Part XI - Vacation with pay
The general intent of Part XI Vacation with Pay is to provide employees with vacation time and vacation pay. An employee whose period of employment is less than five years is entitled to two weeks of vacation time after the completion of each 12-month vacation entitlement year. An employee whose period of employment is five years or more is entitled to three weeks of vacation time after the completion of each 12-month vacation entitlement year.
Where the employer has established an alternative vacation entitlement year (i.e., one that does not start on the date of hire or the anniversary of the date of hire), the employee is entitled to a pro-rated amount of vacation time for the period ("stub period") preceding the first alternative vacation entitlement year and two or three weeks of vacation time after each alternative vacation entitlement year thereafter depending upon their period of employment upon competition of each vacation entitlement year.
Vacation pay accrues so as to provide a sum upon which the employee can draw during their vacation. The amount of vacation the employee accrues will depend upon the employee’s period of employment when the vacation entitlement period ends. Employees whose period of employment is less than five years upon completion of a vacation entitlement period, are entitled to accrue vacation pay at four per cent of the gross wages (excluding vacation pay) earned in that vacation entitlement period. Employees whose period of employment upon completion of a vacation entitlement period is five years or more are entitled to accrue vacation pay at six per cent of the gross wages (excluding vacation pay) earned in that vacation entitlement period.
Section 33 - Right to vacation
Right to vacation - s. 33(1)
The Government Efficiency Act, 2002, SO 2002, c 18 ("GEA 2002") amended this provision, effective November 26, 2002, to reflect the employer’s ability to establish an alternative vacation entitlement year. ESA Part I, s. 1 defines an alternative vacation entitlement year as a recurring 12-month period chosen by the employer and beginning on a date other than the first day of the employee’s employment. A standard vacation entitlement year is defined as a recurring 12-month period beginning on the date of hire.
The Fair Workplaces, Better Jobs Act, 2017, SO 2017, c 22 (“FWBJA”), effective January 1, 2018, amended the requirement to provide employees with two weeks’ of vacation time after each completed vacation entitlement year with a requirement to provide employees whose period of employment is less than five years upon the completion of a vacation entitlement year with two weeks of vacation time and to provide employees whose period of employment is five years or more upon the completion of a vacation entitlement year with three weeks of vacation time in respect of that vacation entitlement year.
When vacation must be taken
It is the responsibility of the employer to ensure that each employee receives their minimum statutory requirement. Note that where the employer has established an alternative vacation entitlement year, ESA Part XI, s. 34 establishes the employee’s entitlement to a pro-rated amount of vacation time for the period of employment (the "stub period") that precedes the first alternative vacation entitlement year.
The right to vacation time accrues only after the completion of each 12-month vacation entitlement year. Nevertheless, vacation time may be taken prior to the expiry of the 12-month vacation entitlement year if the employer is agreeable to this or if the contract of employment clearly provides for that entitlement. The only restriction on when the vacation must be taken is set out in ESA Part XI, ss. 35 and 35.1, which provide that it must be completed no more than 10 months following the end of the period over which it was earned.
Period of employment
The entitlement to either two or three weeks of vacation time is determined solely by the employee’s period of employment upon completion of each vacation entitlement year. If the employee’s period of employment is less than five years upon completion of the vacation entitlement year, the employee is entitled to two weeks of vacation time in respect of that vacation entitlement year. Likewise, if the employee’s period of employment is five years or more upon the completion of the vacation entitlement year, the employee’s entitlement is to three weeks of vacation time in respect of that vacation entitlement year. For example, an employee who reaches the five year period of employment threshold a full 10 months prior to the completion of the vacation entitlement year and an employee who reaches that threshold just one day prior to the completion of the vacation entitlement year will both be entitled to three weeks of vacation in respect of that vacation entitlement year.
The period of employment is a reference to the period that the employee has been employed by the employer since the date of hire. Under the ESA 2000, the period of employment also determines entitlements to things such a pregnancy and parental leave, organ donor leave, reservist leave and termination pay. The period of employment is not affected by inactive periods of employment such as leaves or lay-off. However, if there is a break in the employment relationship, the period of employment will be determined by the most recent period beginning after that break. Note that O Reg 288/01, s. 8(2), which ties together any two periods of employment separated by less than 13 weeks for the purposes of notice entitlements under the ESA 2000, does not apply to ESA Part XI.
Greater right or benefit
In accordance with ESA Part III, s. 5(2), where the vacation time entitlement is a period of more than the statutory entitlement of two or three weeks, as per an agreement between the employer and the employee, this greater right will prevail. However, it should be noted that because vacation time and vacation pay are separate entitlements under ESA Part XI, s. 35.2, the fact that an employer provides a greater right or benefit with respect to vacation time does not necessarily mean that the employer is also providing a correspondingly greater right or benefit with respect to vacation pay and vice versa.
Example:
Employee hired on June 1, 2014 and has a standard vacation entitlement year that runs from June 1 of each year to May 31 of the following year:
Employee earns two weeks of vacation time upon completion of each of the following four vacation entitlement years:
- June1, 2014 to May 31, 2015
- June 1, 2015 to May 31, 2016
- June 1, 2016 to May 31, 2017
- June 1, 2017 to May 31, 2018
On May 31, 2019, the employee completed five years of employment and so will be entitled to three weeks of vacation for the vacation entitlement year June 1, 2018 to May 31, 2019. In each subsequent vacation entitlement year, the employee’s vacation time entitlement will be three weeks.
Active and inactive employment – s. 33(2)
Section 33(2) provides that inactive as well as active periods of employment be included in the 12-month vacation entitlement period for the purpose of determining an employee’s entitlement to vacation time. The corresponding provision with respect to the accrual of vacation time over a stub period is ESA Part XI, s. 34(4).
An employee’s entitlement to vacation time accrues so long as the employment relationship continues. Therefore, the employee need not be actively employed (i.e., actually performing work) to earn the right to vacation time. Provided that the employee completes the vacation entitlement year (i.e., there is no break in the employment relationship during the vacation entitlement year), time spent on a Part XIV leave, or an approved leave of absence, temporary lay-off, etc. (all periods of inactive employment) must be credited to an employee in respect of their entitlement to vacation time. However, vacation pay will only be calculated on the actual wages earned during the period in respect of which the vacation is earned as per ESA Part XI, s. 35.2.
Where vacation not taken in complete weeks – s. 33(3)
Subsection 33(3) sets out a calculation for vacation entitlements for employees who will be taking vacation in blocks of less than one week.
An employee must request permission, in writing, from their employer to take vacation time in days rather than weeks. If the employer agrees to this request, in writing, the employee may take vacation time in shorter periods, i.e., days rather than weeks - see ESA Part XI, s. 35.
Calculating the number of vacation days to which an employee is entitled
Section 33(3)(a)
For those employees who have a regular work week, the number of single vacation days is based on the number of days in the employee’s regular work week. For example, if an employee regularly worked four days per week, the employee would be entitled to four single vacation days for each of the two or three weeks' vacation earned, as applicable, in the vacation entitlement year in accordance with s. 33(1).
Section 33(3)(b)
If the employee does not have a regular work week, the entitlement to single vacation days is calculated under s. 33(3)(b) as the average number of days worked per week during the most recently completed vacation entitlement year. For example, if an employee works an average of three days per week, the employee would be entitled to three single vacation days for each of the two or three weeks’ vacation earned, as applicable, in the vacation entitlement year in accordance with s. 33(1).
Calculation of single vacation days under s. 33(3)(b):
- Count the total number of days the employee worked in the 12-month vacation entitlement year
- Divide this number by the number of weeks in a year (365.25 days per year divided by 7 days per weeks) = 52.18 weeks per year
Example 1: Employee does not have a regular work week
If an employee had worked 160 days in the 12-month period, the number of single vacation days would be calculated as 160 days divided by 52.18 = 3.07 days for each week of vacation (either two or three weeks) the employee is entitled to under s. 33(1).
Example 2: Employee does not have a regular work week and does not have a regular work day
If an employee does not have a regular work day as defined in ESA Part I, s. 1(1) in that the employee does not usually work the same number of hours each day, it is Program policy that a day will be based on an average number of hours worked on the days worked in the 12-month vacation entitlement year preceding the first vacation day. This calculation requires totaling the number of hours worked in the 12-month period and dividing that by the number of days actually worked.
On the facts described in example 1, if the employee had worked a total of 500 hours in the 160 days worked in the 12-month vacation entitlement year, an average day would be: 500 hours divided by 160 days worked = 3.13 hours
As a result, the employee would be entitled to 3.07 vacation days of 3.13 hours each for each week of vacation time (either two or three weeks) that the employee was entitled to in accordance with s. 33(1).
Vacation days/hours vs vacation pay entitlements
The number of single vacation days/hours to which an employee is entitled under this section may not correspond directly to the amount of vacation pay that the employee is entitled to under the ESA 2000. An employee is entitled to a minimum of four or six per cent of the total wages earned in each vacation year as vacation pay (depending upon the employee’s period of employment upon the completion of the vacation entitlement year) or the amount to which the employee is entitled as a greater right or benefit under a contract of employment.
Transition – s. 33(4)
The FWBJA added this provision to the ESA 2000. It provides that although s. 33(1)(b) provides that employees whose period of employment is five years or more upon completion of a vacation entitlement year are entitled to three weeks of vacation in respect of that vacation entitlement year, employers are not required to provide any increased vacation entitlement in respect of a vacation entitlement year that ends before December 31, 2017.
Under s. 33(4), if the vacation entitlement year ended before December 31, 2017, an employee is entitled to two weeks of vacation time in respect of that vacation entitlement year, regardless of the employee’s period of employment upon the completion of that vacation entitlement year. If the vacation entitlement year ended either on or after December 31, 2017, an employee whose period of employment was five years or more when that vacation entitlement year ended is entitled to three weeks of vacation time in respect of that vacation entitlement year.
There is a similar transition provision that applies with respect to stub periods ending before December 31, 2017 in ESA Part XI, s. 34(5).
Section 34 - Alternative vacation entitlement year
Alternative vacation entitlement year application – s. 34(1)
The Government Efficiency Act, 2002, SO 2002, c 18 ("GEA 2002") added this provision to the Employment Standards Act, 2000. It states that s. 34, which provides for the accrual of vacation time over a stub period, applies where the employer has established an alternative vacation entitlement year. Subsequently, the Fair Workplaces, Better Jobs Act, 2017, SO 2017, c 22 (“FWBJA”) repealed and replaced this provision to reflect the increased vacation entitlement (a pro-rated three-week entitlement) brought in by that FWBJA for employees whose period of employment is five or more years upon completion of a stub period.
ESA Part I, s. 1 defines an alternative vacation entitlement year as a recurring 12-month period that begins on a date chosen by the employer, other than the first day of the employee’s employment.
ESA Part I, s. 1 defines a stub period as follows:
Vacation for stub period, less than five years of employment – s. 34(2)
Section 34(2) sets out the method for calculating the vacation entitlement earned in a stub period where the employee’s period of employment is less than five years upon completion of that stub period.
The stub period entitlement is essentially a pro-rated amount of the two week entitlement that an employee whose period of employment was less than five years would earn upon completion of a 12-month vacation entitlement year.
Employees who have a regular work week will earn vacation time of two weeks multiplied by the ratio of the stub period to 12 months.
Example 1:
If the stub period was three months' long the calculation would be as follows:
- Ratio of stub period to 12 months = 3/12
- Two weeks x 3/12 = .75 weeks
Employees who do not have a regular work week will earn vacation time of two times the average number of days worked per work week in the stub period multiplied by the ratio of the stub period to 12 months.
Example 2:
If the stub period was three months' long and the employee worked an average of 2.6 days per week in the stub period the calculation would be as follows:
- Ratio of stub period to 12 months = 3/12
- Two weeks x 2.6 days per week x 3/12 = 1.3 days
Vacation for stub period, five years or more of employment –s. 34(3)
Section 34(3) sets out the method for calculating the vacation entitlement earned in a stub period where the employee’s period of employment is five years or more upon completion of that stub period.
The stub period entitlement is essentially a pro-rated amount of the three week entitlement that an employee whose period of employment was five years or more would earn upon completion of a 12-month vacation entitlement year.
Employees who have a regular work week will earn vacation time of three weeks multiplied by the ratio of the stub period to 12 months.
Example 1:
If the stub period was three months' long the calculation would be as follows:
- Ratio of stub period to 12 months = 3/12
- Three weeks x 3/12 = .5 weeks
Employees who do not have a regular work week will earn vacation time of three times the average number of days worked per work week in the stub period multiplied by the ratio of the stub period to 12 months.
Example 2:
If the stub period was three months' long and the employee worked an average of 2.6 days per week in the stub period the calculation would be as follows:
- Ratio of stub period to 12 months = 3/12
- Three weeks x 2.6 days per week x 3/12 = 1.3 days
Active and inactive employment – s. 34(4)
Section 34(4) provides that inactive as well as active periods of employment are included in the stub period for the purpose of determining an employee’s entitlement to vacation time. Note that ESA Part XI, s. 33(2) is the corresponding provision in regards to the accrual of vacation time over a vacation entitlement year.
An employee’s entitlement to vacation time accrues while the employment relationship continues. Therefore, the employee need not be actively employed (actually performing work) to earn the right to vacation time. Provided that the employee completes the stub period (i.e., there is no break in the employment relationship during the stub period), time spent on any Part XIV leave an approved leave of absence, temporary lay-off, etc. (all periods of inactive employment) must be credited to an employee in respect of their entitlement to vacation time. However, vacation pay will only be calculated on the actual wages earned during the period in respect of which the vacation is earned as per ESA Part XI, s. 35.2.
Transition – s. 34(5)
While the transition provision for vacation entitlement years is found in ESA Part XI, s. 33(4), the transition provision that applies to stub periods is found in s. 34(5).
Subsection 34(3) provides that employees whose period of employment is five years or more upon completion of a stub period are entitled to a pro-rated amount of three weeks of vacation in respect of that stub period. However, this transition provision specifies that employers are not required to provide this increased vacation entitlement in respect of a stub period that ends before December 31, 2017. Therefore, if a stub period ended before December 31, 2017, an employee is entitled to a pro-rated amount of two weeks of vacation time in respect of that stub period, regardless of the employee’s period of employment upon completion of that stub period.
Section 35 – Timing of vacation
This provision was previously amended by the Government Efficiency Act, 2002, SO 2002, c 18, to reflect the changes to the ESA, 2000, allowing employers to establish alternative vacation years. It was subsequently repealed and replaced by the Fair Workplaces, Better Jobs Act, 2017, SO 2017, c 22 to reflect the increased vacation entitlement (three weeks) brought in by that Act for employees whose period of employment is five or more years upon completion of a vacation entitlement year.
Section 35 gives employers the right and the obligation to determine when an employee may take the vacation earned upon completion of a vacation entitlement year. However, the employer must ensure that the vacation is completed no later than 10 months following the completion of the vacation entitlement year during which the vacation was earned.
Under paragraphs 1 and 2, the employer is required to provide the vacation in periods of at least one week, unless the employee requests in writing and the employer agrees to allow the employee to take vacation in increments of less than one week.
The employer’s right to assign the vacation time
Since the employer has the right to assign the employee’s vacation time and, accordingly, the right to approve or reject a vacation period requested by the employee, it follows that the employee has no right to take a vacation on their own initiative. For example, in Fox, Glicksman & Co. v Reynolds (December 16, 1981), ESC 1118 (Black), a decision under the former Employment Standards Act, an employee took a two-week vacation but had obtained employer approval for only one week. Additionally, the employee was warned not to take the two-week vacation. The referee held that in taking the two weeks of vacation without the employer’s permission, the employee’s actions amounted to wilful misconduct and therefore the employee was not entitled to pay in lieu of notice of termination. It must be noted, however, that where an employee expresses an intention to take vacation, in order for the employee’s actions to amount to wilful misconduct the employer must expressly forbid the proposed vacation period - see Peter Tsorovas c.o.b. Mr. Submarine v Zwicker (January 12, 1982), ESC 1131 (Betcherman), also decided under the former Employment Standards Act. For further discussion of the meaning of wilful misconduct, disobedience or neglect of duty, see O Reg 288/01, s. 2.
Limitations on the employer’s right to schedule an employee’s vacation
The vacation must be completed no later than 10 months after the end of the employee’s 12-month vacation entitlement year. The employer will therefore not be in violation of this requirement until 22 months after the commencement of the 12-month period during which the vacation time was earned.
It should also be noted that an employer is not permitted to schedule an employee’s vacation during the statutory notice period, unless the employee, after having received the notice, agrees to take their vacation during the statutory notice period. See O Reg 288/01, s. 7.
Length of vacation period
Section 35 permits employees to take vacation time earned over a vacation entitlement year in increments of less than one week provided the following criteria are met:
- The employee must request, in writing, vacation time in a period shorter than one week; and,
- The employer must agree to the employee’s written request in writing.
It should be noted that where an employee is provided with vacation time in excess of the employee’s two- or three- week entitlement under the Act, an employer is free to schedule those excess weeks as it sees fit (e.g., as single days).
Section 35.1 - Timing of vacation, alternative vacation entitlement year
Timing of vacation, alternative vacation entitlement year – s. 35.1(1)
Section 35.1 was added by the Government Efficiency Act, 2002, SO 2002, c 18, to reflect the changes to the Employment Standards Act, 2000 allowing employers to establish alternative vacation years.
Section 35.1 gives employers the right and the obligation to determine when an employee may take the vacation time earned over the stub period. However, under s. 35.1(2) the vacation days must be taken in minimum blocks (unless agreed otherwise) and the vacation must be taken no later than 10 months following the stub period during which the vacation was earned.
Same - s. 35.1(2)
Section 35.1(2) requires the employer to ensure the employee takes the vacation earned in a stub period within 10 months of the completion of the stub period.
Except where the parties have agreed otherwise, it also provides that if the employee has earned less than five vacation days, those days are to be taken consecutively. If the employee has earned more than five days, the first five days must be taken consecutively, and the balance may be taken together with the first five days or as a separate period of consecutive days.
An employee may request in writing and where the employer agrees, the vacation may be taken in shorter periods than otherwise required under this section.
Section 35.2 - Vacation pay
Section 35.2 provides employees who are entitled to vacation under ESA Part XI, s. 33 or s. 34 with an entitlement to vacation pay. This provision was amended to reflect the changes to the ESA 2000 that allow vacation to accrue over alternative vacation entitlement years in addition to standard vacation entitlement years, as well as the accrual of vacation over a stub period where an alternative vacation entitlement year is established. It was subsequently repealed and replaced by the Fair Workplaces, Better Jobs Act, 2017, SO 2017, c 22 to increase the minimum vacation pay entitlement of four per cent of the wages earned in any vacation entitlement period (i.e., a stub period or vacation entitlement year) to six per cent for employees whose period of employment is five years or more. This change is consistent with the changes made to s. 33 and s. 34 which increased the vacation time entitlement to three weeks and a pro-rated amount of three weeks for such employees upon the completion of a vacation entitlement year or stub period respectively.
The effect of s. 35.2 is to require employers to pay vacation pay of at least four per cent (for employees whose period of employment is less than five years upon completion of a vacation entitlement period) and six per cent (for employees whose period of employment is five years or more upon completion of a vacation entitlement period) of all of the wages earned during the vacation entitlement period (whether a standard vacation entitlement year, alternative vacation entitlement year or stub period) for which the vacation is given, as payment for the vacation. Any vacation pay previously paid is to be excluded from the calculation of wages under this section. ESA Part XI, ss. 36, 37 and 38 stipulate when vacation pay is to be paid.
Note that the vacation pay entitlement is either four per cent or six per cent of the wages earned in a vacation entitlement period. In other words, an employee whose period of employment is less than five years upon completion of a vacation entitlement period is entitled to vacation pay calculated as four percent of the wages earned in the vacation entitlement period. An employee whose period of employment is five years or more upon completion of a vacation entitlement period is entitled to vacation pay calculated as six percent of the wages earned during the entitlement period regardless of whether the employee’s period of employment was five years or more when the vacation entitlement period commenced or the employee reached the five year period of employment part way through the vacation entitlement period.
The question arises however as to how employees who are paid vacation pay on a pay period by pay period basis will be paid vacation pay in a vacation entitlement period in which the employee reaches the five year period of employment threshold.
Although s. 35.2 ties the right to vacation pay to the completion of vacation entitlement periods, employees accrue vacation pay on an ongoing basis as a result of the application of the Apportionment Act, RSO 1990, c A.23. See also the discussion regarding payment of vacation pay on cessation of employment in ESA Part XI, s. 38.
As a consequence, an employee who is paid their accrued vacation pay on each pay day will be paid four per cent of the wages earned in each pay period as vacation pay until the employee reaches the five year period of employment threshold. At that time, the employee’s entitlement increases to six per cent vacation pay on all wages earned in the vacation entitlement period and so an additional two percent of vacation pay will be due and payable on the wages earned to the date the five year threshold is reached. From that date forward, the employee would be paid six percent of the wages earned in each pay period as vacation pay.
Example – Payment of vacation pay on a pay period by pay period basis:
- Employee’s vacation entitlement year is January 1 to December 31
- Employee is entitled to be paid vacation pay on a pay period by pay period basis.
- Employee reaches five year period of employment threshold on July 1
The employee is entitled to be paid four per cent on the wages earned between January 1 and June 30 as vacation pay because the employee’s period of employment is less than five years.
However, on July 1 the employee reaches the five year period of employment threshold and as a consequence the vacation pay entitlement for that vacation year increases from four per cent to six per cent of all the wages earned in the vacation entitlement year.
The employer will therefore be required to "top-up" the four per cent vacation pay earned up to and including June 30 with an additional two per cent. This payment will be due on the pay day for the pay period in which July 1 falls.
The employee will then be paid six per cent vacation pay on the wages earned from July 1 to December 31.
Employee’s right to vacation pay
An employee has the right to be provided with vacation pay of at least four per cent or six per cent as the case may be of the total wages (excluding any vacation pay) earned during the period of employment for which the vacation is given.
As an employment standard, vacation pay is mandatory and cannot be waived pursuant to ESA Part III, s. 5(1). Accordingly, an employer cannot reduce or eliminate vacation pay to compensate for the incompetence of the employee – see MacNamarra v Hanrath (February 23, 1980), ESC 717 (Adamson). Nor is an employer excused from the obligation under s. 38 where the employee has committed a criminal offence – see Burlington Carpet Mills Canada Ltd. v Smitten (May 16, 1974), ESC 227 (Magerman). Both of the aforementioned decisions were decided under the former Employment Standards Act.
In Tim Wilkins Pontiac Buick Ltd. d.b.a. Lorne Brett Motos Ltd. v Ojamae et al (October 2, 1980), ESC 878 (Davis), a decision under the former Employment Standards Act, Referee Davis ruled that where a monthly-salaried employee receives a full month’s salary for a month in which the employee took a one-week vacation, the amount of vacation pay to be considered to have been paid is not one-quarter of the monthly salary but rather an amount equal to the monthly salary divided by 4.33. This is because a month is a slightly longer period than four weeks.
In Laurentian University of Sudbury v Kretzchmar (September 30, 1983), ESC 1492 (Betcherman), the employer and employee agreed that if the employee did not take any vacation, no payment in lieu of vacation would be paid. In confirming the order for pay in lieu of vacation pay under the former Employment Standards Act, the referee held that any agreement between an employee and employer that represents a waiver of the rights to vacation pay under s. 28 of the former Employment Standards Act (corresponding to s. 35.2 of the ESA 2000) was void pursuant to s. 3 of the former Employment Standards Act (corresponding to ESA Part III, s. 5 of the ESA 2000). In this regard, see also John Bear Pontiac Buick Limited v Wade (December 17, 1985), ESC 2001 (Egan). Furthermore, although ESA Part XI, s. 41(1) of the ESA 2000 now expressly allows an employee to agree to forego their vacation time (with the Director’s approval), ESA Part XI, s. 41(2) precludes any agreement to forego vacation pay.
Calculating vacation pay
Vacation pay accumulates as wages are earned. Vacation pay is the equivalent of four or six per cent of wages for the period of employment for which the vacation is given, except that in calculating wages, any vacation pay previously paid must be excluded.
Vacation pay is payable on wages as defined in ESA Part I, s. 1(1):
"wages" means,
- monetary remuneration payable by an employer to an employee under the terms of an employment contract, oral or written, express or implied,
- any payment required to be made by an employer to an employee under this Act, and
- any allowances for room or board under an employment contract or prescribed allowances,
but does not include,
- tips or other gratuities,
- any sums paid as gifts or bonuses that are dependent on the discretion of the employer and that are not related to hours, production or efficiency,
- expenses and travelling allowances, or
- subject to subsections 60(3) or 62(2), employer contributions to a benefit plan and payments to which an employee is entitled from a benefit plan.
For a more detailed discussion refer to ESA Part I, s. 1. Note that wages includes payments made under the ESA 2000 relating to Part XIV domestic violence leave pay.
The decisions cited below (all decided under the former Employment Standards Act) hold that the following items are included in wages for the purposes of calculating vacation pay:
- Termination pay – see Ltd. v. U.S.W.A
- Any bonus that qualifies as wages – see Studio Sound Limited v Hobbs and Taylor (October 25, 1985), ESC 1968 (Sherwood) and Tim Wilkins Pontiac Buick Ltd. d.b.a. Lorne Brett Motors Ltd. v Ojamae et al (October 2, 1980), ESC 878 (Davis)
- Commissions – see Studio Sound Limited v Hobbs and Taylor and Lorne Brett Motors Ltd. v Ojamae et al
- Overtime – see Bruce’s Appliance Service v Doyle (June 20, 1974), ESC 223 (McNish)
- The pro-rata allocation of profit-sharing bonuses (that is, that which is paid to the employee and attributable to the period in which the employee took his or her vacation, regardless of when it is paid) – see Lorne Brett Motors Ltd. v Ojamae et al.
Early referee decisions were not settled on whether termination pay should be considered wages for the purpose of calculating vacation pay. Program policy however, is that termination pay is taken into account when calculating the wages upon which vacation pay will be assessed. The Program’s policy that vacation pay is payable on termination pay has been confirmed by the Ontario Divisional Court in Inco Ltd. v. U.S.W.A.
Where notice of termination is provided under ESA Part XV, s. 60, vacation pay is calculated on wages earned during the notice period. If the employer does not provide notice but gives the employee pay in lieu under ESA Part XV, s. 61, the employer is required to pay the employee the amount the employee would have received "had notice been given". Consequently, the pay in lieu would include vacation pay on the wages the employee would have earned during the notice period. If it were otherwise, an employer would realize a monetary advantage in choosing to provide pay in lieu instead of giving the employee notice. However, vacation pay is not payable on severance pay as severance pay is not compensation for lack of notice of termination. Rather, severance pay is an entitlement that crystallizes after the employment relationship has ended and is provided as compensation for loss of seniority and job-related benefits and also for the investment of long service with the employer.
Section 36 - When to pay vacation pay
When to pay vacation pay - s. 36(1)
Section 36(1) requires employers to pay vacation pay in a lump sum before the vacation time is taken, subject to ss. 36(2), 36(3) and 36(4).
It should be noted that s. 36(1) does not specify when the vacation pay is to be paid beyond the requirement that it be paid before the vacation is taken. The Act does not require the employer to pay it for example, the day before the vacation commences, the week before the vacation commences or on any other particular date prior to the commencement of the vacation.
In Grand & Toy Limited v Ontario (Director of Employment Standards), 2006 CanLII 39100 (ON LRB), the vacation pay accruing during the vacation entitlement year was paid on a date shortly after the vacation entitlement year ended and sometime before the employee took vacation. On that basis, the Ontario Labour Relations Board found that the payment was in conformity with s. 36(1). Further, because the payment was made in conformity with s. 36(1), there was no need for an agreement in writing to fix a date for the payment as per s. 36(4).
Same - s. 36(2)
Section 36(2) sets out an exception to the general rule of advance payment of vacation pay set out in s. 36(1) and permits employers to pay vacation pay on or before the employee’s pay day for the period in which the vacation falls.
For example, if an employee takes vacation during week of September 9 to 13, and the pay day for the pay period September 1 to 15 is September 21, then the employee’s vacation pay is due on or before September 21.
Section 36(2) applies in the following two situations only:
- If the employer pays the employee in accordance with s. 11(4), that is, by direct deposit, or
- If the employee does not take their vacation in complete weeks.
ESA Part V, s. 11(4) provides as follows:
Same - s. 36(3)
Section 36(3) has the effect of permitting an employee and an employer to agree in writing that the employer may pay the vacation pay that accrues during each pay period on the pay day for that period. See ESA Part I, s. 1(3) and s. 1(3.1) for information on agreements in writing. This method of paying vacation pay may only be used if the following criteria are met:
- The employer and the employee agree to this method of payment, in writing.
- The employee must be informed, with each pay period that the monies received include an amount in respect of vacation pay. The employer may fulfil this requirement by:
- Setting out the amount of vacation pay being paid separately from the amount of other wages being paid in the statement of wages required under s. 12(1), or
- Issuing the employee a separate statement of the vacation pay paid with respect to that pay period at the same time the statement of wages required under s. 12(1) is provided.
It should be noted that although ESA Part XI, s. 35 and s. 35.1 require vacation time to be taken (completed) within the 10 months following the period in which the vacation is earned, these provisions do not impose a time limit with respect to the payment of vacation pay where the employer and employee have made an agreement under s. 36(3) or s. 36(4). Where the employer and employee have made such an agreement, the obligations with respect to the payment of vacation pay are independent from the requirements to schedule vacation time.
Same - s. 36(4)
This provision permits the employer and the employee to agree in writing to pay the employee vacation pay at a time they mutually choose. See ESA Part I, s. 1(3) and s. 1(3.1) for information on agreements in writing. Agreements made pursuant to s. 36(4) do not require approval from the Director of Employment Standards.
It should be noted that although ESA Part XI, s. 35 and s. 35.1 require vacation time to be taken (completed) within the 10 months following the period in which the vacation is earned, these provisions do not impose a time limit with respect to the payment of vacation pay where the employer and employee have made an agreement under s. 36(4) or s. 36(3). Where the employer and employee have made such an agreement, the obligations with respect to the payment of vacation pay are independent from the requirements to schedule vacation time.
Section 37 - Payment during labour dispute
Payment during labour dispute - s. 37(1)
This provision introduced by the Employment Standards Act, 2000. It codifies Program policy that applied with respect to the application of s. 29(3) of the former Employment Standards Act.
Section 37(1) requires employers to pay employees their vacation pay at the time of their scheduled vacation, despite any strike or lock-out during the scheduled vacation period. Sections 29(2) and 29(3) under the former Employment Standards Act permitted this result but did not require it. Section 29(2) gave the Director the power to require an employer to pay vacation pay to an employee (who was entitled to vacation pay) at any time. Section 29(3) provided that the Director’s power under s. 29(2) applied even in the context of a strike or lock-out.
Cancellation - s. 37(2)
This provision was introduced by the ESA 2000. The effect of this provision is to require an employer to pay vacation pay to an employee in respect of a pre-approved and scheduled vacation that falls during a strike or lock-out, despite a purported cancellation of that previously scheduled vacation.
Section 38 – If employment ends
This section provides that when an employee’s employment ends, for any reason, the employee is entitled to any accrued vacation pay that is outstanding at the time the employment ended and the employer is required to pay any such vacation pay within the later of seven days of the date the employment ended or on the day that would have been the employee’s next pay day as per ESA Part V, s. 11(5). Note also that ESA Part V, s. 12.1 sets out a requirement to provide a statement of the wages paid (including vacation pay) when employment ends.
Vacation pay entitlements on cessation of employment
An employee whose employment has ended and has not been given a vacation with pay in respect of a completed stub period or 12-month vacation entitlement year is entitled to vacation pay on wages (excluding any vacation pay previously paid) for the stub period or vacation entitlement year.
If the employee has not completed a vacation entitlement period, the employee is not entitled to vacation time and, under ESA Part XI, s. 35.2, the right to accrue vacation pay appears to be explicitly tied to the completion of a vacation entitlement period.
However, by application of another piece of legislation called the Apportionment Act, RSO 1990, c A.23, employees have the right to accrue vacation pay on an ongoing day by day basis and therefore, the right to accrue vacation pay does not depend upon the completion of a vacation entitlement period. Even if an employee is hired and is terminated after working just one hour, the employee has accrued vacation pay on those wages.
The employee whose employment has ended will, therefore, receive at least four per cent or six per cent of the wages earned in any period of employment (whether a completed vacation entitlement year or stub period or not) for which vacation pay has not been given.
Because the entitlement to six per cent vacation pay is determined by whether an employee has reached the five year period of employment threshold, an employee whose employment is terminated during a vacation entitlement period before the employee has reached the five year threshold will be entitled on termination to vacation pay calculated as four per cent of the wages earned during the last (partially completed) vacation entitlement period (plus any outstanding vacation pay earned in previously completed vacation entitlement periods).
An employee who reached the five year period of employment threshold in that last (partially completed) vacation entitlement period is entitled to six per cent of all of the wages earned in that period (plus any outstanding vacation pay earned in previously completed vacation entitlement periods).
Example 1 – Employee’s period of employment less than five years on termination of employment
- Employee’s vacation entitlement year is January 1 to December 31
- Employee would reach five year period of employment threshold on July 1
- Employment is terminated March 31
Employee’s vacation pay for the period January 1 to March 31 is calculated as four per cent of all wages earned January 1 to March 31 because the employee had not reached the five year period of employment threshold prior to the termination.
Example 2 – Employee’s period of employment five years or more on termination of employment
- Employee’s vacation entitlement year is January 1 to December 31
- Employee would reach five year period of employment threshold on July 1
- Employment is terminated November 1
The employee’s vacation pay for the period January 1 to November 1 is calculated as six per cent of all wages earned January 1 to November 1 because the employee had reached the five year period of employment threshold prior to the termination.
Pursuant to s. 38, the employee is entitled to payment of that vacation pay on cessation of employment in accordance with ESA Part V, s. 11(5).
Deductions from section 38 payments (section 13)
The standard rules with respect to permissible and non-permissible deductions from wages apply to s. 38 payments. For a detailed discussion, refer to ESA Part V, s. 13.
Where no records have been kept of vacations taken or payments of vacation pay, and there has been no separate item for vacation pay on wage statements, referees (in decisions made under the former Employment Standards Act) have consistently rejected employers' claims that the rate of pay included vacation pay and that it should therefore be deducted from vacation pay owing under s. 30 of the former Employment Standards Act (which correspond to s. 38 of the ESA 2000) or that vacation had already been taken. See the following decisions decided under the former Employment Standards Act: Natalizio c.o.b. The Lords Men’s Hairstyling and Nataligio Enterprises Inc. c.o.b. L'Image Harstudio v Kraft et al (June 16, 1986), ESC 2132 (Egan); Roundhill Apartments v Turcaj (January 2, 1979), ESC 564 (Franks); Legal Personnel Consultants Ltd. v Strauss (December 8, 1979), ESC 673 (Green); Baker v Newland (July 22, 1980) ESC 821 (Bigelow); and Snow-Sport Limited v Bondy (May 26, 1986), ESC 2119 (Houston).
In Ener-Temp Mechanical v Bristow (February 1, 1985) ESC 1777 (Eaton), vacation pay was incorporated into the hourly rate, but the employee did not understand the method of payment. An order for vacation pay was affirmed.
In addition, no paid time-off will be deducted from a vacation payment under s. 38 unless both the employee and the employer agreed that such time-off constituted vacation with pay.
Finally, an employer is prohibited from deducting or setting off vacation pay from any vacation pay or a vacation with pay previously paid to an employee in excess of the employer’s obligations under ESA Part XI Vacation with Pay. In Re Harold J. O’Brien (a decision under the former Employment Standards Act), where the employee had received three weeks' paid vacation – 1 week in excess of the applicable minimum standard, the employer was not allowed to set off the excess one-week paid vacation from the amount subsequently owed to the employee under s. 30 (now s. 38). However, the payment of vacation in excess of the Part XI Vacation with Pay requirements must be carefully reviewed in order to determine its characterization and the intent of the payment at the time it was made. If it was intended and characterized as an advance on a vacation pay payment, as opposed to an intentional payment of a greater contractual benefit than the Part XI Vacation with Pay standard, then it will be considered as a wage advance as opposed to wages earned. In that case, any adjustment on a subsequent vacation pay payment will be accepted as a proper reconciliation of wages due, i.e., a determination of wages earned, wages paid and those remaining outstanding, as opposed to a deduction or set-off prohibited by ESA Part V, s. 13. The employment standards officer would, in addition to ascertaining the employer’s and employee’s understanding of the payments, review the relevant employer’s payroll records, as well as wage statements to determine if any evidence of intent or characterization of the payments exists.
Section 39 - Multi-employer plans
This provision was introduced by the Employment Standards Act, 2000 and codifies Program policy that applied with respect to s. 31 of the former Employment Standards Act. The provision has the effect of permitting unionized employers to participate in multi-employer vacation plans, where the types of obligations described in ss. 36, 37 and 38 of the ESA 2000 are performed by the administrator of the multi-employer plan as opposed to the employee’s specific employer. These types of arrangements are common in the construction industry.
Where such a plan is in place, ss. 36, 37 and 38 of the Act which deal with:
- When vacation pay is to be paid;
- Vacation pay payments during labour disputes; and
- Payment of vacation pay when employment ends,
do not apply.
Section 40 - Vacation pay in trust
Vacation pay in trust - s. 40(1)
This provision, together with s. 40(2), is substantially the same as s. 15 of the former Employment Standards Act. Section 40(1) creates a statutory "deemed trust" for vacation pay. In doing this, the provision gives employee vacation pay a status equivalent to property that has been held in trust by an employer for another party. In other words, trust property is not the employer’s property and does not form part of the employer’s estate.
Trust claims receive priority over the claims of most other creditors of the employer, including many secured creditors. However, the courts have ruled that a statutory deemed trust, such as the s. 40 provision, does not meet the requirements of an actual trust under the federal Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("BIA"). Therefore, vacation pay entitlements receive preferred but unsecured status in a distribution by a trustee in bankruptcy, in accordance with the scheme of distribution set out in s. 136 of the BIA.
Bankruptcy
In British Columbia v Henfrey Samson Belair Ltd., [1989] 2 SCR 24, 1989 CanLII 43 (SCC) the Supreme Court of Canada considered the effect of a deemed trust provision in the British Columbia Social Services Tax Act, RSBC 1996, c 431 [repealed]. The Court ruled that a deemed trust created by statute was not a trust as contemplated by the former Bankruptcy Act ("BIA"). British Columbia v Henfrey Samson Belair Ltd. has been applied consistently. For example, in I.B.L. Industries Ltd. (Re) (Bkcy.), 1991 CanLII 7223 (ON SC), the Ontario Divisional Court held that an attempt to impose a deemed trust on the property of a bankrupt could not succeed. (If, however, an employer creates an actual trust by keeping the vacation pay separate and apart from other monies, the vacation pay would not form part of the property of the bankrupt and therefore will have priority over the interests of most other creditors, including secured creditors, as a trust under the BIA. Vacation pay is seldom placed in an actual trust by employers.)
In Abraham v Coopers & Lybrand Ltd. Trustee in bankruptcy for Canadian Admiral Corp., 1993 CanLII 8538 (ON SC) the Ontario Divisional Court quashed the referee’s decision in Coopers & Lybrand Limited v Abraham et al (January 26, 1993), ES 08/93 (Wacyk) and indicated that vacation pay falls within the BIA definition of wages and therefore constitutes a preferred claim under s. 136(1)(d). Therefore, in a bankruptcy, vacation pay is subordinate to the claims of secured creditors, although it does have priority over other unsecured creditors with regards to what has accrued during the six months prior to the bankruptcy, to a maximum of $2,000 per employee (the maximum of $2,000 as set out in the BIA). If the bankruptcy occurred prior to August 1, 1992, the vacation pay would only have a priority to the extent of what has accrued during the three months prior to the bankruptcy, to a maximum of $500 per employee. The Divisional Court’s decision in Abraham v Coopers & Lybrand Ltd. is consistent with the Divisional Court’s decision in Armstrong et al. v Coopers & Lybrand Ltd. et al., 1986 CanLII 2621 (ON SC).
Section 136(1)(d) of the BIA now reads:
It should be emphasized that in many bankruptcies, this section will not greatly improve the prospects for recovery of wage entitlements, since it does not give wages priority over the secured creditors of the employer.
Receiverships
The "deemed trust" for vacation pay continues to apply in receivership and other formal insolvency proceedings that are not bankruptcies, to ensure the trust status and priority for the vacation pay claims of employees over the claims of other creditors, including secured creditors. In this regard, see the Divisional Court’s decision in in Abraham v. Coopers & Lybrand Ltd.
In that case, the court upheld the decision of the referee, who had determined that vacation pay took priority over a bank’s secured claims in the form of a registered debenture and general security agreement under the Personal Property Security Act, RSO 1990, c P.10 ("PPSA"). The receiver argued that the bank’s security took priority over the trust claim, as a prior "fixed" charge duly registered under the PPSA. The Court disagreed. In dismissing the receiver’s application, the Court noted that according to s. 3(1)(a) of the PPSA (now s. 4(1)(a)), the PPSA does not apply to a lien given by statute.
Same - s. 40(2)
40(2) An amount equal to vacation pay becomes a lien and charge upon the assets of the employer that in the ordinary course of business would be entered in books of account, even if it is not entered in the books of account.
This provision together with s. 40(1) is substantially the same as s. 15 of the former Employment Standards Act. It has the effect of deeming a lien or charge on the assets of the employer. A lien or charge is a means of enforcing a debt or what may or will become a debt. In this case it is an unsecured debt. This is so, irrespective of whether the charge or lien is ever recorded in the employer’s books of account.
Section 41 - Approval to forego vacation
Section 41(1) has the effect of permitting employees and employers to agree in writing that the employee will forego their entitlement to time off for vacation. It should be noted that because the right to forego vacation is limited to vacation to which the employee is entitled, an employee cannot forego future vacation entitlements. See ESA Part I, s. 1(3) and s. 1(3.1) for information on agreements in writing.
Under the Act, an employee’s right to vacation time is earned through completion of a stub period or vacation entitlement year. An employee cannot therefore agree to forego the vacation entitlement in any stub period or vacation entitlement year until the completion of that stub period or vacation entitlement year.
The agreement must be approved by the Director to be valid. However, as per s. 41(2), the employer is not permitted to forego paying the employee their vacation pay even though they have chosen to forego taking vacation time under s. 41(1).
Section 41.1 – Vacation statements
Vacation statements – s. 41.1(1)
Section 41.1 was introduced by the Government Efficiency Act, 2002, SO 2002, c 18 ("GEA 2002"), effective November 26, 2002. It sets out employees' rights to statements regarding vacation time and pay statements, except where vacation pay is paid on each pay day as it accrues over each pay period as per ESA Part XI, s. 36(3).
Section 41.1(1) requires the employer to provide a statement containing the same information the employer is required to record under the new ESA Part VI, ss.15.1(2) and (3), on the written request of the employee, no more than once with respect to each vacation entitlement year or stub period.
When statement to be provided – s. 41.1(2)
Section 41.1(2) requires that, subject to s. 41.1(3), the vacation statement under s. 41.1(1) must be provided either seven days after the written request was made or the first pay day after the request was made, whichever is later.
Same – s. 41.1(3)
Section 41.1(3) provides that where the employee has made a written request for vacation information during the course of a current vacation entitlement year or stub period, the employer is required to provide the information either:
- Seven days after the end of that vacation entitlement year or stub period, or
- On the first regular pay of the next vacation entitlement year or first vacation entitlement year, whichever is later.
Restriction re frequency – s. 41.1(4)
Section 41.1(4) provides that an employer is required to provide a vacation information statement not more than once with respect to any vacation entitlement year or stub period.
Exception – s. 41.1(5)
Section 41.1(5) provides that the vacation statement obligations in s. 41.1 do not apply where the employer pays vacation pay in accordance with ESA Part XI, s. 36(3) (i.e., the employer and employee have agreed that the vacation pay that accrues in each pay period is to be paid on the pay day for that pay period). Under s. 36(3), the employer must provide information regarding the vacation pay paid each pay day as a separate item on the statement of wages required under ESA Part V, s. 12(1) or on a separate statement at the same time the employee is given the wage statement.