How Does Vacation Pay Work In Canada?
A question that I get asked often by business owners who are hiring their first employee is: how does vacation pay work? Does it get paid out? Do I have to do it? Short answer is yes, all Canadian employers are required to pay at least two weeks of vacation for “every completed year of employment,” CRA. What’s a completed year? It’s twelve consecutive months from the start date of employment. If you hire someone on February 18th, 2021, you will be required to start paying or giving paid time off on February 19, 2022 .
After an employee has been with your organization for five years, they are entitled to three paid weeks of vacation; while employees with 10+ years are entitled to 4 paid weeks of vacation - each of which comes with a different rate of pay. So you’re probably a bit worried about what this is going to cost you, and how you’ll pay it out. There are two ways to pay out your employee vacation time: you can pay it out on each paycheque, or you can save it in an account, and pay it out when the vacation is used (more on this below).
Let’s say that your employee who has worked for you for 16 consecutive months makes a cool $65,000 per year on a semi-monthly basis.
She earns $2,708.33 per paid period - gross income. Her vacation pay is 4% paid out per pay period. She would earn an additional $108.33 per cheque.
If instead you create a vacation ‘bank’ like I mentioned above, you would take that $108.33 and keep a tally of it on the employee’s pay stub.
Remember the 2 ways you can pay out vacation we talked about above? Here’s the scoop on Paying out vacation versus accruing vacation/paid time off…
If you’re paying out vacation, you can simply select ‘pay out vacation’ and your payroll software should then pay it out at the percentages required. When you pay out vacation pay on each pay cheque that means the employee does not get paid on their time off since you already paid it.
If, instead, you have a vacation ‘bank’ that you put that amount into, the employee will still get paid on their time off. This is called ‘accruing vacation’ or ‘paid time off’.
When an employee takes time off, you would adjust their wage for the time off and then move the ‘banked’ amount into their wage.
As the employer, you should have a policy for if someone hasn’t accrued all their vacation time and takes all two weeks at once - are they allowed to go into a negative balance? How long can they roll over into the next 12 months?
In conclusion, Vacation Pay is relatively easy once you get it setup. If you’re looking for Payroll Providers, we’re partnered with Wagepoint who handles it beautifully (including stat pay)!
If you need help with administering payroll or have any other bookkeeping or accounting questions, you can reach out to us at info@signaloperations.com or book a free consultation.