How to calculate vacation pay
Every province in Canada entitles an employee to vacation time after 12 consecutive months of employment. The amount of vacation time an employer grants, however, varies between provinces (and the employer’s discretion). For example, in British Columbia, the BC Employment Standards Act requires employers to:
- provide vacation pay after 5 calendar days of employment of at least 4% of the employee’s wages during the year of employment.
- provide vacation pay of at least 6% of the employee’s wages during the year of employment after 5 consecutive years of employment.
Ways to pay vacation in Canada
1) Vacation pay each period
This is the most convenient method, especially if your employees are part-time, seasonal or casual and have earnings that vary from one pay period to another. With this method, employees are paid out the vacation owing in that pay period’s vacationable earnings each time they get paid, eliminating the need for tracking or accrual.
For example, an employee earns $1,000 per paycheque plus vacation. That means they receive $1,000 in pay + 4% ($40.00) for a total of $1,040.00 of gross pay each pay period. If they have worked for 5 consecutive years or more, they would receive $1,000 in pay + 6% ($60.00) for a total of $1,060.00 of gross pay each pay period.
2) Paid Vacation Time
Commonly used for employees on fixed salaries, paid vacation means employees are paid their standard salary or wages even while on vacation with no change in rate or frequency of their pay. With this method, employers often set the vacation time entitlement. On the payroll, 4% vacation is accrued each week and 6% each work for employees with 5 years or more seniority.
3) Accrued vacation pay
Accrued vacation pay is the amount of vacation pay an employee has earned (as per a company’s employee benefits policy) as of a specified date but has not been taken yet. For example, the accrued vacation pay as of January 1, 2021, is the amount an employee has earned as of January 1, 2021 but has not taken as of that date. The employee may then take vacation time during 2021 or may be paid the amount in 2021. To calculate accrued vacation pay for each employee, an employer must track:
- the amount of accrued vacation pay earned at the beginning of the year.
- the vacation pay earned as the year progresses.
- the amount of vacation pay paid out to an employee each time they take vacation.
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.
Do “Use it or Lose it” policies exist?
A Use it or Lose It policy would mean that an employee must use their vacation time by a certain date or may only be allowed to carry forward a small number of hours (or none at all) into the next year. Such policies do exist in some businesses where employee vacation entitlements are detailed in employment contracts. Vacation is an earned benefit that cannot be taken away, which means this policy may be illegal. As an employer, it is essential you make sure your employee contracts meet all the required standards set out in the BC Employment Standards Act.
How do pay raises affect accrued vacation pay?
If an employee receives a pay raise, then the amount of vacation pay the employee has accrued is also increased by the incremental amount of the pay raise. The reason for this is because if the employee were to leave the company, all unused vacation would need to be paid to the employee at their most recent pay rate.
Cross & Company’s Nanaimo Bookkeeping Services
If you are new to bookkeeping, vacation payroll can be extremely complex. At Cross & Co, our team helps businesses in Nanaimo, Duncan, Ladysmith, Parksville, Qualicum, Port Alberni and Lake Cowichan make sense of their vacation regulations with a wide range of hassle-free bookkeeping services. If you’d like to learn more, contact us today!