New Year, New Vacation Considerations

It’s the new year! For most employers and employees, vacation calendars reset in January. This is an opportune time to review vacation policies and entitlements – and complete a Vacation Pay Audit for your business.

Let’s review vacation generally in Ontario, and then we will discuss Vacation Pay Audits.

Vacation Pay and Time: What’s the Difference?

Even though we often use the terms interchangeably, vacation pay and vacation time are distinct and separate in Ontario. Employers must understand the difference between the entitlement to vacation time and pay to ensure legal and contractual compliance.

Vacation Time

Almost all employees in Ontario earn vacation time off. It resets during each “vacation entitlement year” which can match the calendar year or be an alternative vacation entitlement year. Technically, new employees do not receive any vacation time off in their first vacation entitlement year (since they have not earned/accrued it). But an employer can allow an employee to take vacation time off before it has been fully accrued in the previous year. 

For eligible employees, they are entitled to at least 2 weeks of vacation time per year; after completing five years of employment, the minimum amount of vacation is 3 weeks per year. An employment contract can contain a greater amount of time off.

A “week” means one week for that employee; it could be a standard 40-hour work week, or it could be 3 hours (every employee is unique). But the minimum standards do not require an employer to give a certain amount of days or hours of vacation; the minimums state an employee receives a certain amount of weeks of vacation time off work.

In addition, employers can force employees to take vacation at any point in the year, so long as the employer sets that vacation in blocks of weeks and not any individual days or hours. This equally applies to “unbookable” vacation weeks: an employer can disallow employees to book vacation on certain weeks of the year if the employer so chooses. Generally, all vacation is subject to the employer’s discretion, but the employee must be allowed to take at least their agreed-upon vacation.

Employers and employees can agree to “carry-over” vacation time to a future year, but such carry over should not affect the amount of vacation pay that employee ultimately receives.  The percentage still applies.  The ESA in Ontario technically states that vacation time off expires after 10 months after the end of that vacation entitlement year. In other words, the minimum ESA standard is that an employee uses their 2023 vacation weeks no later than October 31, 2024 (for a standard calendar year vacation entitlement year).

Vacation time off data should be tracked and stored by the employer for at least 5 years post-vacation.

Vacation Pay  

As we said above, vacation pay is separate from vacation time off. Vacation pay is technically an additional percentage of the employee’s gross earned wages from the previous vacation entitlement year (or current year if the employer and employee have agreed).  So, where an employee is entitled to 2 weeks of vacation time off, they receive an additional 4% of their wages from the given vacation entitlement year, payable as vacation pay on the paystub (vacation pay is not to be paid as regular pay).  Three weeks of vacation time off is equal to 6% vacation pay in Ontario; four weeks is 8%.

So for example, an employer and employer agree in their contract that the employee will receive 2 weeks of vacation in a year, and that employee can take their vacation before it has been fully accrued.  For the year 2023, that employee worked for 50 weeks, was off on vacation for 2 weeks, and the employee should have received 4% of all of their gross wages they earned in those 50 weeks of the year as vacation pay (on top of their regular wages).

Vacation pay is typically paid while the employee is on vacation, but an employer and employee can agree (in writing) to have vacation pay paid in a different way (like in a lump sum at the end of the year, on each pay stub, etc.).

Regardless of how much vacation time off an employee takes, an employer must provide the employee with all of their earned/accrued vacation pay.  For example, if an employee is entitled to 3 weeks of vacation time off and only takes 1 week off, they are still entitled to 6% of vacation pay on the 51 weeks of wages they earned from that vacation entitlement year.  In another example, if a 2-year employee was paid for working 13 weeks of the year (lets say they were on a protected leave of absence for 37 weeks), they are still entitled to 4% vacation pay on those 13 weeks of wages, and they are still entitled to take 2 weeks of vacation time off.

Vacation Pay Audits

Because vacation time and pay can be very comprehensive, we recommend employers review all vacation pay and vacation time once per year in a Vacation Pay Audit.

In a proper vacation pay audit, an employer would first collect and confirm all details about their team and vacation: employee tenure, amount of agreed vacation time off, amount of vacation taken, percentage of vacation pay owing, amount of Regular Wages paid (be sure to first understand what is and is not “Regular Wages” under the ESA), amount of “vacation pay” paid (listed on paystubs), any special circumstances (like carry-over) and the company’s vacation policy & payment system (like whether an employee can receive vacation time/pay before it has been accrued). 

The audit itself would cross-reference the theoretical amount of vacation pay owing to an employee (based on what they earned in the vacation entitlement year) against the actual amount of vacation pay paid to the employee. 

If there are amounts owing from the employer to employee, the employer must decide how to manage that accrued but unpaid vacation pay to the employee. 

If the employee has received too much vacation pay, the employer can decide on how to reconcile such an overpayment.

Conclusion

All employers should be mindful of vacation requirements relating to both time and pay.  By completing an annual vacation pay audit, an employer can ensure minimum legal compliance (with the ESA and also their employment agreements), and the employer can expect fewer claims of unpaid vacation pay from employees.

Feel free to contact a lawyer in KMB’s Employment Group if you require assistance with the intricacies of vacation time and pay.