How does vacation pay work in Ontario?

The ESA minimum: 4% now, 6% after five years

Ontario’s Employment Standards Act sets a floor, not a ceiling, for vacation. Once an employee completes each 12-month vacation entitlement year, they are entitled to at least two weeks of vacation time and vacation pay of at least 4% of the gross wages earned in that year. Once an employee has been with the same employer for five years, that floor rises to three weeks of vacation time and 6% of gross wages.

Many Ontario employers offer more than the legal minimum, especially to attract experienced hires, but 4% and 6% are the amounts an employer cannot go below regardless of what an employment contract says. A contract term promising less than the ESA minimum is simply not enforceable, and the statutory floor applies instead.

What counts as wages for the calculation

Vacation pay is calculated on an employee’s gross wages for the vacation entitlement year, and that figure is broader than base salary alone. It generally includes commissions and most overtime pay, since both are considered part of what the employee actually earned for the work performed. It does not include tips and gratuities, reimbursed expenses, or discretionary bonuses that are not tied to hours worked or production.

This matters most for commission-based roles and anyone who works meaningful overtime, since calculating vacation pay on base salary alone in those cases would understate what the employee is legally owed. Payroll software configured correctly will pull the right earnings categories into the vacation pay calculation automatically, but it is worth confirming the setup rather than assuming a default configuration got it right on day one.

Tips and gratuities are a common point of confusion in restaurants and salons, since a server or stylist may earn most of their real income through tips rather than base wages. Because tips are excluded from the vacation pay calculation, an employer only owes 4% or 6% on the wages actually paid through payroll, not on tip income the employee received directly from customers; our answer on running payroll for tipped employees goes deeper into how tipped roles are handled more generally.

Time off vs. the money, and the two ways to pay it out

Vacation time and vacation pay are two separate obligations that both have to be satisfied. Vacation time is the number of weeks off; vacation pay is the money tied to that time. An employer generally must ensure earned vacation time is actually taken, typically within ten months after the end of the vacation entitlement year in which it was earned, rather than letting it accumulate indefinitely.

The default rule is that vacation pay is paid out when the vacation is actually taken. An employer can instead pay vacation pay on every regular paycheque as it accrues, spreading it across the year rather than as a lump sum at vacation time, but this alternative method requires the employee’s written agreement. Without that agreement in place, the default pay-when-taken rule applies.

Employers sometimes assume paying vacation pay on every cheque is simpler to administer and set it up that way without ever getting the required written agreement in place. That gap does not usually cause a problem day to day, but it becomes a real issue if an employee later disputes how their vacation pay was handled, since the employer has no documented basis for departing from the default rule.

One point that causes genuine confusion in payroll setups is whether vacation pay itself becomes part of the wage base used to calculate the following year’s vacation pay. This is a technical area where the details depend on how a specific payroll system defines earnings categories, so it is worth confirming directly with your payroll provider or the Ministry of Labour rather than assuming a particular treatment without checking.

What happens to vacation pay when employment ends

Any vacation pay an employee has earned but not yet received must be paid out along with their final wages when employment ends, regardless of who initiated the termination or why. This includes vacation pay accrued in the current, partially completed vacation entitlement year up to the last day worked, not just a prior completed year that was never paid out.

Employers should keep vacation records, including entitlement year start dates, wages earned, and vacation time taken, as part of their standard payroll records. These records matter most exactly when a termination happens and a final payout has to be calculated correctly and quickly, and they are one of the items our bookkeeping services track alongside the rest of a client’s payroll documentation.

A short example makes the mechanics clearer: an employee earning $52,000 a year with less than five years of service has earned $2,080 in vacation pay for that year, at 4% of gross wages. Once that same employee passes five years with the employer, the same $52,000 in annual wages would generate $3,120 in vacation pay at the 6% rate, with three weeks of vacation time to go along with it rather than two.

How we help employers manage vacation pay correctly

We set up vacation pay tracking correctly from the first payroll run, including which earnings count toward the calculation, whether an employer wants the standard pay-when-taken approach or a written agreement for pay-per-period, and how the five-year rate change is tracked for longer-tenured staff. Getting this wrong quietly compounds over years of payroll, and it usually only surfaces at a termination, when the gap between what was paid and what was owed becomes obvious. Our payroll services include vacation pay as a standard part of the payroll setup, not an afterthought handled once a problem appears.