If you’re a Canadian business owner planning to do your own payroll, you’ll need to learn about paid vacation entitlement - and how to calculate vacation pay - for employees in your province or territory. While specifics vary with the employment standards for each region, all employers must provide their employees with a certain amount of vacation leave and vacation pay each year.
How to Calculate Vacation Pay
Vacation pay is a percentage of the eligible wages earned by an employee during each year of employment. For every week of vacation time an employee is entitled to, you must pay them 4% of their “vacationable” earnings.
Labour standards in your jurisdiction ultimately determine the type of employee earnings that qualify as eligible - and what percentage or fraction of those earnings you must use to calculate vacation pay.
In most provinces, however, you’ll owe a minimum of 2 weeks of vacation pay at the anniversary date of each employee’s work year.
Let’s look at some employee entitlement and vacation pay examples.
If you’re a BC-based business owner with a new employee who’s worked for you for a full 12 months, and that employee had $40,000 in eligible earnings:
- they would be entitled to 2 weeks of vacation time, and
- their vacation pay - calculated at 4% (2 weeks x 2% = 4%) - would be $1600 ($40,000 x 4% = $1600)
If you’re a Saskatchewan-based business owner, on the other hand:
- that same employee would be entitled to 3 weeks of vacation time at their anniversary date,
- you’d calculate vacation pay at 1/52 of their eligible earnings for each vacation week, and
- their vacation pay would be $2307.69 ($40,000 x 1/52 = $769.23 x 3 weeks = $2307.69)
In most employment regions, the number of vacation days an employee is entitled to increases after a set number of years.
In British Columbia, for example, annual vacation leave rises from 2 weeks to 3 weeks after five consecutive years of employment, meaning vacation pay is calculated at 6% rather than 4% annually (3 weeks x 2% = 6%).
When it comes to paying out vacation pay, your business has options. You can pay it as a percentage of your employee’s eligible earnings each pay period, or accrue and pay the amount when the employee goes on vacation.
Paying Vacation Pay Each Pay Period
Paying out what you owe an employee each pay period is the most convenient approach to vacation pay - especially if your workers are hourly, part-time, seasonal, or casual and their work hours vary.
By paying out the vacation pay employees earn each time they get paid, you eliminate the need to track and accrue the fluctuating amounts owing.
And since including those amounts on every paycheque also means your employees receive no vacation pay when they actually take a vacation, you won’t need to track and correlate their time away with their vacation pay entitlement.
Accruing Annual Vacation Pay
If you have full-time, salaried employees, you may find accruing vacation pay on an earnings or time basis makes more sense than paying it out every pay period.
Accruing an employee’s vacation pay based on their eligible earnings can be accomplished by tracking:
- their accrued vacation pay at the beginning of each year,
- the vacation pay they earn as the year progresses, and
- the vacation pay paid out to them each time they take vacation leave
You can also accrue vacation entitlement based on the vacation pay hours an employee earns each pay period.
For example, accruing 3.25 hours each bi-weekly pay period for an employee who a) works 40 hours a week and b) is entitled to 2 weeks (2 x 40 = 80 hours) of vacation pay annually, works out to 84.5 accrued vacation pay hours at the end of the year (3.25 x 26 = 84.5 hours).
As long as you accrue up to an annual maximum, and meet minimum employment standards, you can simply track:
- the vacation hours that employee earns each pay period,
- the rolling balance of vacation time they’re entitled to take, and
- the amount of paid time they actually take
You should also note that employee vacation entitlements can be carried over to the following year - though not every company does vacation carry-overs – and any outstanding vacation balances are owed to employees upon their termination.
Use-it-or-lose-it situations do exist in businesses where details describing employee vacation entitlements are written into employment contracts. But it’s essential that those contracts meet all the minimum standards set out in your jurisdiction’s Employment Standards Act.
Vacation pay regulations can be extremely complex - especially if you’re new to bookkeeping. At Enkel, our dedicated back-office team takes the pain out of payroll by ensuring your employees are paid accurately, on time, and without all the hassle.