How vacation pay works in Ontario

It can be difficult to navigate how much vacation pay should be paid out to your employees. Depending on employee wages and company policies, it can lead to businesses not being compliant with the Ontario ESA—leaving them open to financial risk, legal consequences and disgruntled employees. Here’s where to start.

How to calculate vacation pay

The statutory minimum vacation pay under the Ontario ESA is as follows:

If an employee has less than 5 years of employment with their current employer, vacation pay will be at least 4% of the employee’s wages.

If an employee has more than 5 years of employment with their current employer, vacation pay will be at least 6% of the employee’s wages.

Wages used to calculate vacation pay include:

• Regular salary & commission

• Statutory holiday pay

• Overtime pay

• Bonuses (non-discretionary bonuses)

• Termination pay

How vacation pay can be paid out to employees

In Ontario, employers have multiple options when it comes to when vacation pay is paid out. However, as per Bill 149 that came into play on June 21, 2024, if employers wish to deviate from the ESA standard (a lump sum of earned vacation pay being paid out prior to vacation days being taken), a written agreement is required between themselves and the employee. This written agreement can be part of an employment contract.

Lump sum

Under the ESA, the general rule is that 4% or 6% of an employees’ gross wages must be paid out in a lump sum for their vacation time earned during the vacation entitlement year, sometime before the employee utilizes the earned vacation time.

However, if employers are using an alternate vacation year model to calculate entitlement, things could be tricky. Employers may also choose to use a different model to calculate and pay out vacation pay. While payout timing can vary with agreement, calculation of vacation pay is always based on gross wages under ESA.

During / after vacation

If the employer wishes to pay out vacation pay during the pay period in which the employee takes their vacation days, a written agreement will be required. Here are some ways this can work:

• If the employer pays wages to their employee via Direct Deposit. If an employer pays wages via Direct Deposit, vacation pay can be paid on or before the regular pay day for the pay period in which the vacation time has been taken.

• If the vacation period is less than one week. If the employee is taking less than one week of vacation time, the employer can pay out vacation pay during the regular pay day for that pay period.

Each pay period / upon accrual

Another option for employers, if a written agreement has been established, is to pay out vacation pay within each pay period / as an employee accrues vacation pay. This would mean that when a vacation day is taken, an employee receives no additional pay for that day—as it has technically already been paid out.

How unused vacation pay works in Ontario

As with statutory vacation day entitlements, if there is remaining vacation pay at the end of the vacation year, it must be paid out to the employee.

If an employee resigns or their contract is terminated, they must be paid out for any unused vacation pay that has accrued. This amount can depend on company policy—whether you use standard vacation entitlement years, or how often you pay out vacation pay.

However, in Ontario, any accrued vacation pay must be paid within 7 days of the employee leaving the business, or their next scheduled pay day, whichever is further away. Not doing so would be in violation of the Employment Standards Act.

Need help getting your employees’ vacation pay right?

It can be difficult to navigate how much to pay your employees, what types of contracts are compliant with Ontario employment law and tracking employee entitlements. BrightHR is here to help.

Whether you need compliant policy document templates, a 24/7 employment relations advisor on-demand, or a way to track shifts and schedules, we’ve got you covered.

Book a free demo today to find out how BrightHR can help you navigate compliance in Ontario!