an employee to vacation time after working for 12 consecutive months of employment. The amount of time off an employer must grant their employees is two weeks in every jurisdiction apart from Saskatchewan (which offers three weeks) and Quebec (which offers one day per month).
The amount of vacation an employee is entitled to is governed by the organization's workplace policy, with a minimum amount prescribed under employment/labour standards legislation in each jurisdiction. Some jurisdictions legislate increases to the minimum amount of vacation time and pay an employer is required to give after a certain period.
In terms of vacation pay, many jurisdictions calculate vacation pay from the first day an employee works to the day they leave the company. Usually, employers calculate a minimum of four percent (except in Saskatchewan where it is six percent) of each paycheque toward the vacation pay account.
Provisions in all jurisdictions stipulate when an employer is required to disburse vacation pay to an employee. However, requirements are far from identical across Canada. Normally, vacation pay must be paid in a lump sum within a specified period before the vacation begins. For instance, all three territories and the Atlantic Provinces require that an employee receive his/her vacation pay at least one day before beginning a vacation. In Saskatchewan, vacation pay must be paid in the 14-day period preceding the vacation; where an annual vacation is fragmented, a portion of vacation pay must be paid before each period of vacation. Provisions in Manitoba stipulate that vacation pay is to be paid on the last working day before the vacation, unless the employer and the employee agree otherwise. In some jurisdictions, vacation pay may be paid on the regular payday following the start of a vacation. However, this is normally subject to certain conditions. In Ontario, vacation pay is normally paid to the employee at least one day prior to the commencement of a vacation, or on a regular payday during the vacation.
Since vacation pay is earned from the first day or week of work, employees who do not work a full year receive their vacation pay once they leave the company. At this point, the employer is required to pay out the vacation pay that they owe.
Refer to the comparative table later in this article for certain differences regarding vacation pay between jurisdictions.
Note that, often, legislation excludes certain classes of workers and industries from the application of annual vacation provisions, or from employment standards in general. The list of groups who are covered, or exempted, can vary to a significant extent among all the jurisdictions.
Formula for calculating vacation pay
In most jurisdictions, vacation pay is calculated as a percentage of the gross wages an employee earns during the "year of employment" or what is commonly called the "vacation entitlement year". Vacation pay is set at four percent of an employee's annual wages, except where the employee is entitled to three weeks of vacation, in which case the amount of vacation pay must be equal to at least six percent of annual wages.
Vacation pay is calculated differently in Saskatchewan. Vacation pay in that province is defined as 3/52 of an employee's total wages for the year of employment, or 4/52 when the employee is entitled to four weeks of annual holidays.
In Alberta, an employee paid monthly is entitled to an amount of vacation pay at least equal to his/her wages for normal hours in a work month, divided by 4 1/3, for each week of vacation.
In Manitoba, in cases where the employer provides the employee with board and lodging or an allowance for board and lodging as part of the employee's normal salary, the employer must also pay the employee for each week of vacation an amount equal to two percent of the cash value of the board and lodging or allowance that the employee received in the year of employment.
In Quebec, special provisions also apply to employees who are absent from work due to sickness or accident or by reason of a maternity/parental leave. Should such an absence result in the reduction of an employee's annual leave indemnity (i.e., vacation pay), the latter is to be calculated on the basis of average weekly wages earned during the period of work, multiplied by the number of weeks of vacation entitlement. This amount can be prorated for employees who have less than one year of uninterrupted service. An annual leave compensation calculated in this manner is not to exceed the amount to which an employee would have been entitled were it not for the leave or absence.
Employees in New Brunswick who have completed eight consecutive years of service, but who have only worked for part of the vacation pay year, are entitled to one and one-quarter days of vacation per month in which they worked during that period. In contrast, Alberta's Employment Standards Code allows an employer to reduce an employee's vacation and vacation pay in proportion to the number of days the employee was absent from work.
In Ontario, if an employee requests it and the employer agrees in writing, vacation pay could be added to the employee's regular paycheque, or it could be paid at any other time the employee and the employer agree on in writing.
As stated above, most companies pay their employees' regular salary as vacation pay; provided that the employee takes at least two week's paid vacation (this works out to four percent of wages), the employer appears to be meeting its employment/labour standards obligations by paying the employee his or her regular salary while the employee is on vacation.
However, what is considered vacationable earnings varies greatly by jurisdiction.
Vacationable earnings
Quebec defines wages as remuneration in currency and benefits having a pecuniary value due for the work or services performed by an employee. Definitions used in jurisdictions such as Alberta and Ontario explicitly list the types of payments that are deemed and not deemed to be wages for vacation pay. Moreover, special vacation pay provisions sometimes apply to certain categories of employees, particularly in seasonal occupations such as construction and harvesting, or where wages are calculated on a piece-work basis.
For example, in Quebec, the wages earned during the vacation entitlement year include performance bonuses, the payment of overtime, reported and attributed tips, as well as statutory holiday and vacation pay.
In Ontario, it includes, regular earned wages, as well as commissions, bonuses and gifts that are non-discretionary or are related to hours of work, production or efficiency, allowances for room and board, overtime pay, public holiday pay and termination pay.
What is considered vacationable earnings by jurisdiction can be found in the following chart: 10861.
As a matter of convenience, some employers pay vacation pay as a regular day's pay for each vacation day taken. Such a practice may lead to an inadvertent violation of the four percent minimum standard, particularly if the employee is entitled to only two weeks of vacation and has worked extensive overtime during the period for which the vacation time is earned. In such cases, the employer should reconcile the required four percent minimum with vacation pay actually paid. Also, the practice of paying vacation pay as a regular day's pay may establish a precedent that leads to the payment of vacation pay even though the employee has been off on extended unpaid leave of absence and may not have any earnings.
If an employer simply pays the employee a regular day's pay for each day of vacation, the employer must ensure that the minimum four percent vacation pay rule is not being violated. If, for example, the employee has been paid for extensive overtime, and overtime is part of gross wages, the four percent rule may generate a larger vacation pay requirement than just a regular day of pay.
Employers should consider defining vacation pay as a percentage of wages. Although the employee may be entitled to vacation time, calculating vacation pay as a percentage of wages eliminates vacation pay when an employee is absent from work without pay due to illness or a leave of absence.
Recording vacation time and pay
It is critical to keep track of employees' vacation time and pay, especially if it is the business's practice of continuing paying their employees' regular pay when an employee goes on vacation; because an employee can say they worked for a certain week and they did not take vacation, in turn causing problems for the employer.
Employers are required to keep records of the vacation time earned since the date of hire (in some jurisdictions, “start date”) but not taken before the start of the vacation entitlement year; the vacation time earned and the vacation time taken (if any) during the vacation entitlement year (or stub period); and the balance of vacation time remaining at the end of the vacation entitlement year (or stub period). Employers must also keep records of the vacation pay paid out for each employee during the vacation entitlement year (and stub period, if any) and how that vacation pay was calculated.
If the employer and employee agree that vacation pay will be paid on each paycheque as it is earned, in some jurisdictions, the employer does not need to keep records and provide statements about vacation pay as discussed above. Instead, the employer must report the vacation pay that is being paid separately from the amount of other wages on each wage statement, or provide a separate statement setting out the vacation pay that is being paid at the same time as the wage statement is provided. The employer must also keep a record of that information.
Taxability of vacation pay
When you pay vacation pay, how you calculate deductions will depend on if your employee takes holidays or not.
The employee takes holidays
When you pay vacation pay and your employee takes holidays, you have to deduct CPP contributions, EI premiums, and income tax in the following way:
CPP contributions
Deduct CPP contributions from vacation pay in the same way as you would from regular pay. Do not change the pay period table you would normally use. Do not deduct more than the maximum employee contribution for the year.
EI premiums
Deduct EI premiums from vacation pay in the same way as you would from regular pay. Do not deduct more than the maximum employee premium for the year.
Income tax
When you calculate the amount of income tax to deduct, use the tax table that applies to the period of vacation. For example, for one week of paid vacation, use the weekly tax deduction table. If your payroll is bi-weekly, and the employee is paid one week of vacation pay and one week of regular pay, the bi-weekly tables should be used.
The employee does not take holidays
When you pay vacation pay and your employee does not take holidays, deduct CPP contributions, EI premiums, and income tax in the following way:
CPP contributions
To deduct CPP contributions, use the bonus method.
EI premiums
Deduct EI premiums from vacation pay in the same way as you would from regular pay. Do not deduct more than the maximum EI premium for the year.
Income tax
Use the bonus method.
Include in the employee's income any contributions you make to a trust for vacation credits that an employee earns in the year. Deduct income tax from this amount as if you had paid the amount directly to the employee. For more information, see the Canada Revenue Agency document: IT-389, Vacation Pay Trusts Established Under Collective Agreement.
Comparative chart by jurisdiction and other resources
The table below shows the differences between jurisdictions.
|
Jurisdictions |
Vacation
pay starts
being accumulated |
Vacation time
and pay |
Extension after years
of service |
Extension of Vacation time and pay |
Increase in Vacation Pay, % of gross earnings |
If an employee does not work for a full year, vacation pay must be paid out within: |
Can vacation pay be paid out without taking vacation time? (waiving or forgoing vacation) |
Disbursement of vacation pay | |
Fed. Reg. |
First day |
After 1 year: 2 weeks- 4% |
6 years |
3 weeks |
6% |
The employer must "pay out" any vacation pay owed to the employee for any prior completed "year of employment". In addition, the employee is entitled to vacation pay for the partially completed current year. |
Yes |
Within 14 days before vacation begins. Employer may also choose to pay employees either during or immediately following their vacation, according to their usual practice. | |
BC |
After 5th day |
After 1 year: 2 weeks- 4% |
5 years |
3 weeks |
6% |
48 hours |
No |
7 days before beginning of vacation or, if agreed by the employer and the employee or provided for in a collective agreement, on the employee's scheduled paydays. | |
AB |
First day |
After 1 year: 2 weeks- 4% |
4 years |
3 weeks |
6% |
3 days with termination notice, 10 days without |
No |
No later than regular payday following start of vacation; at employee's request, vacation pay must be paid at least one day before the vacation starts. | |
SK |
First day |
After 1 year: 3 weeks- 6% |
10 years |
4 weeks |
8% |
14 days |
Must be approved by employer and Director of Labour Standards |
Within 14 days before each period of vacation (vacation pay may be divided) | |
MB |
First day |
After 1 year: 2 weeks- 4% |
5 years |
3 weeks |
6% |
After termination |
N/A |
Last working day before the vacation unless the employer and employee agree otherwise | |
ON |
First day |
After 1 year: 2 weeks- 4% |
No |
No |
No |
7 days or next regular payday |
Must be approved by employer and Director of Labour Standards |
Normally, before vacation begins. If employer pays employee's wages by direct deposit or employee does not take his/her vacation in complete weeks: payment on or before payday for period in which vacation falls. If employee agrees, and a wage statement sets out vacation pay: payment on payday of each pay period where it accrues; or payment at a time agreed-upon by both parties. | |
QC |
First day |
Up to 1 year: 1 day per month
From 1 to 5 years:
2 consecutive weeks, plus optional days without pay up to 3 weeks 4% |
5 years |
3 weeks |
6% |
After termination |
No |
Before beginning of vacation | |
NL |
After 5th day |
After 1 year: 2 weeks- 4% |
15 years |
3 weeks |
6% |
After termination |
No |
Before beginning of vacation | |
NB |
July 1-June 30 |
Up to 8 years: 2 regular weeks or 1 day for each calendar month
in which an employee works (whichever is less)- 4% |
8 years |
3 weeks |
6% |
Final regular payday |
Allowed if agreed in writing between employer and employee |
At least 1 day before the vacation begins | |
NS |
First day |
After 1 year: 2 weeks- 4% |
8 years |
3 weeks |
6% |
10 business days |
Only if worked less than 90% of hours, and put forth a letter in writing to employer that they do not wish to take vacation time |
1 day before vacation begins.
If vacation is broken, 1 day before an unbroken vacation period of at least 1 week | |
PEI |
First day |
After 1 year: 2 weeks- 4% |
No |
No |
No |
Final regular pay day |
No |
1 day before beginning of vacation | |
NWT |
First day |
After 1 year: 2 weeks- 4% |
5 years |
3 weeks |
6% |
After termination |
A Labour Standards Officer must approve an application not to take vacation |
1 day before beginning of vacation | |
YU |
First day |
After 1 year: 2 weeks- 4% |
No |
No |
No |
14 days after last day |
Agreement must be made between the employer and employee |
1 day before beginning of vacation | |
NU |
First day |
After 1 year: 2 weeks- 4% |
5 years |
3 weeks |
6% |
After termination |
A Labour Standards Officer must approve an application not to take vacation |
1 day before beginning of vacation |
Online vacation pay calculator
Saskatchewan has an online vacation pay calculator:
www.labour.gov.sk.ca/standards/vacation-pay-calculator
Alberta has monthly and other rate of vacation pay online calculators:
http://employment.alberta.ca/cps/rde/xchg/hre/hs.xsl/1471.html
Quebec has an annual leave vacation pay calculator:
www.cnt.gouv.qc.ca/en/on-line-services/calculation-tools-for/index.html
By Yosie Saint-Cyr, LL.B., Managing Editor at HRinfodesk.com
Published on HRinfodesk---Canadian Payroll and Employment Law News and Developments
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