Is Your Vacation Policy Compliant with the Employment Standards Act?

Just like anything else in an employment relationship, the Employment Standards Act (the “Act”) defines the minimum that you must provide to employees in terms of vacation and vacation pay.  A failure to comply with the requirements of the Act can have significant financial consequences.  In addition to requiring you to comply, there are significant penalties that you could face, including interest on any outstanding amounts and fines which can be significant.  The amount of fine increases with the number of times that you fail to comply with the act, with the fines being as follows:

• $500 for the first time an employer doesn’t follow the Act or Regulations
• $2,500 for not following the same requirement at the same location within three years of the first contravention
• $10,000 for not following the same requirement at the same location within three years of the second contravention.

The Employment Standards Branch has significant enforcement powers including the ability to register liens, demand payment from third parties, seize assets and register a certificate of judgment against land owned by the employer.  The liability for unpaid vacation pay is not limited to the employer corporation but also extends to directors or officers of the corporation who will be personally liable for the unpaid vacation pay if they were in their position when the vacation pay was earned or payable.

The penalties and enforcement powers demonstrate the importance of ensuring that your policy with respect to vacation pay is compliant with the requirements of the Act.  The sections of the Act that detail the requirements are found at Part 7, section 58.  That section provides as follows:

58. (1) An employer must pay an employee the following amount of vacation pay:

(a)        after 5 calendar days of employment, at least 4% of the employee’s total wages during the year of employment entitling the employee to the vacation pay;

(b)       after 5 consecutive years of employment, at least 6% of the employee’s total wages during the year of employment entitling the employee to the vacation pay.

(2)       Vacation pay must be paid to an employee:

(a)        at least 7 days before the beginning of the employee’s annual vacation, or

(b)       on the employee’s scheduled paydays if,

(i)        agreed in writing by the employer and the employee, or

(ii)       provided by the collective agreement.

(3)       Any vacation pay an employee is entitled to when the employment terminates must be paid to the employee at the time set by section 18 for paying wages.

The Act simply sets the minimums.  Many employers have policies that exceed these minimums.  The important thing is that the minimums are met.  Be mindful that employees are entitled to vacation pay after they have completed 5 calendar days of employment, regardless of the number of hours worked during that period.  Until they have been employed for 5 consecutive years, they must be paid at least 4% of their total wages for vacation pay.  After an employee has worked for 5 consecutive years, they must be paid at least 6%.  For the purposes of calculating vacation pay, be mindful of the definition of “wages” under s. 1 of the Act.  Wages include overtime, statutory holiday pay, bonuses and compensation for length of service.  The Employment Standards branch has the authority to enforce a higher vacation pay entitlement if it is established under an employment contract.

Owed vacation pay, as well as compensation for length of service, are payable within set time frames following the termination of employment.  The Act requires that all wages, including vacation pay, are payable as follows:

• within 48 hours after the employer terminates the employment;
• within 6 days after the employee terminates the employment.

While these requirements of the Act have been the same for some time, it is important to conduct an annual review of your vacation policy to ensure that it is compliant with the requirements currently in force.

This update was authored by Rose Keith. Have questions about your vacation policy? Contact Rose at [email protected] or anyone else listed on the authors page.