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Legislative Compliance

How to Calculate Vacation Pay in Canada 

Facts and myths: How to calculate vacation pay

Questions regarding how to calculate vacation pay in Canada are ones our HR experts have a lot of experience with. Many times, what follows those questions are common vacation pay myths. The most prevalent myth we hear from our clients is that employee vacation entitlements exist on a “use it or lose it” basis; handbooks or policies warn employees that unused vacation expires at the end of the vacation year and is forfeited. In fact, this myth is so ingrained that each December, as the calendar closes in on the year-end holiday period, many employers experience a mad rush of employees scrambling to submit vacation requests to use up earned vacation before it’s lost. 

In this article, we take a close look at this “use it or lose it” myth, the facts about vacation entitlements under the law, and some best practices to ensure statutory compliance regarding vacation entitlements. 

Vacation pay standards and legislation 

Each jurisdiction sets minimum employee vacation entitlements in its employment standards legislation. For example, in Ontario, it is the Employment Standards Act, 2000, whereas for federally regulated businesses, vacation entitlements are specified in the Canada Labour Code. If you’re unsure what your jurisdiction’s laws require, book a free demo with one of our HR experts and see how our Jurisdiction Comparison Tool can help. 

Whatever the jurisdiction, the applicable employment standards legislation requires that all employees receive vacation pay and vacation time. While related, vacation time and vacation pay are distinct entitlements. They are calculated differently, and they accrue differently, so you should understand them as separate entitlements. 

How much vacation time is an employee entitled to? 

In most jurisdictions, employees with less than five years of employment with a given employer are entitled to two weeks of vacation time, and employees with five or more years of accrued service receive three weeks of vacation time after each 12-month vacation entitlement year. Ordinarily, a vacation entitlement year is a recurring 12-month period beginning at the date of hire, or it may be a common year that is set by the organization, such as the calendar or a fiscal year. Again, it is important to refer to your specific jurisdiction to ensure you are observing the entitlements that are applicable to your business. 

In addition, employment standards legislation provides a minimum period within which the employer is to ensure vacation is taken once earned: for example, in Ontario, an employee’s vacation time earned for a vacation entitlement year must be taken within 10 months of completing that year; in British Columbia, an employee’s vacation time earned for a vacation entitlement year must be taken within 12 months of it being earned. 

The most important aspect of any vacation policy is that to be legally compliant, unused vacation time can only be forfeited if an employee has had the full opportunity to take their vacation time within their vacation entitlement period. While there are limited jurisdictions and situations where vacation time may be forfeited, vacation pay can never be forfeited, as it is considered part of an employee’s earned wages. We discuss this further below. 

How much is vacation pay? 

Vacation pay is a payment issued to employees, providing a sum they can draw upon during their scheduled vacation time. There are provisions under some employment standards that allow vacation pay to be calculated and paid to employees per pay period if the employee and employer agree. It is important to note that even with such an agreement, employees are still entitled to the vacation time—it will just be unpaid when taken. 

Vacation pay is calculated as a percentage of an employee’s gross wages during the applicable vacation entitlement year. Vacation pay typically accrues at a rate of: 

  • Four percent of gross wages for employees with less than five years of employment where the vacation time entitlement is two weeks; and 
  • Six percent of gross wages after five years of employment with a vacation time entitlement of three weeks. 

The earnings or wages included in the calculation can vary across jurisdictions. In Ontario, “gross wages” include payments like salary, commissions, overtime pay, and termination pay. They do not include expenses, discretionary bonuses, or severance pay. Of note, under Alberta’s Employment Standards Code, vacation pay is not earned on overtime pay or general holiday pay. 

Do employees accrue vacation entitlements while on vacation or protected leaves? 

It is important to note that employees continue to accrue vacation time when they are away from work because of a temporary layoff, sickness or injury, or any protected leave that does not result in a break in service (for example, pregnancy leave, parental leave, or family responsibility leave). In other words, vacation time accrues during both active and inactive service. Depending on jurisdiction, vacation pay may accrue during leaves, too, such as in Ontario, though if a leave is unpaid, the employee accrues a percentage of zero pay, which is still zero pay. 

Is vacation time mandatory? 

The purpose of vacation is to ensure employees take time off work. There are very limited provisions in legislation that allow an employer to pay out vacation pay if an employee forgoes (does not take) their vacation time. 

For example, in Quebec, the Act Respecting Labour Standards provides an entitlement to earn a third week of vacation time with vacation pay entitlement equivalent of six percent of earnings. However, the legislation allows an employee to receive their vacation pay for their third week of vacation without a requirement to take the week of vacation time. 

Another example is that in Ontario an employee can forgo some or all of their earned vacation time with the employer’s electronic or written agreement and the approval of the director of employment standards. This approval does not affect the employer’s obligation to pay the employee vacation pay; employees may give up vacation time, but not the right to vacation pay. 

Facts and myths about vacation pay in Canada 

Fact or myth: Part-time and casual employees are not entitled to vacation time. 

  • Myth: All employees under employment standards legislation are entitled to earn both vacation time and vacation pay, regardless of their employment status. 

Fact or myth: Employees can’t be forced to take vacation; they have earned the vacation, so it’s their right to decide whether they wish to use it. 

Fact or myth: When a worker’s employment ends, they must receive any outstanding vacation pay with their last paycheque. 

  • Fact: Vacation pay is money that is earned based on a percentage of earnings. Any earned but unused vacation pay must be paid at the end of employment. 

Fact or myth: Under employment standards in all jurisdictions, you do not have to allow employees to “carry forward” a portion of their unused vacation at the end of the vacation entitlement. 

  • Fact: Under employment standards in all jurisdictions, employees must take their vacation within the stated vacation entitlement period, allowing for exceptions where an employee may be on an extended, protected leave. 

Fact or myth: If you provide your employees the opportunity to earn vacation time and pay that is greater than your respective employment standards minimum, you can have a vacation policy that will pay an employee unused vacation time only up to the employment standards minimum if an employee voluntarily resigns from their employment. 

  • Myth: Vacation pay is considered wages earned, and you cannot reduce or require an employee to forfeit wages earned. You cannot “fall back” to the legislative minimums if you commit to more in your policy. 

Tips for managing employee vacations 

To ensure compliance with jurisdictional vacation requirements (or even if you provide a greater entitlement to your employees), you may wish to consider the following best practices: 

Set out vacation entitlements and obligations in writing 

Clearly address employee vacation rights and obligations in writing. By taking this step, either in a written employment agreement or in a written policy (brought to the employee’s attention), you can set parameters for taking vacation and minimize the risk of disputes down the road. 

Use a written policy to address the following aspects of employee vacation rights and requirements: 

  • The employee’s annual entitlement to vacation time and vacation pay; 
  • How and when vacation pay is calculated and paid; 
  • The steps an employee must take to request vacation time; 
  • How far in advance vacation time must be requested; 
  • Any period during the year when vacation is prohibited (for example, if your business is particularly busy during April each year, you may choose to not allow vacation requests during that time); and 
  • Your discretion to refuse a vacation request based on operational needs. 

Report and record vacation accrual clearly 

Having a clear vacation policy is only half the battle. Beyond that, it’s critical to track vacation entitlements consistently and accurately (eligible vacation time and pay versus actual vacation time and pay used). This is both a statutory requirement in many jurisdictions (such as under Ontario’s Employment Standards Act, 2000) and necessary to establish a transparent and defensible vacation tracking system. An employer’s inability to show that vacation pay has been properly accrued, tracked, and paid may result in statutory or contractual liability. 

Caution: All the above information presumes there is no contract with the employee containing specific rights regarding vacation. All the above information represents minimum standards, but some employment contracts may provide more than the minimum standards. For example, some contracts provide more vacation time than the minimum requirement, and some have more generous terms for when and how vacation is to be taken. Check your employees’ contracts to understand your rights and obligations regarding vacation time and pay to any employee. 

Vacation pay and employer responsibilities 

  • It is your responsibility to ensure employees take their earned vacation in the timelines required. 
  • If you allow an employee to use more vacation than they have earned, and the employee resigns from their employment before earning all the vacation they have used, you must get written or electronic consent from the employee to deduct money owing from their last payroll. 
  • The key to managing employees’ vacation entitlements is to have a process in place to schedule them. Start by establishing a window of opportunity when employees must request vacation periods for the year (for example, by January 31 of each year). Advise employees that in the absence of receiving preferred vacation dates, you will assign vacation periods to them. 

Still have questions about how vacation pay is calculated? 

We can help. At HRdownloads, we understand the importance of concise vacation reporting and record keeping. This is why we’ve fully integrated Timetastic into our HR service offerings. Approve time off requests in seconds, track and record annual leave, and sync with online calendars at your fingertips with Timetastic. We offer clients tailored solutions for HR software, HR content, and HR support, with hundreds of online training courses to provide a flexible platform to organizations of all sizes. Book your free demo with one of our HR experts at a time that fits your schedule. We’re here when you need us!