Vacation pay is one of those areas in payroll where there are great variations between employers. These include variations in the vacation pay rate, the number of vacation weeks provided, the earnings on which vacation pay is accrued and when vacation time and pay are given. Some employers don’t accrue vacation pay at all and others accrue time not dollars. This article summarizes all these differences into the four basic ways that employers commonly process vacation pay in Canada.
Paid Each Pay Period
The first method doesn’t involve an accrual at all. Each pay period, employees are paid the vacation pay owing on the vacationable earnings paid in that pay period. This is the simplest method of processing vacation pay and is often used for casual or hourly employees whose earnings vary from one pay period to the next. For example, paying vacation pay on every pay cheque means employers do not have to carry a liability for vacation pay on their balance sheets. It also has the advantage of avoiding paying vacation pay on vacation pay, in those jurisdictions where vacation pay is itself an earning on which vacation pay would otherwise be accrued. However, from the employee perspective, it has the disadvantage that no actual vacation or other earnings are received when vacation time is later taken.
Paid Vacation Time
Paid vacation time means employees are paid their regular salary or wages while off work on vacation. This amounts to salary continuance, to the extent that some employers don’t even bother to show vacation pay as a separate item on the pay statement. Paid vacation time is commonly used for employees on a fixed salary or for hourly-paid employees who work a set number of hours. Under this method employers often seed the vacation time entitlement – measured in hours or days – at the start of every year and then reduce this entitlement as employees take vacations. Apart from this seeding, paid vacation time means employers don’t have to otherwise formally accrue vacation pay. However, any time not taken will still have to be reported as a liability on audited financial statements.
If paid vacation time is provided to employees who also receive exception pay, such as bonuses or sales commissions, employers will have to ensure the employment standards minimums have been met at the end of every vacation entitlement year. For example, an employee whose base salary is $52,000 a year is given 3 weeks paid vacation. If the employment standards require vacation pay at 4% and the employee had vacationable exception pay in excess of $26,000, 3 weeks paid vacation would not meet the minimum requirements: $52,000 plus $26,000, at 4% is $3,120, whereas 3 weeks base salary is only $3,000.
Accrued Hours/Pay Current
This method means employers accrue vacation owing based on time, rather than as dollars. For example, for employees entitled to 2 weeks of vacation time and whose regular work hours are 80 in a bi-weekly pay period, an employer might accrue vacation entitlements as 3.25 hours earned in every pay period, to an annual maximum of 80 hours. When vacation time is taken in the subsequent year, it’s paid out as 80 hours at the employee’s current rate. Just as for paid vacation time, when time is accrued, rather than dollars, employers must ensure that the current, regular pay for the time taken meets the applicable employment standards minimums. For example, these may not be met if hourly pay rates are reduced or if employees have vacationable exception pay, such as overtime (overtime is not vacationable in all jurisdictions). This method also means employers have to keep accurate records of employee vacation time entitlement balances, additions to this each pay period and any reductions for time taken or for time entitlements cashed out.
Accrued Hours/Pay Balance
When vacation pay dollars are accrued, based on vacationable earnings in a vacation entitlement year, employers have to track the balance owing at the start of each such year, the vacationable earnings paid or vacation pay accrued during the year and any vacation pay either cashed out or paid when vacation time is taken. When audited financial statements are required, any vacation pay accrual balances have to be reported on these as a current liability.
Where the employment standards provide an additional week after completing 5 years of consecutive employment (after 6 years, under the federal Canada Labour Code, and after 10 years in Saskatchewan), there is a difference between accruing vacationable earnings versus the resulting vacation pay. For example, in BC, after completing 5 years of service, employees are entitled to vacation pay at 6%. Note, it’s the vacationable earnings during the 5th year that have to be paid out at the higher rate after the 5th year has been completed. As such, a best practice is to accrue vacationable earnings and only apply the appropriate percentage on payment.
Instead, if vacation pay is accrued, this means a vacation pay percentage was applied to vacationable earnings as work is performed. Yet, in jurisdictions where an additional year may be required, the amount of vacation pay owing is determined by the number of completed service years at the time of payment. This means either accruing the higher rate before it has been earned or having to adjust the accrual once the applicable entitlement year has been completed.
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at firstname.lastname@example.org, (250) 228-5280 or visit www.alanrmcewen.com for more information. This article was first posted to Canadian HR Reporter on September 17, 2013.