Vacation pay on inactive service

There has been a recent, active discussion in the Canadian HR Law group on LinkedIn (managed by Stuart Rudner, a fellow blogger on www.hrreporter.com) about employee entitlements to vacation arising out of time off on long-term disability.

Since the points made deal broadly with vacation rights for any period of inactive service, including sick, maternity or parental leaves, I thought it would be useful to summarize this discussion. Three broad aspects of this issue were raised by contributors.

Aspect 1: Employment standard entitlements to vacation

The first aspect raised is the employment standard entitlement to vacation for a period of inactive service. Employees earn the right to vacation by completing years of service.

For this purpose, very few jurisdictions distinguish between active and inactive service. In other words, an employee off on maternity or parental leave has the same rights to vacation upon return, as any other employee. However, two jurisdictions, Alberta and Newfoundland and Labrador, restrict the right to vacations where the vacation year is not a complete year of active service. In N.L., an employee has no right to vacation time, unless at least 90 per cent of the normal working hours in the year, have in fact been worked. In Alberta, an employer may reduce both vacation time and pay, in proportion to the days an employee has been absent during the year.

These Alberta and N.L. exceptions illustrate the point that there are in fact two distinct rights around vacations — vacation time and vacation pay. The right to time is earned by completing vacation years. The right to pay is based on the vacationable earnings in each completed vacation year.

In other words, the right to pay is based on the definition of vacationable earnings in the jurisdiction concerned. There is nothing special in these definitions about either active or inactive service. However, in practice, an employee’s right to vacation pay, for a period of inactive service, is limited by the simple fact there may be no vacationable earnings for the vacation year concerned

Without getting into too much detail, there are two broad trends in the definition of vacationable earnings that affect an employee away from active employment. First, some jurisdictions (Ontario and the Yukon) tie the definition of vacationable earnings to amounts owing under the contract of employment. For example, in Ontario, vacationable earnings include signing bonuses. An employee off on a parental leave could be entitled, under the terms of a new collective agreement, to a signing bonus. In Ontario, such an employee would be entitled to vacation pay on the signing bonus, even though it may have nothing to do with work or service.

In other jurisdictions, earnings are only vacationable if they are “for work”. In such jurisdictions (Federal, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, N.L., Northwest Territories and Nunavut), a signing bonus would not be vacationable, since a signing bonus is generally recognized as payment for agreeing to the terms and conditions of employment.

However, “for work” does not mean that vacationable earnings are limited to payments directly tied to work performed, such as hourly wages. A good example of “for work” including an indirect relationship between pay and work is paid sick leave. Common sick leave policies entitle employees to one paid sick day for each month of active service, with the sick days either accumulating or not across multiple years. In this case, it’s quite reasonable to say the paid sick leave is “for work” in the months over which the right to this pay was earned.

There are two jurisdictions that are exceptions to the general rule that inactive employment does not affect an employee’s right to vacation pay. In Alberta, as already mentioned, an employer may reduce the vacation pay otherwise owing based on the number of days not worked in the applicable vacation year. The opposite is true in Quebec, where employers must base vacation pay on the vacationable earnings from actual hours worked during the vacation year, where part of that year was spent away from active service because of illness, accident, maternity or parental leave or organ or tissue donation.

Aspect 2: Greater benefit

The next aspect to consider is a greater benefit under either an individual or collective contract of employment.

Most employment standards recognize and will enforce the payment of benefits that are greater than required under the applicable employment standards. For example, employees are sometimes given paid vacations (meaning their regular pay, with no explicit accrual of vacation pay).

If the terms of employment don’t distinguish between active and inactive service for this right, this is a greater benefit. It’s a greater benefit because, other than in Quebec, an employee away on an approved leave would not normally have vacationable earnings on which vacation pay could be paid. Where the employment contract provides for paid vacations, following a return to work from an approved leave, this greater benefit will generally be enforced by the applicable employment standards authorities.

Aspect 3: Human rights

The final aspect is any human rights implication. It’s a well established principle that employees can’t be discriminated against because of illness, disability or maternity or parent leaves.

For example, employees away on maternity leave can’t be paid less vacation pay than other employees just because of their maternity leave. The difficulty is applying this principle to the facts of each different situation.

Once such difficulty is establishing who to compare such employees with.  In one case (Cameco Corporation v. United Steelworkers of America, Local 13173, 2007 CanLII 37669 ON LA), the comparison was against all other employees away from active service.

In this case, the employer was held to discriminate since employees on lay-off received better treatment than employees on maternity leave. In other words, it’s likely not discrimination if vacation pay is not paid to an employee for a period of inactive service, so long as there isn’t a distinction based on the reasons why employees aren’t at work.

If all employees away from active service have equal rights to vacation pay, then it’s not likely discrimination if one of the reasons a person might be away from work is something like maternity or parental leave.

Alan McEwen is a payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@cogeco.ca,(905) 401-4052 or visit www.alanrmcewen.com for more information. This article was first posed to Canadian HR Reporter on November 6, 2012.

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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One Response to Vacation pay on inactive service

  1. Nanci Lazar says:

    It is about time ltd, etc. was recognized as equal to other groups off work with full pay + benefits. What about holiday pay, special allowances (signing bonus), denial of insurance (only for people on the active payroll) and the right to be severed (after 15 years, isn’t clear going back to work ever – is remote?

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