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When an employee leaves

Expert: Julie King

Ray asked:

I have a salaried employee whose contract entitles him 3 weeks paid vacation per year. He simply receives his salary while on vacation.

This employee is resigning approximately 2/3 through his employment year. To date, he has taken 1 weeks vacation this year. What portion of the the remaining 3 weeks are we entitled to pay him for. If we are required to pay vacation pay, can we pro-rate it to the amount of the year he has worked, or are we required to pay out the full remaining two weeks of vacation pay?

Julie King answered:

Thank you for contacting CanadaOne. From your email it looks like you are based in Ontario. To answer your question I spoke to a representative from the Ministry of Labour.

She explained that there are four ways to pay out vacation pay:

  1. You can pay it out in a lump sum when the employee takes a vacation

  2. You can allow the employ to take a day here or a day there, accruing the vacation pay and paying it out on the days off.

  3. You can pay it with every pay cheque if you have the employee's agreement

  4. You can pay it at a time agreed to by the employee.

It sounds like you have been using the first option. In that case, she explained that the vacation pay rate for 3 weeks of holidays is equal to 6% of the employee's gross pay.

To calculate how much vacation pay is still owing to your employee you can use this calculation:

  1. Calculate the gross salary paid to the employee's final work date this year.

  2. Calculate 6% of that gross salary amount to determine the vacation pay accumulated so far this year.

  3. Deduct the gross pay already paid out for the week of vacation from

(Gross salary x 0.06) - (gross vacation pay already paid out)

Here is an example.

Annual gross salary: $42,000
Gross salary to exit date: $30,000

Vacation pay accrued: ($30,000 x 0.06) = $1800
Vacation pay already paid out this year: $840
Vacation pay owing: (1800 - 840) $960

There is also an excellent fact sheet on the Ministry website that provides much more detailed information on how vacation pay is calculated as well as documenting what records you need to keep.

The fact sheet notes that:

"The employer must also keep records of the vacation pay paid to the employee during the vacation entitlement year (and stub period, if any) and how that vacation pay was calculated."

If you are not doing this already then you should look at how you can change your bookkeeping procedures to meet this obligation.

The fact sheet also explains requirements for tracking how vacation time earned as well as the vacation time still owing.

I hope that will help you calculate the vacation pay owed to your employee when he leaves.

About the author

Julie King is the co-founder and managing editor of CanadaOne, Canada's first small business portal.

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