Taking vacation time can help keep your productivity levels up and help reduce any stress building up from the demands of having a full-time job. While many employees enjoy this particular work benefit, there are still those who get a little confused about the technicalities of employee benefits.
To lessen some of that confusion, here are some frequently asked questions about vacation pay in Canada and what it really means.
How much vacation are employees entitled to?
According to the Employment Standards Act, an employee becomes entitled to two weeks of vacation time on the anniversary date of their first year of employment. This means you can finally take the vacation you earned in the year before! After completing five years of work with the same employer, you become entitled to a minimum of three weeks of vacation.
How does vacation pay work?
Vacation pay is calculated based on your gross earnings from the previous year. The definition of gross earnings is important to understand when knowing what to pay out for vacation time. This includes types of pay such as regular salary or hourly wages, bonuses, and commissions paid out. For Ontario specifically, a more extensive list can be found here; refer to the “Vacation Pay” section.
Vacation time vs Vacation pay
This is an important distinction to make. As noted above about gross earnings, bonuses and commission are included in this number, among other types of earnings. The inclusion of these earning types changes the amount of vacation PAY but not vacation TIME.
Vacation time would be based on your employment agreement and is straightforward to track. For example, an employee who is entitled to 3 weeks of vacation time has 15 days total to use towards their vacation time balance.
On the flip side, vacation pay is further calculated based on the earnings in each pay period. An employee that has 3 weeks of vacation receives 6% of gross wages as vacation pay.
Tip: to calculate the percentage for someone’s vacation time into vacation pay, you divide their total weeks by 52. Roughly speaking, every one week adds 2% to the vacation pay amount.
Here’s a simple scenario:
Brian works for Blueprint Accounting and receives 3 weeks of vacation (6%). In 2020, he earned $50,000 in wages. His company would be paying him $3,000 in vacation wages ($50,000 x 6% = $3,000).
In the above example, Brian is entitled to 3 weeks, or 15 days of vacation. He can’t take any more time off than the 3 weeks. This is the vacation TIME amount he is owed based on his employment agreement. However, the vacation PAY amount can be different. Let’s assume Brian earned a bonus of $5,000. This would mean his vacation PAY would increase from $3,000 to $3,300 ($5,000 x 6% + $3,000).
When do I pay out all vacation pay?
Vacation is paid out as it’s taken and aligns with the pay cycle. When paying out vacation, you’ll reduce regular pay and increase vacation pay equally. For example, if the following is true about your business and the employee above, Brian:
- Salary of $50,000 per year
- Bi-weekly payroll, so there are 26 pay periods in a year
- Therefore, Brian’s bi-weekly pay is ~$1,923 ($50,000 / 26)
When Brian takes vacation for one week, his bi-weekly regular pay will decrease by ~$961.50 (or one week of pay) and his vacation pay will increase by the equivalent amount so that his total pay stays the same for the pay period.
This is normally the case for salaried employees and can certainly be the case for hourly employees, but also depends on your employment agreement.
Another option is to have vacation pay added to employees pay checks each pay period. However, that would require a written agreement between the employer and employee.
Can employers give more vacation?
According to the Employment Standards Act, employees’ amount of vacation pay is proportional to the minimum amount of vacation time. For each week of vacation, you basically earn 2% of your gross wages. The employment code doesn’t require an increase in vacation beyond the three-week minimum, but employers are welcome to add more vacation to their employees if they wish to do so.
Is it possible not to use vacation days and instead take the vacation pay?
The law requires employers to make sure that employees take their yearly vacation and receive their vacation pay. However, if an employee decides not to use those vacation days, the employer may cut you a cheque at the end of the year for the remainder of the pay owed to each employee. Other employers prefer to just carry the vacation days over to the following year, resulting in more vacation days that can be accumulated.
Take note that these all depend on the company policy or the employment contract each employee has signed with the company. A vacation policy should be created so that it is clear as to the requirements by the employer for the employees’ vacation entitlement.
Every employee is entitled to have some time off from work in the form of vacation time and vacation pay. These are just some of the most common questions being asked by professionals about Canada’s employment standards. If you need more help understanding the Employment Standards Act’s technicalities, it’s best you seek an experts’ help.
In need of an expert to make sense of your business’ vacation pay regulations? Turn to Blueprint Accounting, Inc.! Our team of accounting experts provides a wide range of cloud-based accounting services in Canada. We’re here so you can work on growing your business while we’re in charge of crunching the numbers for you. Contact us today for a free assessment!