Vacation Pay Salary vs. Hourly

[Conner Lantz]

#90355

Hello,

We are based in Ontario and follow the ESA guidelines. We are moving most of our management employees to salary and want to bee sure we are understanding the legalities around vacation properly. Currently our hourly employees receive their hourly rate + x% of vacation pay taxed then accrued. Employees get a minimum of 4% vacation accrued annually and can take vacation and/or withdraw vacation pay as they wish. How does that work for salary?
If an employee is offered an annual salary of 100k with 6% vacation pay, does that mean the employee would have 15 days vacation included in the 100k salary, or does the 6% vacation pay accrue outside the 100k salary? If the employee does not use the 15 days, are we required to pay 6% out on-top of his/her salary at end of year?

[Conner Lantz]

#90356

When transitioning employees from hourly to salary, it’s important to understand how vacation pay works under the Ontario Employment Standards Act (ESA) and how it should be incorporated into the salary structure. In Ontario, vacation pay is a statutory entitlement for employees, and it’s usually expressed as a percentage of the employee’s earnings. Here’s how it typically works:
1. Accrual of Vacation Pay: Under the ESA, employees earn vacation pay as they work, typically at a rate of 4% of their gross wages. This accrual happens as they work and is not typically paid out with each paycheck.
2. Annual Vacation Entitlement: In addition to vacation pay, employees are entitled to a certain number of paid vacation days each year. The number of days is determined based on their length of employment. For example, after one year of employment, they are entitled to two weeks (10 days) of vacation.
Now, when transitioning employees to a salary structure, you have a few options:
Option 1: Include Vacation Pay in the Salary
In this option, you would include the vacation pay percentage (6% in your example) as part of the annual salary. So, if you’re offering an employee a $100,000 annual salary with 6% vacation pay included, that would mean the employee’s salary is calculated as follows:
Annual Salary = $100,000 + (6% x $100,000) = $100,000 + $6,000 = $106,000
In this case, the employee’s $106,000 salary includes their vacation pay. They are entitled to 15 days of paid vacation as part of this salary. If they don’t take all 15 days of vacation, you are not required to pay out the unused vacation pay separately at the end of the year because it’s already included in their annual salary.
Option 2: Keep Vacation Pay Separate
Alternatively, you can keep the vacation pay separate from the salary, similar to how it was handled for hourly employees. In this case, you would pay the employee their annual salary of $100,000 and separately calculate and pay out the 6% vacation pay on each pay period based on their earnings. This would be on top of their salary, and if they don’t use their vacation days, you would still need to pay out the accumulated vacation pay.
It’s essential to communicate clearly with your employees about which option you choose and how vacation pay is handled under their new salary structure. Ensure that your payroll processes align with your chosen method to avoid any misunderstandings or legal issues. Also, keep in mind that employment contracts and collective agreements may have specific provisions regarding vacation pay.
Vacation Policy – Ontario
How to Make Payments of Vacation Pay

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