The Story of The Baker

A story we often tell when we get asked what Project House is all about, is one about a Baker who loves to bake pies.  We’ll call him The Baker.  The Baker made pies all of the time.  His pies were well-loved by his family, who demanded pies for every conceivable occasion.  His pies were delicious and better than anything available in a shop.  Over time,  The Baker started making pies for his kids’ fundraising events, for his friends and their friends, and before he knew it, his pies were in such high demand that he had a business on his hands and he needed to hire some helpers and find a community kitchen space several days a week just to keep up with the orders.

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How to pay Employee Vacation Pay


“How to pay employees Vacation Pay” is a question that comes up quite frequently with our clients. I thought it would be a good idea to take some time to describe the various options, as well as the pros and cons of each, to help you identify the most appropriate option to suit your business and employee needs.

The Employment Standards Act states that an employer must give an employee annual vacation of at least 2 weeks after 12 consecutive months of employment, or at least 3 weeks after 5 consecutive years of employment, and so on. This is calculated as 4% of the employee’s gross salary for two weeks of vacation, 6% of gross pay for 3 weeks, 8% for four weeks, etc. Regardless of how you manage this time off, the end result needs to equate to the above.

So what does “after 12 consecutive months” mean? This means that the employee accrues their vacation pay/hours during the first year of employment, and is then entitled to start using it after one year. Day by day, week-by-week, the employee accrues vacation time as they work.

While technically, the employer is not required to give the employee any time off until after completion of their first year, for some companies this is a little too harsh. Many companies will let their employees take their accrued vacation time during their first year of employment. Some will even allow the employee to take vacation time before it accrues. The risk of doing that is that, if you give them more days than they have accrued, and they quit before the 12 month mark, the employee may then need to pay back any overpaid money or time off they received.

I would typically recommend that you not allow an employee to use any vacation days prior to at least their 3-month mark, unless they want to take an unpaid day, and in general, I wouldn’t recommend letting them take more days than they have accrued.


So how do you track and pay out vacation pay? Here are some options:

Option 1: Paid out on every Paycheque

This option, in my opinion, is the simplest. Essentially, you pay out the employee their vacation pay on each paycheque. For example, if your employee receives 2 weeks of vacation per year, that is equivalent to 4% of their gross salary. To do this, you simply add an additional 4% of pay to each paycheque. No need to track anything or do any complicated calculations…then when an employee wants to take a day off, they take it off with no pay.

There are some pros and cons with this method for sure… This can be a difficult option for some employees, as when they take their vacation they don’t get any pay. If the employee is good at saving, this is not a bad option for them, and for the rest of the year, they actually get a little more pay on their paycheques. For other employees, they would rather have a little less pay on each paycheque and be paid for their days off. From the employer’s standpoint, the pros are that it is easy to manage this system, and you end up saving payroll costs when your employees are off; however it is more expensive for you during the rest of the year as you are paying more payroll costs throughout the year, given that you need to add the vacation pay on top of their base salary.

My recommendation is that this is a good option for seasonal employees, casual employees and part-time employees, although it might not be ideal for long-term or salaried employees.


Option 2: Paid Vacation Time

With this option, the employee continues to earn their regular wages or salary while on vacation. This option is used more commonly for salaried employees, who are issued their vacation entitlement at the beginning of the year and then simply draw down the days as the Employee takes vacation. It is simple to administer – no fancy systems required for this one!

Pros: simple to use and administer. Cons: not simple for hourly staff. This method is truly best for salaried employees only.


Option 3: Accrued Hours

A third option is the accrual method. Every hour the employee works, they earn their 4% of vacation pay. It is your responsibility as the employer to track this. This option is slightly more complicated in terms of administering, especially if you have many seasonal or part time employees and you do not have a system that can calculate this for you. Essentially, for every hour/day of work your Employee works, they accrue vacation hours/pay to take. When they go to take vacation time, the Employer pays them from this accrued balance.

This option is certainly a bit more onerous. You need to track the vacation balance that might be owing from the previous year, you need to track the vacation pay earned throughout the year, and you need to track the amounts that you pay out to the employee to ensure that the balance is always accurate

All of this can be a bit complicated to navigate and every company’s needs are unique, so taking the time to determine what system is best for your company is a good idea. If you need help to find the right system to track this process for you, please don’t hesitate to ask!