“Use it or lose it” Vacation Policies

Test your payroll knowledge:

Under her collective agreement, Rose earns the right to 5 weeks of vacation for each completed year of employment. Rose has never taken all the vacation time she’s entitled to and now the time owing is 17 weeks. Her employer wants to wipe this slate clean, to no longer to carry this liability on its books. Can the employer simply write off these 17 unused vacation weeks?

We can answer this question, but not without a little more detail.

One important detail is the employment standards that apply.

The British Columbia employment standards allow employers and employees to opt out of any aspect of the right to annual vacations – in a collective agreement. So, it would be perfectly feasible, for a BC employer and trade union to agree on rules that allowed the employer to take away unused vacation entitlements, including minimum requirements that would otherwise apply. By contrast, under the Ontario employment standards, such an open-ended removal of accrued vacation rights would not be permitted, whether in a collective or individual contract of employment.

Another important detail is whether these 17 weeks are part of the excess over the minimum number of vacation weeks Rose is entitled to. Under the Ontario employment standards, employees are entitled to at least 2 weeks of vacation time for each completed year of employment. So long as Rose had always taken at least these 2 weeks, and the 17 weeks owing all came from the greater benefit (5 weeks versus 2) promised by the employer, the employer could apply a “use it or lose it” policy to any of these greater benefit weeks.

However, any employer wishing to apply such a “use it or lose it” policy to weeks above the employment standards minimums must take the following factors into account.

The policy would have to be a formal part of the terms and conditions of employment. For example, letters of offer could reference the relevant employer policies and include them as part of the employment contract, should an applicant accept the offer.

James was promised 4 weeks of annual vacation and vacation pay at 8%, in his letter of offer. When signed, this letter made no mention of any employer policy in relation to these vacation benefits. Can the employer apply a “use it or lose it” policy to James?

There’s two possible reasons the answer to this question might be “no”. First, as described above, to be effective a “use it or lose it policy” has to be a formal part of the employment contract. From the wording above, it’s reasonable to assume there’s no such term in James’ contract of employment.

It also matters that James was promised both 4 weeks’ vacation time and vacation pay at 8%.

In Ontario, the term “wages”, among other things, means money promised to an employee in an employment contract. Without a “use it or lose it” term in this contract, the Ontario employment standards authorities would be in a position to write an order, requiring James’ employer to honour the promise to pay 8% vacation pay, as wages owing. In other words, in these circumstances, 8% is the minimum vacation pay required for James under the Ontario employment standards, not 4%.

Despite a slightly different definition of “wages”, the BC employment standards authorities would take a similar approach. Without a “use it or use it” term in the employment contract, the BC government would enforce 8% as the rate vacation pay accrues for James.

For vacation time, the real question is the enforceability of the employment standards minimum requirements themselves.

Every jurisdiction places the onus on employers to ensure that employees take at least the minimum annual vacation time that applies. If Rose is carrying 17 weeks of unused vacation time, has the employer met its obligations to provide employees with annual vacation time? I’ve covered this point in an earlier article, about employees who don’t take the vacation time they’ve earned.

So what happens if the employer, realizing it needs to deal with the 17 unused vacation weeks that Rose is carrying, now wants to add a “use it or lose it” policy to her employment contract? Can the employer do this unilaterally?

The answer is no. There are really two options that employers would have to consider in these circumstances.

One option would be to offer Rose something for changing the terms and conditions of employment. This is termed “consideration”. For example, consideration might be more flexibility in scheduling vacation time off, paying a bonus when she takes vacation time or accruing vacation pay at a higher percentage. The point is that the terms and conditions of employment are a contract. Changing this contract requires both employee consent and offering employees something in exchange.

The other option might be seen as harder nosed. The employer could give Rose the notice required if she were being terminated without cause and advise her in writing that continued work past the end of this notice period, would be under the revised terms and conditions of employment. You have to judge for yourself if this is good HR policy. One risk is that the required notice period could be quite long, well beyond the applicable employment standard minimums.

Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 25 years’ experience in all aspects of payroll. He can be reached at armcewen@shaw.ca or (250) 228-5280. If you like these articles, please consider buying one of my Need to Know resources. Signup to my email list to be notified as new resources are added, including webinars and seminars.

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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3 Responses to “Use it or lose it” Vacation Policies

  1. Dolce says:

    In BC, if an employee does not take their required minimum vacation days in a year, but they received vacation pay on each paycheck, can the employer demand that the vacation pay be paid back to them? I wish I was joking, but this is something I see employers trying to do right now.

  2. Alan maddock says:

    Alan see below for email

  3. Alan maddock says:

    Can you touch base with me when you have a moment to chat I would like to discuss salary holiday pay and long term employee on illness leave that I haven’t heard from we kept missing each other last year

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