Managing Vacation Pay in Canada (2025 Update)

Vacation pay remains one of the more nuanced areas of payroll for Canadian small businesses — especially as federal and provincial standards continue to evolve. From minimum entitlements to how vacationable earnings are defined, staying compliant can be challenging. 

While employment standards laws set the floor, non-union employers still have flexibility in how vacation pay is calculated and paid. To help you navigate vacation pay in 2025, we break down the key methods below, with a focus on non-union workplaces.

Vacation Terminologies

Before diving into the different ways vacation pay can be managed, it’s helpful to understand some common “vacation related” terms used in payroll:

Vacation Time
The period of time off work that an employee is entitled to take each year.

Vacation Pay
The amount of money paid to an employee in relation to their vacation time.

Vacationable Earnings
Earnings that vacation pay must be calculated on. This varies by jurisdiction but typically includes regular wages, overtime, commissions, bonuses tied to work performance, and some allowances. (Check out this chart for a breakdown)

Accrued Vacation
The process of earning vacation time or pay over time, based on hours worked or earnings, to be used or paid out at a later date.

Vacationable Exception Pay
Are non-regular earnings that must still be included when calculating vacation pay. (Examples: Bonuses, commission, overtime, piece work, Stat holiday pay)

Vacation Entitlement Year
The 12-month period used to track vacation time and pay. This can be based on the employee’s hire date or a common calendar year set by the employer.

Vacation Statutory Minimum
The lowest amount of vacation time or pay an employer can provide, as required by provincial or federal law. Employers can offer more, but never less.

Key Vacation Pay Updates for 2025:

What’s new this year?

• Pay statement transparency: Most provinces now require vacation pay to be clearly itemized on employee pay statements, even if it’s embedded in regular pay.
• Clear communication of balances: New recordkeeping laws require employers to give employees access to vacation accruals, entitlements, and balances.
• Minimum monetary check: Employers must verify that paid vacation meets or exceeds the minimum monetary value required under employment standards. This is particularly important when employees receive bonuses or commissions.

For example, an employee whose base salary is $52,000 a year is given 3 weeks paid vacation. If employment standards require vacation pay at 4% and the employee had vacationable exception pay in excess of $26,000, 3 weeks paid vacation would not meet the minimum requirements: $52,000 plus $26,000, at 4% is $3,120, whereas 3 weeks base salary is only $3,000.

Vacation Pay Rates by Entitlement

Vacation pay rates are directly tied to the amount of vacation time an employee is entitled to under employment standards.

Vacation Entitlement & Pay Rates

Note: These percentages are based on vacationable earnings, which may include exception pay (overtime, bonuses, and commissions, etc) depending on provincial legislation.

How to Manage Vacation Pay in Canada

There’s no one-size-fits-all approach to vacation pay. While laws define minimums, employers can choose from several methods to manage vacation accrual and payouts. Your choice may depend on employee type, scheduling consistency, and payroll systems.

Below are the four most common methods used today:

1. Payout Vacation Pay On Each Paycheque

How it works: Vacation pay is paid out with each paycheque, calculated as a percentage of vacationable earnings. No accrual tracking is required.

Who uses it? Employers with casual, part-time, or seasonal workers whose hours vary. It’s also frequently used in industries where there’s high turnover or temporary contracts.

Pros:

• Simplifies payroll; no need to accrue vacation.
• Avoids carrying vacation liability on the books.
• Eliminates the need to calculate vacation pay on top of vacation pay (required in some provinces).

Cons:

• Time off is still required: Even if vacation pay is paid out, employees must be scheduled for time off in accordance with employment standards.
• Employees receive no additional pay during vacation periods.
• May discourage employees from taking time off, potentially conflicting with wellness legislation.

2. Payout Vacation Time (Regular Salary/hours)

How it works: Employees take vacation and are paid their regular salary or hourly wage. Vacation is tracked as time, not dollars.

Who uses it? Employers with full-time salaried staff or hourly employees with fixed, predictable hours.

Pros:

• No requirement to track vacation pay as an accrual

Cons:

• Unused vacation balance must still be reported as a liability
• Doesn’t easily accommodate employees with variable earnings

3. Accrue Vacation Hours – Paid Out At Current Rate

How it works: Vacation time is accrued in hours per pay period. When vacation is taken, it’s paid out at the employee’s current hourly rate.

Who uses it? Employers with hourly or salaried employees on consistent schedules.

Pros:

• Easy to align vacation with time off
• Works well for hourly roles with regular hours
• Avoids upfront vacation payouts

Cons:

• Requires detailed tracking of hours earned, used, and remaining
• Risk of underpayment if pay rate drops
• Must account for vacationable exception pay (e.g., overtime)

Example: If an employee is entitled to 2 weeks of vacation per year, and they work 80 hours bi-weekly, vacation time accrues at roughly 3.08 to 3.28 hours per pay period (depending on rounding and total annual hours).

• Over the course of a year, this adds up to 80 hours of vacation time.
• When vacation is taken, it’s paid at the employee’s current hourly rate, not the rate at which it was accrued.

4. Accrue Vacation Dollars – Paid Out From Accrued Balance

How it works: Vacation pay is accrued as a dollar amount each pay period (e.g., 4% of vacationable earnings) and stored as an accrued balance. Paid out when vacation is taken or cashed.

Who uses it? Many employers but especially ones who have employees with variable pay structures (e.g., sales commissions, overtime).

Pros:

• Ensures accurate vacation pay for variable earnings
• Works well with payroll/accounting systems
• Easily tracks financial liability

Cons:

• Requires precise tracking of vacationable earnings
• Compliance risk if earnings are misclassified or miscalculated

Employer vacation pay tracking responsibilities:

When using the “accrue vacation dollars” method, employers are responsible for maintaining detailed and accurate records. This ensures compliance with employment standards and supports accurate payouts. Here’s what needs to be tracked:

• Starting balance each year:
  The carry-forward amount of any unused vacation pay from the previous entitlement year. This forms the opening balance for the new year and must be accurately rolled over.
• Amount accrued from earnings:
  The vacation pay earned during the year, calculated as a percentage of vacationable earnings such as wages, commissions, or bonuses. This amount is added to the employee’s vacation pay balance with each pay period.
• Amount paid out or cashed out:
  Any vacation pay that is either paid when employees take time off or cashed out (where permitted). This amount reduces the employee’s vacation pay balance and must be documented precisely.

This tracking is essential. Not only for legal compliance, but also for internal reporting, financial audits, and maintaining employee trust in the accuracy of their entitlements.

Vacationable Earnings by Province & Territory

Note: The information below provides a general overview of vacationable earnings by jurisdiction. Please reference the official provincial and territorial employment standards links listed below for complete inclusion/exclusion details and to ensure you have the most current information.

Vacationable Earnings – Federal (Canada Labour Code)

Vacationable Earnings – British Columbia

Vacationable Earnings – Alberta

Vacationable Earnings – Saskatchewan

Vacationable Earnings – Manitoba

Vacationable Earnings – Ontario

Vacationable Earnings – Quebec

Vacationable Earnings – Nova Scotia

Vacationable Earnings – New Brunswick

Vacationable Earnings – Prince Edward Island

Vacationable Earnings – Newfoundland & Labrador

Vacationable Earnings – Yukon

Vacationable Earnings – Northwest Territories

Vacationable Earnings – Nunavut

For a comprehensive overview of vacationable earnings across all jurisdictions, you can also refer to the National Payroll Institute resource: Detailed Vacationable Earnings – PDF

Note: It’s essential to recognize that the inclusion or exclusion of specific earnings types can vary based on the nature of the payment and the specific circumstances. For instance, discretionary bonuses not tied to hours worked or performance metrics may be excluded in certain jurisdictions. Employers should consult the detailed guidelines provided by their provincial or territorial employment standards authority.

Managing Vacation Pay In Canada with Confidence

Navigating vacation pay in Canada isn’t always straightforward — especially with evolving legislation and varying provincial standards. But by understanding your options and choosing a method that aligns with your workforce and payroll system, you can simplify compliance, support employee well-being, and minimize risk.

Whether you pay vacation out on each cheque, accrue it in time or dollars, or handle it as part of regular salary, what matters most is consistency, transparency, and accuracy in how it’s calculated and tracked. 

And, if you’re looking to hire this summer to help cover for those taking some well deserved vacation time, be sure to check out our blog on employee vs. contractors to help identify the best role to hire for your business.

Disclaimer

This article is intended for informational purposes only and does not constitute legal, employment or HR advice. Always consult with a qualified professional or your local government to ensure full compliance.

Written by Bianca Mueller, CPB, PCP

Bianca is a fintech socialite, award-winning Certified Professional Bookkeeper and Wagepoint’s Community Manager. When she’s not nurturing Wagepoint’s bookkeeping and accounting partner relationships, you might find her nursing a glass of wine in her vegetable garden.

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