This blog post is written for Canadian businesses. U.S.-based companies should refer to How to Structure Paid Time Off Plans Like a Pro.
Small business owners have a decision to make when it comes to Vacation Pay. As delightful as vacations can be, the complexities of vacation payroll can sometimes leave a small business owner wishing for a vacation day.
Vacation pay is one of those areas in payroll where there are great variations between employers, including differences in the vacation pay rate, the number of vacation weeks provided, the earnings on which vacation pay is accrued and when vacation time and pay are given. There are even some employers that don’t accrue vacation pay at all and others accrue time not dollars.
The multicultural country that we are, we have managed to distil vacation payroll into the following "standardized" processes.
Four Basic Ways to Process Vacation Pay in Canada
Paid Each Pay Period
The first method doesn’t involve an accrual at all. Each pay period, employees are paid the vacation pay owing on the
This sample vacation policy is the simplest method of processing vacation pay and is often used for casual, part-time or seasonal employees whose earnings vary from one pay period to the next. For example, paying vacation pay on every pay
It also has the advantage of avoiding paying vacation pay on vacation pay, in those jurisdictions where vacation pay is itself an earning on which vacation pay would otherwise be accrued. However, from the employee perspective, it has the disadvantage that no actual vacation pay or other earnings are received when vacation time is
Paid Vacation Time
Paid vacation time means employees are paid their regular salary or wages while off work on vacation. This amounts to salary continuance, to the extent that some employers don’t even bother to show vacation pay as a separate item on the pay statement.
Paid vacation time is commonly used for employees on a fixed salary or for hourly-paid employees who work a set number of hours. Under this method, employers often set the vacation time entitlement – measured in hours or days – at the start of every year and then reduce this entitlement as employees take vacations.
Apart from this
If paid vacation time is provided to employees who also receive exception pay, such as bonuses or sales commissions, employers will have to ensure that their provincial employment standards minimums have been met at the end of every vacation entitlement year.
For example, an employee whose base salary is $52,000 a year is given 3 weeks paid vacation. If the employment standards require vacation pay at 4% and the employee had
Accrued Hours/Pay Current
This method means
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.
When vacation time is taken in the subsequent year, it’s paid out as 80 hours at the employee’s current rate. Just as for paid vacation time, when time is accrued, rather than dollars, employers must ensure that the current, regular pay for the time taken meets the applicable employment standards minimums.
For example, these may not be met if hourly pay rates are reduced or if employees have
This method also means employers have to keep accurate records of employee vacation time entitlement balances, additions to this each pay period and any reductions for time taken or for time entitlements cashed out.
Accrued Hours/Pay Balance
When accruing vacation pay based on dollars, the calculation is
For example, an employee entitled to 2 weeks of paid vacation calculates to accruing vacation pay at 4% of
These can vary depending on provincial employment standards. When vacation pay dollars are accrued, based on
- The accrued vacation balance owing at the start of each entitlement year.
- The accrued vacation pay earned on
- Any vacation pay either
When audited financial statements are required, any vacation pay accrual balances have to be reported on these as a current liability.
This brings us to the end of this wonderful article that summarizes the four possible ways that a company in Canada can handle their vacation pay.
Honestly, all this vacation
About the Author
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry.More Content by Alan McEwen