How to Calculate Vacation Pay in Canada

Suppose you’re a Canadian business owner planning to do your own payroll. In that case, 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 in order to comply with employment standards. This is a very important aspect of managing payroll, and one that could get you in serious trouble if it's not done properly. Read on for some guidelines on calculating vacation based on provincial guidelines across Canada.

Let's use our vacation pay calculator and apply it to some examples of employee entitlement and vacation pay.

If you’re a BC-based business owner or a business owner based in Ontario 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 business owner in Saskatchewan, on the other hand:

• that same employee would be entitled to 3 weeks of vacation time at their anniversary date.
• You would calculate vacation pay at 3/52 (5.77%) of their eligible earnings for each vacation week, and
• their vacation pay would be $2308 ($40,000 x 5.77% = $769.23 x 3 weeks = $2308)

In most employment regions, an employee is entitled to more vacation days 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%).

Your business has options when it comes to paying vacation pay. 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 employed on an hourly, part-time, or seasonal basis or are casual workers, 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 take a vacation, you won’t need to track and correlate their time away with their vacation pay entitlement. It's a fairly straightforward calculation to manage every pay period (see above) and leaves the responsibility in the employee's hands when it's time for them to fund their time away from work.

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 employee's vacation pay hours each pay period.

For example, accruing 3.25 hours each bi-weekly pay period for an employee who works 40 hours a week and is entitled to 2 weeks (2 x 40 = 80 hours) of vacation pay annually accumulates to 84.5 accrued vacation pay hours at the end of the year (3.25 x 26 = 84.5 hours).

• 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 you can carry over an employee's vacation entitlements to the following year. Not every company does vacation carry-overs and outstanding vacation balances are owed to employees upon termination.

Use-it-or-lose-it clauses exist in businesses where details of employee vacation entitlements are written into employment contracts. But those contracts must meet all the minimum standards in your jurisdiction’s Employment Standards Act.

Vacation pay regulations can be 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. Whether you're located in Vancouver, Edmonton, Mississauga, or Toronto, we can help! Contact us today for more information.