Most employees think vacation is simple - you go on vacation and you get paid your regular wage while you are off. That assumption is understandable, however it is not what the ESA says. Vacation pay is a percentage of your gross wages, and the way that percentage is calculated, and what counts as gross wages, is where most employers get it wrong. The word gross will be key for the following discussion, as it is not just your hourly rate or base salary that gets factored into the calculation.
The Two Rates: 4% and 6%
The ESA sets two minimum rates. Employees with fewer than 5 years of service are entitled to vacation pay equal to 4% of gross wages earned in the vacation entitlement year, which corresponds to a minimum of 2 weeks of vacation time. Employees with 5 or more years of service are entitled to 6%, which corresponds to 3 weeks. Both the vacation time entitlement and the pay rate upgrade at the same point simultaneously.
However, if you are governed by a Collective Agreement or a workplace policy that provides a greater right than what the ESA sets out, you are entitled to the higher amount. The ESA is a floor, not a ceiling.
If your employer has been paying you at a higher vacation pay percentage and wants to reduce it, that is a significant change to your employment contract. Depending on the full context of your situation and how much notice they have provided, there is a high chance that change is not permitted.
What Gross Wages Actually Means
This is the key takeaway from the ESA that rarely gets discussed by employers or among employees. Gross wages for vacation pay purposes is not just your base salary or hourly rate. Under the ESA it includes regular wages, commissions, non-discretionary bonuses, piece-rate earnings, and statutory holiday pay. It explicitly excludes overtime pay, gifts, and discretionary bonuses.
The distinction between non-discretionary and discretionary bonuses matters significantly here. If you regularly receive a bonus that is stipulated in your employment contract and calculated based on a formula or performance target, that is a non-discretionary bonus and it must be included in your vacation pay calculation. A purely discretionary year-end gift with no pre-set criteria is excluded. If your bonus falls into the non-discretionary category and your employer has been leaving it out of the calculation, your vacation pay has been understated.
How Vacation Pay Is Paid
There are three legitimate ways an employer can pay vacation pay under the ESA. It can be paid as a lump sum before the vacation starts, rolled into each regular pay cheque as a percentage shown separately on the stub, or paid at a time agreed to in writing between the employer and employee. If you are governed by a Collective Agreement, your method may differ.
To ensure you are aware of your vacation pay being paid correctly, it must be explicitly stated on each pay cheque if it is being rolled in. A blanket statement in an employment contract that wages include vacation pay, without any separate identification on the stub, does not comply with the ESA.
Vacation pay is also not a use it or lose it system. If you are unable to take your vacation during the vacation entitlement year, you must receive it in pay. Your employer can require you to schedule and take vacation before the end of the entitlement window, and the ESA requires that vacation be taken within 10 months of the end of the vacation year - but they cannot simply let it disappear.
Vacation Pay When You Leave a Job
If you leave your employment for any reason - resignation, dismissal, retirement, or the end of a fixed-term contract - all outstanding vacation pay must be paid out. This includes any accrued vacation earnings you have not yet used, including amounts accrued right up to your last day of employment.
If you have been terminated without cause and are receiving a lump sum payment covering pay in lieu of notice, severance pay, or common law notice pay, vacation pay needs to be explicitly confirmed and identified on your pay stub as a separate amount. It should not be bundled in without clear identification of what it represents.
The payment deadline is strict - all outstanding vacation pay must be provided within 7 days of the termination date or on the next regular pay date, whichever comes later. This is one of the amounts most commonly missed or undercalculated in final pay packages, and it is fully recoverable if not paid correctly.
What to Do If You Think You Have Been Underpaid
If you believe your vacation pay has been calculated incorrectly, file a complaint with the Ministry of Labour, Immigration, Training and Skills Development. There is no cost to file, and the lookback period is two years, meaning you can recover up to two years of underpaid vacation pay. For an employee earning $70,000 per year with $10,000 in annual non-discretionary commission that has been excluded from the vacation pay calculation, the underpayment over two years could be in the range of $800 to $1,200, recoverable through a straightforward complaint process. You can also review the exact legislative language for vacation pay in the partnHR ESA Interactive Index, which breaks down every section in plain English.
Know What You Are Owed
Although the ESA can be difficult to read, the language is legal and the structure is not written with the average employee in mind. Vacation pay is one area where understanding your rights has a direct impact on your paycheque. Vacation exists for a reason. It is time to rest, recover, spend time with people you care about, and step away from work. In a country that does not legislate as much leave as many others around the world, every day you are entitled to matters. Know what you are owed, check how it is being calculated, and do not leave money on the table that is yours by law.
Legislation Referenced
- Ontario Employment Standards Act, 2000 - Part VI: Vacation with Pay
- Ontario ESA, s. 33: Vacation entitlement - 2 weeks and 3 weeks
- Ontario ESA, s. 35: Vacation pay - 4% and 6% of gross wages
- Ontario ESA, s. 36: When vacation pay must be paid
- Ontario ESA, s. 37: Timing of vacation - employer scheduling and 10-month rule
- Ontario ESA, s. 41: Vacation pay on termination and stub periods
This article is for informational purposes only and does not constitute legal advice. For your specific situation, consult a qualified Ontario employment lawyer. Nothing on partnHR constitutes legal advice - all content is educational and informational only.