When it comes to taking time off work in Ontario, many employees (and employers) are confused about the difference between vacation time and vacation pay. Both are mandated by the Employment Standards Act, 2000 (ESA), but they are distinct entitlements with different purposes and rules.
Vacation Time: Your Right to Time Off
Under the ESA, most employees in Ontario earn at least two weeks of vacation time per year after completing 12 months of employment. For employees with five or more years of service, this increases to three weeks per year.
Vacation time is just that- time off work to rest, recharge, and enjoy personal activities without performing work duties.
Key points about vacation time:
- Vacation time is earned after the first year of employment.
- Practical Note: Most employees take vacation well before the first year is over, and most employers allow this to take place and simply keep track of the vacation accrual.
- Legal Note: If contractual language is deficient, an employee could be entitled to all their vacation time on January 1st of the year at issue. This happens all the time and becomes and often becomes a point of contention upon termination of employment.
- Employees have the right to take vacation in a block or, if agreed upon, in smaller segments.
- Employers can schedule the vacation if an agreement cannot be reached, but they must give proper notice.
- An employee cannot waive their right to vacation time without written approval from the Ministry of Labour.
Some employees prefer to cash out their vacation time, but this is only allowed under certain conditions, and the employee must still be paid vacation pay in addition to any wages earned.
Vacation Pay: Your Right to Earnings
While vacation time is about time off, vacation pay is about money.
Vacation pay ensures employees receive compensation during their time off- or in some cases, when they do not take the time off at all.
Key points about vacation pay:
- For employees with less than five years of service, vacation pay equals 4 percent of gross wages earned in the vacation entitlement year.
- For employees with five or more years of service, it increases to 6 percent of gross wages.
- Employers can pay vacation pay either when the employee takes vacation time, on each paycheque, or in a lump sum.
- Legal Note: Vacation pay is technically owed on all “wages”, which includes incentive compensation. There is a growing understanding amongst the courts and employment lawyers generally that, upon the termination of employment, an employee may be entitled to their vacation payout on all their incentive compensation, not just their base salary. In some circumstances, this may mean that the employee at issue is owed vacation pay on their incentive compensation all the way back to their first day of employment.
Even if an employee chooses not to take vacation time (or is not eligible yet), they are still entitled to vacation pay.
Why the Distinction Matters
It is crucial to understand that vacation pay does not substitute for vacation time. For example:
- An employee cannot work through their vacation and simply take vacation pay unless the Ministry permits it.
- Employers who pay vacation pay on each paycheque still have to ensure the employee receives vacation time.
Failing to provide either entitlement can result in complaints to the Ministry of Labour and potential penalties.
Conclusion
In short, vacation time and vacation pay are separate but related entitlements: time off work and money during that time (or in lieu of it). Both exist to protect employee well-being and ensure fair compensation for earned leave.
If you’re unsure whether your vacation policy complies with Ontario’s ESA, we can help you stay on the right side of the law before issues arise. Contact us to review your policies or discuss employee entitlements.
