Vacation Pay: How Much Is It & Who Gets It
As an employee, and even an employer knows, vacation time and vacation pay are very important factors in their salary. However, determining the correct amount and length of vacation time can have a bit of a trick to it. Depending on the length of employment and the type of leave being requested, employers may find some methods of vacation pay more suitable than others. Let’s take a look at the Ontario laws of vacation pay, who is entitled to vacation pay, and what options you have as an employer to pay it out.
What is Vacation Pay?
Vacation pay is a term used to describe a common fringe benefit given to an employee for a period of time that they do not have to work, much like an employment reward. Typically in Ontario, employees are given a minimum of 2 weeks of paid vacation time for every 12 months of vacation entitlement. Vacation entitlement is a 12 month period in which employees are eligible for vacation pay, usually beginning after the first 12 months of employment which have passed within a company. There is a bit of grey area between how that time period is calculated. Some companies opt for the standard calendar of vacation entitlement, meaning that the 12 months begins on the hire date of the employee. However, other companies may choose a more generic calendar, making every employee’s imaginary start date the same. For an example, beginning everyone’s clock on January 1st.
But, what happens to the in-between time if a company switches from one option to the other? That time is called stub time. For example, if you were hired by a company on September 1st, but if during your mandatory pre-paid vacationed year, the company you work for switches to an alternative entitlement year, like January 1st, the time between your actual start date and your new imaginary, generic start date would be your stub time. This time is still calculated into your vacation pay probationary period.
Depending upon the employer, vacation time can be used on a day-by-day basis, or may be restricted to specific blocks of time, such as full week or two. This can often depend on the time of year and also upon accessibility of a replacement worker in your absence.
How Does Vacation Pay Get Paid?
Vacation pay is typically paid to employees in one of two methods, often dependant upon whether or not they are full time or part time. For full time employees, most companies chose to use a gradual pay system. This method adds their vacation pay in small portions to each cheque. By Ontario law, a minimum of 4% of their annual wages must be added to pay each employee their allotted vacation pay. This means that come vacation time, any vacation pay owed, was already given to you and the savings aspect was the employee’s responsibility. While this method is most common, it’s not favoured by employees. The major downside to this method of accumulated vacation pay is that when it comes time to take a vacation, the employee most likely has not set aside that vacation pay in order to cover off their expenses while they are enjoying the time off.
The second method is more preferred by full time staff as this method involves a lump sum payment when requested ahead of their vacation to be given on the same week of their usual paycheck that the employee is taking the time off. With the same Ontario law as we had mentioned before, a minimum of 4% of the employee's wages is still paid to employee, however, it is kind of set aside until their vacation time is taken. For example, if an employee has made $13,978 in gross pay thus far, when they take their vacation time they will be given a lump sum of $559.15, as opposed to small increments added to each pay cheque.
Who Gets Vacation Pay?
While most major employers offer vacation time and pay, not all do. In Ontario, any business covered by the Employment Standards Act, or ESA, gives their employees paid vacation time. However, many career fields are not covered, and use their own discretion. Much like the rules of minimum wage, overtime and holidays are different for different areas of work or industries, paid vacation time is as well. For example, the hospitality industry has their own set of rules in regards to vacation time, as does dentistry, agriculture, and many others. It is important to check with your labour laws to ensure you understand your vacation pay rules and exemptions, both as an employee and as an employer.
Many companies also use the idea of “if you don’t use it, you lose it”. This is in reference to the 12 year period, we mentioned before. Often, if you don’t use your vacation days within a 12 month period, they are discarded, and not carried over.
Calculating vacation pay for employees or trying to figure out if you've been paid correctly as an employee can be a difficult task, especially when it comes to calculating part time and full time payouts. As there are different methods, many exemptions and even cardinal rules for calculating vacation pay, it is always suggested that you speak with your accountant to ensure accuracy. If you have any questions about calculating your vacation pay, either as an employee or as an employer, please give us a call at 705-728-6469. Our dedicated team of experienced accountants are always here to help and explain all of your financial bookkeeping, payroll and business questions.