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Great question — this is exactly where the vacation time vs. vacation pay distinction really matters.
Short answer
Yes, you would generally need to pay out accrued vacation pay, but only to the extent it actually accrued.
If no vacation pay accrued during STD/LTD, then there may be little or nothing to pay out, even though vacation time continued to accrue.
How this plays out in practice
When employment ends (including termination after STD or LTD), employment standards in Ontario, Québec, and Manitoba require employers to pay out any accrued but unpaid vacation pay.
However:
Vacation time (days) ≠ money owed on termination
Vacation pay is the monetary entitlement, and it is calculated as a percentage of wages actually earned
If the employee:
-Was receiving STD or LTD benefits paid by an insurer, and
-Was not receiving wages from the employer during that period,
No statutory vacation pay accrues during that time, unless your policy or contract says otherwise.
So at termination:
-You must pay out any vacation pay that accrued before the disability leave, and
-Any vacation pay that accrued on wages paid during the leave (if any), and
-Nothing further for the vacation time that accrued during STD/LTD without wages behind it.
Why this is not a problem legally (do not accept this as legal advice, though)
Employment standards legislation does not require a payout based on days accrued. It requires a payout of vacation pay earned. Vacation time continuing to accrue preserves the employee’s right to time off if they return, but it does not magically convert into money when no wages were earned.
Make sure your policy clearly states:
-Vacation time continues to accrue during approved leaves
-Vacation pay accrues only on wages paid by the employer
-STD/LTD benefits paid by insurers are not wages for vacation pay purposes
Bottom line:
On termination after STD/LTD, you pay out vacation pay actually earned, not vacation time that accrued without wages. In many LTD cases, that means the payout is minimal or zero beyond pre-leave earnings.