Negative vacation balances
Arecent HRinfodesk Poll asked participants if their vacation policy allows employees to "go negative". And if so, how are negative hours captured upon termination? Out of 244 respondents, 140 respondents allow negative vacation balances and 104 don't allow them. However, it is not just a question of yes or no. Employers should think of the positive and negative implications of this policy. The negative being a reason for employers to call their lawyers: employees taking unfair advantage of the company, mostly by leaving before they pay back the vacation time.
Below is a breakdown on the poll results and an overview of what employers need to consider before allowing employees to borrow against vacation days not yet earned; as well as the legal implications when recovering the borrowed time off.
What is a negative vacation balance?
A negative balance happens when the employee takes vacation time before actually accruing or earning it. Allowing employees to use vacation time that they have not yet accrued is becoming increasingly popular. This results in a negative balance. In actuality, the employer is intentionally overpaying the worker, or giving the employee an advance on his or her salary. Providing that the employer and employee clearly agree to carry forward a negative balance, this practice is acceptable under employment standards.
Employers must find authority to recover negative balances in legislation, the provisions of a collective agreement, or the consent of the affected employee.
In general, the recovery of pay advances in the form of a negative vacation balance is acceptable under employment standards in most jurisdictions, as long as the pay advance is considered a direct benefit to the employee. However, in some jurisdictions, the employer must obtain written authorization from the employee in question to allow the negative balance to be recovered.
British Columbia specifically states that an employer cannot reduce an employee's annual vacation or vacation pay because the employee was paid a bonus or sick pay, or was previously given a vacation longer than the minimum. Annual vacation or vacation pay may be reduced if an employee asked for and was given annual vacation in advance. However, advances on wages cannot be deducted from an employee's paycheque unless the employee has given written permission to the employer authorizing the repayment.
In Manitoba, allowing employees to use vacation time they have not yet earned is considered a direct benefit, and the employer would be able to deduct payroll advances from employees' wages. Regardless of authorization, any deduction from wages that does not benefit employees will not be allowed.
Federally regulated workplaces are allowed to deduct from an employee's paycheque without written authorization anything that is considered an overpayment of wages.
Therefore, a repayment situation exists if the employee has used vacation before earning the vacation time. Depending on the legislation and the collective agreement or written authorization, at termination the employee would be expected to repay the negative balance for any unearned used vacation.
Recovery of the negative balance cannot result in the employee receiving less than the minimum wage in any pay period.
The policy of advancing vacation time is a common occurrence for new employees who haven't worked long enough at the company to accrue time off. It also helps long-term employees who may have had to expend their leave under special circumstances. Allowing employees to borrow vacation time and pay that has not already been earned should be set up as a privilege.
To ensure employees are well aware of their right to borrow against vacation days not yet earned and the accompanying conditions to use that right, employers are advised to have and communicate a written policy. The policy allows employers to set conditions and limits.
Employers need to consider first:
- Is the policy compatible with business and employee needs? Will advancing vacation days interfere with business? Is it a benefit or flexibility employees would enjoy and need?
- Is the policy necessary for recruitment and retention purposes? The need to recruit and retain high-quality employees might prompt an employer to grant the privilege of using time before it is earned.
- Does the policy convey the right message to employees? A flexible time-off policy is part of being an "employee-centric” company. The policy contributes to a positive attitude.
Other things to consider; the policy:
- Need not be applied to all employees, but it must be applied consistently.
- Should provide a set of guidelines that will be used in granting permission to borrow vacation time.
- Should state the number of days that can be borrowed.
- Should state the permissible reasons for borrowing.
- Provide a statement that, when resigning, the employee must reimburse the company for a negative time-off balance.
- Provide the formula that will be used to calculate the amount owed for borrowed time.
- Should state the procedure for requesting vacation time. Who must approve it?
- Should state that the person approving the request will take into account a department's staffing needs.
- Should state the factors the person approving the request will rely on to approve or deny the vacation time, such as the employee's disciplinary and attendance records, and length of service or passage of the probationary period.
- Should indicate what happens to borrowed vacation time when an employee leaves the company. Should clearly state that the employer reserves the right, consistent with provincial and federal law, to deduct unreimbursed time from employees' paycheques.
- Should specify the value of the time the employee is receiving.
- Should specify what the employee is expected to pay back and on what schedule, and the consequence of not doing so.
- Should refer to a written request to borrow vacation time. A prior written agreement should be drafted in accordance with the term of the policy, and with an authorization to be reimbursed from employee's paycheques; this agreement should be included in the employee file.
In addition, the agreement should state that the employee is responsible for lawyers' fees if the employer is forced to take legal action over unearned time for which the employee has not reimbursed the employer.
The borrowed time must be recorded and tracked properly. Human resources and payroll management systems, as well as pay stubs, should indicate the employee's balance. As part of the process when an employee leaves the company, the systems should indicate if the employee has a negative balance. The policy and procedure manual should indicate that the value of the time owed will be deducted from the last one or two paycheques. Similarly, the company pays the employee the value of any unused accrued time.
Some employers add to their policy that negative vacation leave balances cannot be carried over from one calendar month to the next. In this case, an employee with a negative vacation leave balance must be placed on leave without pay for any unearned vacation leave taken.