Vacation Time – Use it or Lose it?

Are "use it or lose it" vacation policies legal in Canada?

02 Jul. 2014

"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.