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<Can employers pay their salaried employees their regular weekly wages as vacation pay? >

Can employers pay their salaried employees their regular weekly wages as vacation pay?

By Yosie Saint-Cyr, LL.B., Managing Editor, HRinfodesk.com---Canadian Payroll and Employment Law News, October 2011

Can employers pay their salaried employees their regular weekly wages as vacation pay? This is a question we are often asked, and by the looks of it, a common business practice. According to 248 respondents out of a total of 404 (61 percent), yes, you can pay employees their regular wages as vacation pay. But is it law?

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.

In every case, the minimum length of annual vacations is two weeks after each year of continuous employment (12 months of employment), with the exception of Saskatchewan where the minimum is three weeks. Quebec allows employees with less than a year of service to accumulate one day of vacation per month worked in the reference year (up to two weeks).

Vacation time is the time an employee is entitled to take off from work; 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, 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 an hourly wage. Either way, a percentage of the employee's total annual gross wages is calculated to vacation pay. That is the law.

However, many companies have implemented a business practice that allows salaried employees to continue receiving their regular weekly salary as vacation pay during their vacation. The policy of most Employment/Labour Standards Branches across Canada is to deem employees who continue to receive their regular salary during their vacation to have received vacation pay, provided that the salary during the vacation pay is at least equal to the set statutory percentage of their gross earnings. This is where it becomes complicated, because there is little consistency across Canada with regard to the types of earnings (e.g., salary, tips, public holiday pay, overtime pay, commissions and bonuses) considered as wages. The definition of wages varies in the employment/labour standards legislation of each jurisdiction.

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 piecework basis.

For example, in Quebec, the wages earned during the vacation entitlement year include performance bonuses, the payment of overtime and 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.

Thus, the practice of paying salaried employees their regular weekly wages as vacation pay may lead to an inadvertent violation of the four percent minimum standard (six percent in some cases), particularly if the employee is entitled to only two weeks of vacation time 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 or six percent minimum with the 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 on an 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.

It is critical to keep track of employees' vacation time and pay, especially if it is the business's practice of continuing employees' regular pay when an employee goes on vacation, as an employee could say they worked for a certain week and 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.

In some jurisdictions, if the employer and employee agree that vacation pay will be paid on each paycheque as it is earned, 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 keep a record of that information.