Time to Revisit Your Company’s Vacation Policy…

Vacation entitlements in Ontario can be tricky because of the minimum entitlements in Ontario’s Employment Standards Act, 2000 (“ESA”) and the reality that many employers provide a greater right or benefit than the ESA minimums.

Most employers want to of course comply with the minimum standards requirements regarding vacation in the ESA but they also want to limit any banking or carrying over of vacation time, and build up potential liabilities. We recommend employers take stock of their employees and vacations in the fall (as most vacation entitlement years is the calendar year) so employers can take proactive steps now if necessary to minimize potential vacation liabilities down the road. Here are the key points to keep in mind:

1. An employer cannot contract out of ESA minimum requirements for vacation time and vacation pay.

   Under the ESA, after one year of employment, an employee is entitled to 2 weeks of vacation time up to their fourth year of employment. However an employee is entitled to vacation pay of at least 4% of their annual wages from the outset of their employment. After their fifth year of employment the minimum entitlement goes up to 3 weeks of vacation time and vacation pay of at least 6% of their annual wages. Vacation time and vacation pay are two distinct concepts. Most employers provide paid time off in lieu of vacation but employers can also pay vacation pay on each cheque and provide unpaid time off.

2. Under the ESA, an employee can carryover their vacation time to 10 months from the end of the vacation entitlement year in which it was earned.

   What this means is that if your company has a vacation calendar year that starts for January 1, 2023, and the employee under the ESA is entitled to 2 weeks vacation time, that employee can take that two week vacation entitlement up until October 31. 2024. If for whatever reason, the employee does not take their ESA minimum vacation requirement then the employer has to pay out that employee their vacation entitlement.

3. Under the ESA, the employer can require an employee to take their vacation

   During the COVID-19 pandemic, some employees did not take their vacation which left employers on the hook for figuring out what to do with all this banked vacation time. It is important for employers to remember that under the ESA if for whatever reason an employee is not taking their allotted vacation, the employer has the right to schedule the employee’s vacation in 1 or 2 week blocks.

4. If the employer provides a greater right or benefit, the employer can institute a use it or lose it policy

   If the employer provides for instance an employee 4 weeks of vacation from the outset of employment (more than the ESA minimum), the employer can put in place a use it or lose it policy that says if the employee does not take their vacation entitlement above their ESA entitlement in the year in which it is earned, the employee forfeits that vacation. Under the common law an employer can contract out of the greater right or benefit they are providing that employee for vacation through their employment agreement and or vacation policy. Or employers can provide their own rules about carryover if need be (i.e. carry over 5 days to the following year to be taken by March 31st etc.) again through an employment agreement or vacation policy.

5. Remember vacation pay is calculated on an employee’s “wages”

   Employers please remember that vacation pay is owed on not just base salary but overtime, non-discretionary bonuses and commissions.

6. During a statutory leave, an employee accrues vacation time but not vacation pay

   While an employee is on a leave i.e. maternity or parental leave, the employee continues to accrue vacation time given that their years of service continues to accumulate but are not entitled to vacation pay as they are not earning wages during an unpaid leave.

7. Upon termination, vacation pay accrues to the end of the statutory notice period

   Upon termination, any accrued and unpaid vacation pay is due to the employee and that period accrues to the end of the statutory notice period. For example if you had a six year employee, their statutory notice period would be 6 weeks from the date of termination. However, no vacation pay is due on statutory severance pay (which in this example would be 6 weeks of statutory severance pay).

With these key points, employers would be well advised to take stock of their employees and their vacation entitlements now with a view to the following:

• If possible, get employees who have not taken their ESA minimum vacation entitlements, to take their vacation before the end of the vacation entitlement year or at least within 10 months of that vacation entitlement year;

• Ensure employment agreements address vacation entitlements and mention use it or lose it policies if they exist;

• Revisit or update vacation policies to ensure compliance with the ESA and institute whatever use it or lose it or carryover policies the employer wants; and

• Deal with those lingering long term employees with “banked” vacation time (most companies have one or two of these employees)

If you have any questions or need assistance with these issues and vacation policies, please do not hesitate to reach out to the GWL team.