There are 2 methods to calculate vacation pay: you can include vacation pay in each paycheque, or your can pay it out in a lump sum when employees take their holiday (or when their contract ends). For our examples, let’s assume an employee receiving the Employment Standards Act minimum of 2 paid weeks per year worked, or 4% of earnings.
Method 1 – Pay with each cheque:
Vacation pay can be rolled into regular pay, so the employee receives it as they earn it. This means that the employee has to do their own saving-up for time off. This method is often used for part-timers, temporary and hourly-paid staff.
Example: An employee earns $1,000.00 per pay cheque. The employee has vacation paid on each cheque, therefore s/he receives $1,000.00 in pay + 4% ($40.00) for a total of $1,040.00 of gross pay each pay period
Method 2A – Pay with holiday – Salary:
Salaried employees get “paid vacation”, which means they receive their normal salary without interruption even when on vacation. There is no change in the rate or frequency of their pay; they just get paid time off. In the payroll records, 4% vacation pay is accrued each week. That is, the employer sets aside the vacation pay amount as money owing to the employee for their holiday. Since the process is seamless for both the employer and the employee, the accrual process may be omitted: if the employee gets their regular pay, the requirements have been fulfilled!
Method 2B – Pay with holiday – Non-Salary:
Part-time, casual and hourly-paid staff often have an irregular stream of earnings. From the employer’s viewpoint, the accounting is the same: you accrue 4% of each week’s earnings, setting it aside as an amount owed to the employee. However, when the employee takes time off, their vacation payout will not correspond to a normal paycheque — so from their point of view vacation pay is a lump sum.
Example: The employee is about to take her/his annual vacation, and no vacation pay has yet been paid. Therefore, the employer bases vacation pay on the employee’s total gross pay since the last time s/he took vacation. In this case, the employee has earned $13,978.65 in gross earnings since his or her last vacation. 4% of those gross earnings warrants vacation pay of $559.15.
Visit the Ontario Ministry of Labour website (or a comparable website for your area) for more information on vacation pay.