Paid Vacation

Many employees spend the majority of the year working and are entitled to paid vacation days off for rest. It's important for your employees to get their vacation entitlement to allow them to relax, recharge and keep their motivation levels up so they can stay productive.

As an employer in Canada, you must provide your staff with vacation pay as part of their gross wages. Your employees are entitled to a fixed number of paid days off depending on their length of employment.

Understanding vacation pay is a vital part of your responsibilities as an employer if you decide to provide employees with paid days off. As with vacation entitlements, employee vacation pay varies by length of service.

Calculating vacation pay and understanding what factors to consider can be complex. That's why we've created this guide to help employers like you better understand everything about vacation pay. We discuss what paid vacation leave is, your employee’s entitlements and how to manage this leave.

What does paid vacation mean?

Paid vacation refers to your employee's statutory entitlement to vacation time off and vacation pay. Every year, your employees are entitled to a period of time off from work and to a percentage of their wages to be paid in connection with vacation. This employee entitlement is also called annual leave.

As the employer, you fully pay for this time away from work, and your employees are entitled to use it as they please. It can be used to rest, relax, or take a trip.

Vacation pay intends to cover the wages 'earned' when employees are away from work. It’s calculated as a portion of the gross wages the employer pays depending on the employee's length of employment.

This calculation is set in employment standards legislation, for that reason, the amount of vacation pay varies across Canadian jurisdictions.

For example, Ontario legislation provides that employees with 1 to 4 years of continuous employment must receive 4% of their wages as vacation pay. And for employees with 5 or more years of employment, their entitlement raises to 6%.

Vacation entitlement

Your employees are entitled to paid vacation under employment standards. However, vacation time and vacation pay entitlements vary across Canadian jurisdictions.

Generally, for vacation time most employees must receive at least 2 weeks of time off from work once they have completed a year of employment. Once employees complete a certain amount of years of continuous employment (generally 5 years) vacation time off entitlement increases to 3 weeks.

For that reason, employers can't contract for less vacation time or vacation pay than what the law provides.

The conditions for their annual vacation entitlement should be outlined in their employment contract or collective agreement so they know exactly how many days off they are entitled to take each year.

It's illegal to deny employees their vacation entitlements. Failure to give your employees their mandatory weeks of vacation could lead to litigation and poor employee management resulting in employee burnout, drops in productivity and reputational damage.

Including a vacation or annual leave policy in your employee handbook is crucial to managing your paid vacation process. You should provide all the details related to procedures for requesting vacation time, black-out periods (if any) and advance notice requirements. It's also best practice to make sure your employees review and sign off on your business's vacation policy.

Managing paid vacation

Part of your responsibility as an employer is making sure paid vacations are properly managed in your workplace.

Your employees must take their minimum vacation time in accordance with the Employment Standards Act or Employment Standards Legislation of your jurisdiction. Failure to authorize employees to take their minimum vacation time puts you at risk of legal trouble.

If you don't have a proper vacation management structure in place you risk having too many employees off at the same time. If this happens, it could disrupt your business operations as employees who aren't on vacation become overworked and less productive.

That's why it's crucial to have a clear and concise vacation policy that guides how paid vacations are taken in your workplace. Your vacation policy should be included in your employee handbook and contain the following:

• How to request paid vacation leave
• Vacation pay rules
• How vacation leave is accrued
• How to roll over vacation time
• Eligibility and vacation entitlement

Your vacation policy clarifies any questions your employees may have around annual vacation and makes the vacation management process easier for you.

How to calculate vacation accrual

Accrued vacation is the number of hours employees have earned but have not used. You can create your own system for calculating accrued vacation pay and include it in your vacation policy. It's usually calculated based on your business's payroll cycle.

As a Canadian employer, you're not mandated to have a vacation accrual system, but it’s best practice, and most businesses use it to manage vacation entitlement properly.

It’s also important to note that you can't enforce a use-it-or-lose-it policy regarding statutory vacation time off. Even if your employees don't use up their entire vacation entitlement, your employees must receive accrued vacation pay for the remaining days they didn't take off.

However, this restriction is not applicable for vacation entitlements that go beyond the minimum statutory requirements.

For example, if you offer 25 days’ vacation time off to an employee whose minimum statutory entitlement is 2 weeks, you can enforce a use-it-or-lose-it policy for the 15 days that go beyond what the law requires from you.

In such cases, employers must have a clear annual leave policy and ensure employees have reviewed and understood the terms and conditions of their vacation time allowance. This includes how your employees will accrue annual leave.

Defining year of employment

Clearly defining your workers 'year of employment' helps you determine how many weeks of vacation an employee can accrue on a regular schedule. Employees acquire a right to a certain amount of time off work once they have completed a year of service.

While most employers set the vacation year from the first day of employment, others set an alternative vacation year (e.g., January to December). Some employers use the same date to reset vacation entitlements, such as resetting all employees' vacation time entitlements on the 1st of January each year.

Remember that employees shouldn't lose any vacation time if you decide to use this form of years of employment. Alternatively, you could allow vacation time to roll over into the next vacation year for accrued but unused vacation time.

However, employers must note that there is no statutory requirement to roll over vacation time; this can be set at your discretion.

Alternative vacation entitlement year formulas include:

• A fixed 12-month period, such as a financial year
• A recurring 12-month period starting when you hired the employee 
• A 12-month period of your choosing that is different from the day you hired the employee

Employees are entitled to a pro-rated vacation if you use an alternative vacation entitlement year from the date you hired them. Generally, this would be one day of vacation time off per month of employment until the next vacation year commences.

How is vacation pay calculated?

Calculating how employees earn vacation pay is straightforward.

Although minimum vacation pay varies across Canadian jurisdictions, generally, your employee's vacation pay should be at least 4% of their annual gross earnings for their vacation entitlement year if they have completed 1 to 4 years of continuous employment.

The percentage of annual wages typically increases to 6% after some time. However, the specific duration of continuous employment needed for this increase to take effect varies among provinces.

Federally regulated employees who have worked for your business for 10 years or more are entitled to 8% of their gross earnings in the vacation year.

Below is a list of the components of vacation pay calculations that should not be considered part of their “wages.” Remember that this set of components varies across Canadian jurisdictions:

• Overtime pay
• Tips and gratuities
• General holiday pays
• Termination pay
• Allowances and expenses
• Discretionary bonuses unrelated to hours of work, production, or efficiency

Do employees get paid for unused vacation time?

If an employee has not used their vacation time by the end of their vacation entitlement year, they are still entitled to be paid their vacation pay for that accrued time.

As an employer, you can allocate any untaken leave to your employees to make sure they're getting time away from work. This usually happens towards the end of the calendar year when annual vacation entitlements end.

For example, if your employee is entitled to three weeks' vacation and they have only used less than one week of their vacation entitlement, but they still have two weeks' vacation left and you have previously paid vacation pay, you would only have to pay for the remaining two weeks' vacation they haven't used.

Vacation time vs vacation pay

Vacation time and vacation pay often get mixed up, but they aren't the same thing.

Vacation time refers to the number of weeks of vacation your employees earn each vacation entitlement year. Most employees are entitled to vacation time after completing one year of employment with the same employer. However, many employers choose to give employees vacation time starting when they get hired.

Generally, across Canadian jurisdictions, employers have an obligation to provide notice to employees of the commencement of their annual vacation period. Usually, this notice is communicated with two weeks’ notice; some Canadian jurisdictions provide for a written notice requirement.

Vacation pay, on the other hand, is the gross wages earned on your employee's pay cheque. You can choose to pay their vacation pay earned for that vacation year:

• In a lump sum before they take their vacation time
• By continuing with their usual paycheque when they're on vacation
• In a lump sum immediately after they return from their vacation time
• On a different schedule you agree with the employee

Some Canadian jurisdictions provide a default time for distributing vacation time.

If you operate in such jurisdictions, employment standards legislation requires you to get the employees written agreement to an alternative schedule for distributing vacation pay. In a case like this, it's best practice to present this agreement in your employment contract for new hires.

Exemptions from the minimum standards for vacations and vacation pay

There are a few workers who are exempt from the general minimum standards for vacations who don't get paid vacation pay.

This could be for various reasons, such as their industry or working patterns. For example, in Ontario, chiropodists, chiropractors, dentists, naturopaths and a few others are not entitled to vacation with pay.

Postponing or interrupting annual vacation to take another leave

An employee can put off or interrupt their annual vacation to take a different leave for which they're qualified.

Examples of other leaves employee can hold off their vacation for include:

• Maternity leave
• Parental leave
• Family responsibility leave
• Critical illness
• Personal leave

It’s important to note that employees' vacation time still accrues while your employee is away from work on an approved leave.

So, if before taking parental leave, your employee had four weeks of vacation left, they can still take those 4 weeks off when they return from parental leave.

Annual vacation pay during a leave of absence

Vacation pay is based on a percentage of wages earned by the employee. If the employee is not working because they are on a leave of absence, then they are not earning wages.

For this reason, under employment legislation, employers are not required to pay vacation pay during periods of statutory leave of absence unless the employer agrees otherwise in an employment contract.

Employment Insurance (EI) contributions are taken out of every employee's pay cheque and put towards a fund that is available when they're away on statutory leave and are eligible to access such funds. The program pays out a percentage of the weekly salary to employees on eligible leaves.

Frequently asked questions

Our clients ask a lot of questions about vacation pay entitlement, here are some of the most asked questions:

What happens when a statutory holiday falls on a non-working day?

Statutory vacations and statutory holidays should not be mixed up. Statutory holidays established by minimum standards legislation, are specific paid days of rest and differ from an employee's vacation entitlements.

Your employees are entitled to both vacations and statutory holidays under this legislation, and they cannot be fulfilled by the same day off. Each jurisdiction has its own regulations regarding what actions employers must take if a statutory holiday occurs during an employee's vacation.

Do employees get vacation pay owed after resignation?

As an employer, you must still pay employees their unused accrued vacation pay when the employment relationship ends.

Whether the employee quits, or you terminate their employment, you'll still have to pay the employee any vacation pay that has been accrued during the vacation year that hasn't been used. However, the sum is different from what you would pay an employee with a full year of employment.

The vacation pay owed to the employee comprises any unpaid vacation pay earned in a previous vacation year, along with accrued amounts up to the termination date within the current vacation year.

Vacation pay continues to accumulate during the statutory notice period in all jurisdictions. Each jurisdiction's minimum standards legislation stipulates a defined timeframe for the payment of vacation pay following termination.

Can I cancel an employee's vacation?

Employers have total discretion to determine the dates when an employee can take their accrued vacation time.

You can only cancel an employee’s vacation leave in some instances. However, it’s important to first review your annual leave policy to be familiar with the remedies you’re required to provide or the rights the employee has in your policy and according to minimum employment standards. Cancelling an employee’s vacation can mean a financial hurdle for the employee.

For this reason, employment standards legislation in some Canadian jurisdictions require employers to reimburse the employee for reasonable expenses that they incurred that can't be recovered (e.g., Saskatchewan and Newfoundland & Labrador). Other jurisdictions are silent on the matter. Generally, it’s good practice to only consider cancelling an approved vacation request when it’s reasonable and necessary.  

It's preferable to avoid cancelling or denying vacation requests as much as possible. Doing so can result in unhappy, demotivated, unproductive, and burned-out employees who are more likely to seek employment elsewhere.

Can a company refuse to pay out vacation in Canada?

It's illegal to withhold vacation pay in Canada. As an employer, it's your duty to give your workers their vacation pay entitlement, or you could risk your employees filing a claim against you.

You must pay any outstanding vacation pay your employees have earned during that vacation year. The same rule applies to terminated employees. You can't refuse to pay vacation pay in the event of a termination of employment unless the employee was terminated with cause.

Does salary include vacation pay?

If you have salaried employees, their vacation pay is a percentage of their annual gross wages. How you structure their vacation pay period depends on what works best for your business. You can decide to pay it when they receive their weekly, biweekly, or monthly pay.

We have also broken down other ways to structure vacation pay earlier in this article.

Get help with managing paid vacation today with BrightHR

Failing to handle paid vacations fairly and in line with the law not only results in costly employee claims but also increases employee turnover due to burnout and decreased motivation.

When your business doesn't have a comprehensive vacation policy and management system, requesting time off and understanding vacation entitlements can be tedious, time-consuming, and stressful.

Your staff have a statutory right to time off, and with BrightHR's staff vacation planner, you can:

• Spend less time wondering how much time off your employees have left and see it all in a flash with our vacation balances feature
• Instantly flag vacation clashes, resolve them and avoid understaffing
• Enjoy peace of mind knowing you're acting in line with relevant laws and regulations on vacation management

Interested in learning more about how our staff vacation planner makes handling your employee's time off a breeze? Contact us on 1 888 220 4924 or book a demo today.