For many employers, January marks the start of a new vacation entitlement year and while employee time off is crucial to a healthy work-life balance, it can also be a source of confusion and headache for employers. So, as the New Year is rapidly approaching, here’s a refresher on vacation entitlements under the Ontario Employment Standards Act (ESA). 

Vacation pay vs. vacation time 

Under the ESA, there are two standard vacation entitlements: vacation time and vacation pay. It’s important to keep these standards separate, as they are completely different concepts and should not be used interchangeably. 

Vacation time is the amount of days off an employee is entitled to annually. It is calculated by the years of service of an employee. Employees with less than five years of service are entitled to two weeks of vacation (or ten days) per year. Employees with five or more years of service are entitled to three weeks of vacation (or fifteen days) per year. Under the ESA employees are only entitled to vacation time once they have completed 12 consecutive months of employment. However, many employers offer a greater entitlement here and allow vacation time within the first year of employment. 

The ESA gets a bit hairy about “vacation entitlement years” so it’s important to note that an employee’s “vacation entitlement year” is technically the recurring 12-month period following their first day but to avoid employees running on different vacation schedules, many employers set a company-wide vacation entitlement year (i.e. from January 1 to December 31). When employers set their own vacation entitlement year, employees are entitled to prorated vacation time between their start date and the start of the company’s vacation entitlement year. These calculations can be tedious but the ESA Guide breaks it down here.    

Vacation pay has nothing to do with employees taking time off work and instead is calculated on an employee’s gross wages. Employee’s entitlement to vacation pay begins as soon as they start working. Employees with less than five years of service earn vacation pay at 4% of their gross wages. Employees with over five years of service earn vacation pay at 6% of their gross wages. The ESA defines wages as including commissions, overtime pay, and bonuses related to hours of work, production, or the efficiency of the employee, but not tips or discretionary bonuses.

When to pay vacation pay

Typically, an employer will pay accrued vacation pay to date in a lump sum when an employee takes their vacation time. Alternatively, and only if agreed upon in writing, an employer can pay vacation pay on each pay cheque as it accrues or at any time agreed by the employee.

If an employee is terminated or resigns, they are owed all outstanding vacation pay that has been earned and not yet paid. An often overlooked ESA requirement is that vacation pay is also payable on statutory termination pay (i.e. it is owing on wages earned up to the end of an employee’s statutory notice period). Any unpaid vacation pay must be paid within seven days of the employment ending or the employee’s next pay date, whichever is later. 

Conclusion 

Vacation entitlements can be tricky to navigate and this blog only scratches the surface. There are further nuances, calculations, and exemptions under the ESA. If you have questions about vacation entitlements at your workplace, get in touch for a consultation. 

By Lindsay Koruna