The dog days of summer are upon us. As employees head to cottages (or their backyard), it is a good time for employers to review vacation policies to ensure they are fit for purpose. Managing and tracking employee vacation entitlement can be one of the trickier things for employers to navigate. Errors in this regard can result in unnecessary disputes and unintended liability.
Minimum Statutory Entitlements
In Ontario, minimum employee vacation entitlements are set out in the Employment Standards Act 2000 (“ESA”). The ESA requires that all provincially-regulated employees receive vacation pay and vacation time. While related, these concepts should not be conflated; each offers a stand-alone entitlement.
1. Vacation Time
Employees with less than five years of employment with a given employer are entitled to two (2) weeks of vacation time after each 12-month vacation entitlement year. Employees with five or more years of accrued service are entitled to three (3) 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.
It is important for employers to also be aware that:
vacation time continues to accrue when an employee is away from work because of a temporary lay-off, sickness or injury, or any other approved leave that does not result in a break in service (i.e. pregnancy leave, parental leave or declared emergency); and
under the ESA, employee vacation time earned for a vacation entitlement year must be taken within ten (10) months of completing that year.
2. Vacation Pay
Vacation pay is a payment issued to employees. It provides employees with a sum they can draw upon during their scheduled vacation time. It is calculated as a percentage of an employee’s gross wages during the applicable vacation entitlement year.
Vacation pay accrues at a rate of:
4% of gross wages for employees with less than 5 years of employment; and
6% of gross wages after 5-years of employment.
In accordance with the ESA, “gross wages” includes payments such as salary, commissions, overtime pay, and termination pay. It does not include expenses discretionary bonuses, or severance pay. As a result of how the ESA requires vacation pay to be calculated (i.e. as a percentage of gross wages) it, unlike vacation time, may vary from one vacation entitlement year to the next.
Vacation pay may be issued to employees in one of four ways:
as a lump sum payment prior to the employee taking earned vacation time;
on each pay cheque (i.e. accruing on each bi-weekly/bi-monthly pay period), where agreed in writing with the employee;
at any other time agreed in writing with the employee;
if the employee is paid by direct deposit, on (or before) the pay day for the pay period in which the vacation time falls.
Practical Tips for Managing Employee Vacations
To ensure compliance with ESA vacation requirements (or to provide a greater entitlement) employers may wish to consider the following:
1. 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), employers can set parameters for taking vacation and minimize the risk of disputes down the road.
Employers can use their employment agreements (or written policy) as an opportunity to address the following aspects of employee vacation rights and requirements:
The employee’s annual entitlement to vacation time;
The employee’s annual entitlement to vacation pay;
How and when vacation pay will be calculated and paid;
The steps an employee must take to request vacation time in writing;
How far in advance vacation time must be requested;
Any period during the year when vacation is prohibited (i.e. if your business is particularly busy during April each year, you may choose to refuse vacation requests during that time);
The employer’s discretion to refuse a vacation request based on operational needs; and
Whether there is a “use it or lose it” policy in effect (i.e. any unused vacation – in excess of minimum statutory entitlements – is automatically forfeit if unused, rather accruing as an ongoing liability).
2. Implement clear reporting systems and records
Having a clearly-stated vacation policy is only half the battle. Beyond that, it is critical to ensure that vacation entitlements (and vacations taken) are tracked consistently and accurately. This is both a statutory requirement (under s. 15.1 of the ESA) 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 and/or contractual liability.
Recent Lessons from the Courts
Finally, a couple of recent decisions from the Ontario Superior Court of Justice highlight the importance of tracking and issuing vacation entitlements in accordance with the ESA.
1. Russell v. The Brick Warehouse (2021 ONSC 4822[1]) is a useful reminder to employees to continue to accrue and pay vacation pay during the applicable statutory notice period.
In this action (for wrongful dismissal), Justice Vella awarded $25,000.00 in moral damages, relying in part on the court’s finding that an offer issued by the employer at the time of termination failed “to meet all of the statutory entitlements, including vacation pay accrued over the course of the statutory notice period.”
With further, and specific regard to this aspect of the court’s findings, Justice Vella noted:
…the termination letter provided that vacation pay would only be paid accrued to the date of termination. Under the ESA, vacation pay continues to accrue over the statutory notice period, or eight weeks beyond termination in Russell’s case.
2. Goruk v. Greater Barrie Chamber of Commerce (2021 ONSC 5005) serves as a reminder that employers must be careful in adopting and implementing “use-it-or-lose-it” vacation policies or risk them being found unlawful and unenforceable.
In this case, there was disagreement between the parties as to the plaintiff’s vacation entitlements. The employer submitted that it prohibited the banking of vacation time without express written approval in support of its use it or lose it policy. The plaintiff, on the other hand, denied there was a “use-it-or-lose-it” policy and that staff were permitted to accrue and carry-forward vacation entitlements from year to year.
While the court was unable to conclude with certainty that the employer had a use it or lose it policy, it nonetheless confirmed that “the ESA establishes mandatory minimum vacation entitlements, which cannot lawfully be subject to a use it or lose it policy. ” As such, employers that intend to implement a “use-it-or-lose-it” policy, should do so carefully, taking steps to ensure that it meets ESA minimum requirements.
If you are an employer, or employee, with questions about your vacation rights and obligations, please contact one of our Ottawa employment lawyers to discuss further.
Vey Willetts LLP is an Ottawa-based employment and labour law firm that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in Ottawa and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca.
[1] Note: this decision is not yet available on CanLII.org.