Three Surprising Facts about Vacations and Vacation Pay

With summer vacations on the horizon, it seemed timely to share a few sometimes surprising facts about employers’ vacation obligations.  In this blog post, we will discuss:

1. Employer liability for vacation pay on non-base pay, including incentives;
2. Whether vacation time off and pay accrue on various forms of leaves; and
3. Whether employers can enforce a “use it or lose it” vacation policy.

Before turning to these topics, it is important to remember that vacations rights in B.C. are governed by the Employment Standards Act (ESA). Under the ESA, there are actually two separate vacation entitlements:

1. To vacation time off, starting at 2 weeks and rising to 3 weeks after 5 years of service;
2. To vacation pay, which obligation is stated as a % of “wages”, either 4% (after 5 days of employment) or 6% after 5 years.

Vacation Pay on Non-Base Pay

The definition of “wages” is not limited to salary or base hourly wages. Thus, employees who work overtime or earn statutory holiday premium pay must receive vacation pay on those non-base pay wages. Less well known is that fact that vacation pay must accrue on almost all forms of incentive/bonus or commission payments (collectively “Incentive Pay”) which reward the performance of the employer and/or employee. In my experience, many employers are not complying with this obligation. There are two ways to comply:

• Accrue and pay vacation pay on the Incentives, but with the added cost that imposes; or
• Draft your Incentive Pay plans to promise an incentive or commission payment which is comprised of two components: (1) a “base” incentive and (2) 6% vacation pay which adds up to the total your organization wants to pay. In other words, the employee would be receiving the incentive pay with the vacation pay already accounted for in the amount. We recommend 6% to ensure the highest rate under the ESA is covered. 6% can be paid even to employees who earn regular vacation time at a rate higher than 3 weeks per year since it only needs to meet the ESA’s requirement. The base incentive and the vacation pay on it can be paid at the same time but need to be shown as separate pay items on pay statements to comply with the ESA. Employment Standards Tribunal (EST) decisions have refused to accept arguments that employer policies or agreements stating vacation pay was ” included” in incentive payments are compliant with the ESA.

 Vacation Accrual on Leave Time

For vacation purposes, it is important to distinguish between two categories of leaves:

• leaves mandated by the ESA, which include shorter leaves such as sick, family responsibility and bereavement leave through to longer leaves such as the combined maternity/parental leave of 18 months; and
• other leaves, such as disability leaves, which are not mandated by the ESA. For the latter type of leave, it is permissible to pause accrual of both vacation time off and vacation pay accrual but this should be clearly stated in the vacation policy to avoid any doubt.

For longer ESA leaves such as pregnancy (maternity), parental, compassionate care and critical illness leave, many employers do not continue to accrue any vacation rights. This makes intuitive sense: why does an employee who is off work need to earn vacation during their leave when vacation itself is time off to recover from working? However, under little known decisions, the EST has ruled that the ESA requires vacation time off to continue to accrue during all ESA leaves. Because the obligation to provide vacation pay under the ESA is separate and based on the amount of wages earned, it is, in our view, open to employers to state in their vacation policies that no vacation pay will accrue during unpaid ESA leaves.

Use It or Lose It Policies

Many employers do not want employees who do not take their entire vacation entitlement to build up large untaken vacation balances from year to year and thus want to impose “use it or lose it” (UILI) policies on unused vacation balances. Two key points need to be kept in mind when drafting such policies:

• Under the ESA, it never possible to cancel accrued ESA minimum vacation. In fact, employers have an obligation to make sure employees take ESA vacation within the year following the year in which it was earned. It follows that “use it or lose it” policies can only apply to vacation entitlements above ESA minimums. All UILI policies need to expressly acknowledge that ESA minimum vacation will always be honoured or risk being held invalid;
• The baseline assumption is that untaken vacation carries forward from year to year, so the onus is on employers to clearly communicate any UILI rule for it to be enforceable. We recommend this be done both in employment agreements and the vacation policy.

To give employees some flexibility and avoid punishing hard working employees who do not have time to take their vacation, we recommend that UILI policies allow for some carry over but up to a cap, which might be a number of weeks or expressed as the employee’s annual entitlement.

Conclusion

With these insights in mind, we recommend you review your incentive plan terms and vacation policies to ensure:

1. Vacation pay is accrued on overtime and, for incentives, is either included but paid separately on incentives in the incentive plan terms or is paid on top of the incentive itself;
2. The policy states that vacation pay does not accrue on ESA leaves and neither vacation time off nor pay accrue on other leaves; and
3. Use or lose it rules do not purport to cancel ESA minimum vacation and are well communicated to employees.

If you want more information on this topic, you can contact us at:

Geoffrey Howard:           ghoward@howardlaw.ca

604 424-9686

Sebastian Chern:            schern@howardlaw.ca

604 424-9688