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Q&A: What happens when an employee does not use their vacation entitlement?

vacation entitlementIn this conference Q&A, we address the alternatives when an employee chooses to not use their vacation entitlement in the vacation entitlement year as prescribed by law.

In partnership with Stringer LLP, First Reference Inc. recently hosted the 19th Annual Employment Law Conference on June 12, 2018, where we discussed the latest legal developments including issues surrounding practical strategies for compliance with Bill 148.

We received a large number of questions from conference attendees during the Q&A session. Though we could not answer them all during the conference, the First Reference Blog will be updated weekly until further notice, to provide further clarity on this year’s hot topics based on the questions we received.

Q:

What happens with unused vacation not taken: How much or all can they carry over to next year? What happens if the employee leaves? Can we cap any of vacation to carry over to the next year?

A:

This question raises important issues on the mechanics of vacation entitlements under the Employment Standards Act (ESA) in Ontario, which are covered under Part XI. Given the multiple aspects of the question, we will address one aspect at a time below, but first let’s summarize the vacation time and pay entitlement in Ontario.

Employers must give employees both vacation time and vacation pay. Vacation time and vacation pay provisions are dealt with separately under the ESA and apply to all employees, regardless of their employment status (e.g., full-time, part-time) or how they are paid (e.g., hourly, salaried), unless exempt from the vacation provisions by regulations.

Employees are entitled to two weeks of vacation time after each 12-month vacation entitlement year, with vacation pay of at least four percent of their annual wages. Since January 1, 2018, employees with five years or more of service (as of January 1, 2018) are entitled to three weeks of vacation time after each 12-month vacation entitlement year and six percent vacation pay.

As always, employers have the option to provide a greater benefit with respect to vacation time and vacation pay than the statutory minimum requirement found in the ESA.

A vacation entitlement year is the 12-month period over which employees earn vacation.

A standard vacation entitlement year is a recurring 12-month period beginning on the date of the employee’s hire.

An employer may establish a vacation entitlement year that is different from the standard vacation entitlement year. The ESA refers to this as an “alternative vacation entitlement year” and is defined to mean, “with respect to an employee, a recurring 12-month period that begins on a date chosen by the employer, other than the first day of the employee’s employment.”

If the vacation entitlement year is a standard vacation entitlement year, the employee will be entitled to a minimum of two weeks of vacation time 12 months after the date of hire and after completing each of the next four 12-month vacation entitlement years. The employee will then be entitled to three weeks of vacation after completing the fifth vacation entitlement year and for each vacation entitlement year thereafter.

The Ontario Employment Standards Act says employees have to work for a year before they are entitled to vacation time off (whether two or three weeks, or whatever other entitlement under workplace policy or collective agreement.) Employers do not have to view vacation as accruing monthly and let employees take one or more vacation days before the end of the first entitlement year or any subsequent year. When an employer lets the employees take vacation right away in the first year, that is vacation time and money paid in advance. Technically, the employee should work one year and then the employee has earned his or her vacation entitlement. The employer is then required to make sure that the employee is taking his or her vacation time and money during the following 12 months, in other words during the employee’s second year. In the employee’s second year he or she is earning what is to be his or her entitlement up to the third year. So the first year, technically, there is no vacation time that the employee can take, but he or she is earning it all the way through. If the employee is taking it in advance and he or she is terminated before his or her time is up, the money has to be accounted for and paid out.

Usually for employees whose period of employment is less than five years, employers are required to schedule the vacation time earned for each vacation entitlement year in a block of two weeks or in two one-week blocks. For employees whose period of employment is five years or more, employers are required to schedule the vacation time earned for each vacation entitlement year in a block of three weeks, a two-week period and a one-week period, or three periods of one week each. However, if the employee makes an electronic or written request, and the employer agrees electronically or in writing, the employee can schedule the vacation in shorter periods.

The vacation must be completed no later than 10 months after the end of the vacation entitlement year for which it is given.

If an employee is not taking his or her vacation or refusing to schedule his or her vacation, in Ontario, employers are allowed under the ESA to schedule an employee’s vacation. The employer must schedule the vacation in two one-week blocks or a block of two weeks, for example, unless the employee and employer agree otherwise.

Carrying over unused vacation time and pay to next year

As stated earlier, the ESA requires employees to take vacation no later than 10 months after the end of the vacation entitlement year for which it is given. Therefore, employees should be required to take their full entitlement of vacation every year after the first year of employment. Under the law, there should not be any carry over. Moreover, employees cannot carry over their statutory minimum vacation time. If there is carry over, the employer has failed to comply with the Employment Standards Act. That means that the time and money are considered to be unpaid wages and a complaint for unpaid wages could be filed.

However, it happens frequently due to operational needs or workload, among other reasons. But it must be noted, an employer cannot infringe upon the rights of an employee and deny him or her vacation time or payment of vacation time whether it is taken or not. Employers cannot deprive employees of the right to vacation time and vacation pay.

Employees can give up their vacation time, but this requires both the agreement of the employer and the approval of the Director of Employment Standards with the Ministry of Labour. Vacation pay earned must still be paid out. Unlike vacation time, an employee cannot give up their entitlement to vacation pay.

That said, employers should have a vacation policy that outlines what happens with carryover of vacation, how many weeks can be carried over (cap), or if it is even allowed. Employers should clearly set out the rules for carrying over vacation time in their policy manual, and employees should make sure they are aware of the rules and take whatever steps are necessary to carry over their vacation time. Pre-arrangement must be made to establish and negotiate the carryover prior to year’s end. In principle, the carry over should only be for entitlements above the minimum statutory requirements under the ESA.

What happens to vacation upon termination?

Upon termination of an employee’s employment, the employer must pay out the employee’s accrued but unused vacation pay. This is because the employee has already earned that vacation pay. Some employers might allow employees to take vacation time and vacation pay before it is earned as explained above. In this case, the employer may require employees to pay back any such advanced vacation upon their employment ending. This should be done with a written authorization from the employee.

If an employee is entitled to statutory termination notice or pay in lieu of notice, the employee is also entitled to vacation pay accrued during the notice period.

To learn more about the law and best practices regarding vacation entitlements and related topics, consult The Human Resources Advisor, Ontario edition. If you are not already a subscriber, try a 30-day free trial here.

Please Note: This article is prepared for information purposes only; it is not legal advice. Consult a lawyer before acting on it or to obtain legal advice or a legal opinion.

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Yosie Saint-Cyr, LL.B. Managing Editor

Managing Editor at First Reference Inc.
Yosie Saint-Cyr, LL.B., is a trained lawyer called to the Quebec bar in 1988 and is still a member in good standing. She practiced business, employment and labour law until 1999. For over 18 years, Yosie has been the Managing Editor of the following publications, Human Resources Advisor, Human Resources PolicyPro, HRinfodesk and Accessibility Standards PolicyPro from First Reference. Yosie is one of Canada’s best known and most respected HR authors, with an extensive background in employment and labour across the country. Read more
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