Vacation Time – Use it or Lose it?

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"Use it or lose it" vacation policies are illegal in Canada, unlike the situation in the United States. It wasn't until roughly 1944, that vacation legislation was first enacted in Canada, making vacations with pay a legal right for employees.
Employment Standards sets out the minimum legislation relating to employment and each jurisdiction has it's own legislation surrounding the treatment of vacation.  Legislation surrounding vacation, will often address:
  • earning vacation and entitlement
  • minimum vacation time
  • minimum vacation pay
  • defines what earnings are "vacationable"
  • employer's rights to schedule vacation time
  • employee's rights to forfeit vacation time
  • timing of paying vacation pay
  • obligations of vacation pay when employment is terminated
  • requirements to track/record vacation
  • types of employment that are exempt
Some jurisdictions have legislation specifically addressing vacation time and vacation pay.  This covers the minimum amount vacation time that an employee earns and is entitled to. For instance most provinces legislate a minimum 2 week vacation entitlement for new employees. Saskatchewan in the one exception, legislating a 3 week minimum.  Some provinces will increase the minimum vacation entitlement after so many years of service.

It is not uncommon for jurisdictions to state that the employee earns the vacation in the first year of employment and is entitled to take the time off in the year following.  Vacation entitlement may be on a calendar year basis or employment year basis, as defined by company policy.  In the event the employee doesn't take the vacation time, they are still entitled to vacation pay.   In most cases, vacation pay out in lieu of time, is not permitted or highly discouraged.  The percentage of vacation pay depends on the company's vacation policy.  2 weeks vacation is equivalent to 4%, 3 weeks vacation is equivalent  to 6%, 4 weeks vacation is equivalent to 8% and so on. 
Commissions are an area that cause great confusion. Commissions are generally considered wages, and as such would be subject to “vacationable” dollar calculations. However, there are three jurisdictions, Alberta, Ontario and Nova Scotia that break down Commissions into those earned at the employer’s premises and those earned outside the employers premises, and each is treated differently for calculation purposes.

Upon termination of employment, any outstanding vacation is owed to the employee.  One exception, being in British Columbia, an employee terminated within 5 days of hire is not entitled to any vacation pay.  Each province defines which earnings are "vacationable", that is, which earnings are to be used in the calculation of vacation pay entitlement.  There are several earnings other than regular pay that are subject to vacation dollar calculations.  A common one is commissions.  In all jurisdictions and in almost all circumstances, commissions paid are "vacationable".  A less common one is employer controlled tips, which is considered vacationable earnings, only in the province of Québec. Calculation of the vacation pay on termination can handled efficiently by ensuring your records of vacation time taken are up to date, all vacationable earnings are included and/or you have a good accrual system in place. 

Be aware that where a company's policy meets or exceeds employment standards, the employee is entitled to the greater benefit.  For salaried employees, we always recommend recording vacation time when taken and having it paid as such through payroll.  Our software solution can handle an hourly accrual, to manage vacation time, as well as a dollar accrual, so you can always stay on top of the vacation liability as it accrues.  As vacation time is taken or paid, the accrual is reduced.  With every payroll, you then know exactly what your liability is.
  •  Natasha Smyth, B.SC.(Agr.), CPM
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  • George Kralidis on 2014-07-02 2:48:16 PM

    Where the company vacation benefit exceeds the minimum requirement under ESA, the company can decide to have a use it or lose it policy for the vacation in excess of minimum.

  • Carrie Elhard on 2015-03-03 1:21:01 PM

    Are you saying that if an employee takes only 2 of 3 weeks they are entitiled to, say over 5 yrs employment, therefore 3 weeks holidays, but only takes 2 weeks in the year, they can lose the 3rd week because they've met the 2 week minimum requirement ? Therefore, the use or lose it applies?

  • Ted McNicol on 2015-03-05 4:39:20 PM

    This can be a confusing subject since it is legislated differently in each province and under the Canada Labour Code. But you can't really go wrong if you follow the following steps:
    a. ensure the employee takes at least the minimum vacation leave they are entitled to under the Employment Standards
    b. where Company policy exceeds the employment standards, the employee is eligible for the additional vacation time off either during the year or it will accrue, UNLESS the company has a "use it or lose it" policy. So keep your policies current AND make sure employees have ready access to them.
    c. Entirely separate from the time off consideration (which implies that it will be paid time off unless specified as otherwise) is the payment for vacation. Most legislation states a percentage accrual on almost all earnings, which would include commissions, short and long term incentives, overtime, allowances AND base pay. The author, Natasha, is correct in stating you should be accruing all of this liability against actual payments because if the accrual is higher than what the %age X base pay calculations dictate, the employee should receive that amount. This, combined with market competitiveness, is one reason many companies provide a higher rate of vacation % than the Employment Standards dictate. Another reason to accrue this liability is that Financial Standards dictate that liabilities should appear on the books; where companies don't do a good job of enforcing the "use it or lose it" they often wind up with high paid employees with substantial leave that must be paid out on termination.

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