- Employees earn 2 weeks / 4% pay for under 5 years of service; 3 weeks / 6% pay at 5+ years.
- Vacation pay is calculated on all gross wages — base salary, commissions, overtime, and non-discretionary bonuses. Excluding commissions is the most common ESA violation.
- Vacation must be taken within 10 months of earning it unless deferred in writing.
- On termination, all accrued vacation pay must be paid out immediately.
- Vacation records must be kept for 5 years — not the standard 3.
1. What Is Vacation Pay Under Ontario's ESA?
Every Ontario employer must provide vacation to every employee under Part XI of the Employment Standards Act, 2000. There are no exceptions for small businesses, part-time workers, or new hires. From the first day of employment, a worker begins accruing vacation entitlements.
Ontario's vacation framework has two distinct but related components:
- Vacation time — the number of working days an employee is entitled to take off with pay each year.
- Vacation pay — the monetary amount an employee earns during a vacation entitlement year, expressed as a percentage of gross wages.
These two components can diverge in practice. An employee might earn vacation pay on all gross wages throughout the year but only become entitled to take the vacation after completing their first year. Understanding this distinction prevents underpayment on termination — one of the most costly compliance failures Ontario employers make.
2. Vacation Entitlement: Time Off and Minimum Pay
The ESA sets minimum entitlements based on length of service. Employers may provide more, but never less.
| Length of Service | Minimum Vacation Time | Minimum Vacation Pay | Example: $70,000 Gross Wages |
|---|---|---|---|
| Less than 5 years | 2 weeks | 4% of gross wages | $2,800 |
| 5 years or more | 3 weeks | 6% of gross wages | $4,200 |
When does the 5-year upgrade apply? The increased entitlement begins in the vacation entitlement year in which the employee reaches their 5th work anniversary. If hired March 15, 2020, the 3-week/6% entitlement applies starting March 15, 2025.
What about long-tenured employees? The ESA does not increase entitlement beyond 3 weeks at 5+ years. Many Ontario employers voluntarily offer 4 weeks at 10 years as a retention benefit — but that is above the legal floor, not required by law.
3. What Counts as Gross Wages?
This is the single most important — and most violated — aspect of vacation pay compliance. Gross wages is not base salary. Under the ESA, vacation pay is calculated on all wages earned:
| Compensation Type | Included in Gross Wages? | Notes |
|---|---|---|
| Base salary / hourly wages | ✓ Yes | Always included |
| Commissions | ✓ Yes | Most commonly omitted — creates large retroactive liability |
| Non-discretionary bonuses | ✓ Yes | Bonuses tied to targets, KPIs, or performance formulas |
| Overtime pay | ✓ Yes | Premium for hours above 44/week |
| Public holiday pay | ✓ Yes | Statutory holiday pay is part of wages |
| Retroactive pay increases | ✓ Yes | Included in the year received |
| Purely discretionary bonuses | ✗ No | One-time gifts with no set formula or obligation |
| Vacation pay itself | ✗ No | Explicitly excluded to prevent compounding |
| Benefits / employer pension contributions | ✗ No | Non-wage compensation |
| Expense reimbursements | ✗ No | Reimbursements are not wages |
Worked example: A sales employee earns a $50,000 base salary plus $45,000 in commissions, plus $3,000 in overtime pay. Total gross wages = $98,000. Vacation pay (4%) = $3,920 — not $50,000 × 4% = $2,000. The gap of $1,920 is a liability that accumulates every year this calculation is done incorrectly.
4. The Vacation Entitlement Year and Stub Period
Vacation entitlements are calculated over a 12-month “vacation entitlement year.” Employers have two options:
- Standard entitlement year: Begins on the employee's hire date and runs for 12 months. Each anniversary restarts a new entitlement year. This is the default.
- Alternate entitlement year: The employer and employee can agree in writing to align the vacation year with a calendar year (January 1–December 31) or any other fixed 12-month period. This simplifies multi-employee tracking but requires a written agreement and a stub-period calculation.
The Stub Period
When switching to an alternate entitlement year, the gap between the hire date and the start of the new cycle is the “stub period.” During this stub period:
- Employees earn 1/12 of their annual vacation time entitlement per month.
- Vacation pay is calculated using the applicable percentage (4% or 6%) applied to gross wages earned during the stub period.
Example: An employee hired October 1 whose employer switches to a calendar year gets a 3-month stub period (Oct–Dec). If they earned $25,000 in that period, their stub vacation pay is $25,000 × 4% = $1,000.
5. When Vacation Pay Must Be Paid
| Payment Method | When Paid | Requirements | Best For |
|---|---|---|---|
| Lump sum before vacation | Before the vacation period begins | No special agreement needed — the ESA default | Most full-time employees |
| Accrual on every pay cheque | Each regular pay period | Requires written agreement; must be itemized on pay statement | Casual, part-time, irregular workers |
| Agreed date in writing | At a written agreed date | Must be in writing; cannot be deferred indefinitely | Fixed-term or seasonal employees |
On termination: All accrued, unpaid vacation pay must be paid within the later of: (a) 7 days after employment ends, or (b) the employee's next regular pay day. This cannot be withheld, conditioned on a release, or deferred.
6. Scheduling Vacation Time
The employer controls when vacation is taken, subject to reasonable employee preferences. Key rules:
- Employer must provide at least 2 weeks' written notice before requiring an employee to take vacation.
- Unless the employee requests otherwise, vacation must be taken in periods of at least 1 week (7 consecutive calendar days).
- Vacation must be taken within 10 months after the end of the vacation entitlement year in which it was earned — unless the employee agrees in writing to defer it (maximum 12 months after the entitlement year ends).
Vacation During ESA-Protected Leaves
If an employee's vacation entitlement year passes while they are on pregnancy, parental, or another ESA-protected leave, the employer must either allow them to take the vacation after returning, or pay out the vacation pay. Accrued vacation time does not expire because an employee was on leave.
7. Vacation Pay on Termination
When employment ends for any reason — termination, resignation, retirement, or death — the employer must pay out all outstanding vacation pay. This includes:
- Vacation pay earned in the current vacation entitlement year up to the last day of employment.
- Any vacation pay from prior years not yet paid out.
- Vacation time earned but not yet taken.
Calculation on termination: Apply 4% (or 6%) to all gross wages earned since the start of the current vacation entitlement year — including commissions, bonuses, and overtime earned in that period.
8. Record-Keeping Requirements
Vacation records have a longer retention period than most other ESA records. Employers must keep the following for 5 years:
| Record Type | What to Record | When to Create It |
|---|---|---|
| Vacation time earned | Days/weeks earned in the entitlement year | Within 7 days of the start of each new entitlement year |
| Vacation time taken | Actual dates and duration of vacation | When vacation is taken |
| Vacation pay earned | Dollar amount at applicable percentage of gross wages | Within 7 days of the start of each new entitlement year |
| Vacation pay paid out | Amount and date of each disbursement | When paid |
9. Ten Common Vacation Pay Mistakes Ontario Employers Make
| # | Mistake | Why It's a Problem | Risk |
|---|---|---|---|
| 1 | Calculating vacation pay on base salary only (excluding commissions) | Commissions are gross wages — creates retroactive underpayment | High |
| 2 | Not upgrading to 3 weeks / 6% at the 5-year mark | Automatic non-compliance starting at year 5 | High |
| 3 | Enforcing “use it or lose it” for ESA minimum entitlements | Accrued vacation below the ESA minimum cannot be forfeited | High |
| 4 | Paying vacation pay on each pay cheque without a written agreement | Accrual method requires written agreement to be valid under ESA | Medium |
| 5 | Withholding or delaying vacation pay on termination | All accrued vacation pay is a wage owed on termination — no exceptions | High |
| 6 | Not accruing vacation pay during working notice periods | Vacation continues to accrue during working notice | Medium |
| 7 | Forgetting vacation accrues during ESA-protected leaves | Vacation pay entitlement continues during pregnancy and parental leaves | Medium |
| 8 | Only keeping vacation records for 3 years instead of 5 | ESA s.15 specifically requires 5-year retention for vacation records | Medium |
| 9 | Assuming part-time or casual employees are not entitled | All employees — regardless of hours or arrangement — earn vacation from day one | Medium |
| 10 | Including vacation pay itself in the gross wages base | The ESA explicitly excludes vacation pay from the calculation base | Low |
10. Frequently Asked Questions
How is vacation pay calculated in Ontario?
Vacation pay is at least 4% of gross wages for employees with under 5 years of service, and at least 6% for employees with 5 or more years. Gross wages includes base salary, commissions, overtime pay, and non-discretionary bonuses. Calculating on base salary only is a common — and costly — mistake.
Does vacation pay apply to commission earnings in Ontario?
Yes. Commissions are wages under the ESA and must be included in the gross wages calculation for vacation pay. This is one of the most frequently cited violations in Ontario ESA complaints, particularly for sales roles where commissions may exceed base salary.
When must vacation pay be paid in Ontario?
The default is before the employee takes vacation. With a written agreement, vacation pay can be paid on each regular pay cheque as it accrues. On termination, all outstanding vacation pay must be paid within 7 days or on the next regular pay day, whichever comes first.
What is the vacation entitlement after 5 years of service in Ontario?
Three weeks of vacation time and vacation pay of at least 6% of gross wages, beginning in the vacation entitlement year that includes the 5th work anniversary. The employer must proactively update this — it does not require the employee to request it.
Can Ontario employers use use-it-or-lose-it vacation policies?
Not below the ESA minimum. Employers can have forfeiture policies for vacation accrual above the statutory floor, but the ESA minimum of 2 or 3 weeks (and corresponding 4% or 6%) can never be forfeited involuntarily.
How long must employers retain vacation records in Ontario?
Five years. This is longer than the 3-year standard for most ESA records. Vacation records must document time earned, time taken, pay earned, and pay paid, created within 7 days of each new entitlement year start.
External References: Ontario.ca — ESA Guide: Vacation | Employment Standards Act, 2000 — Part XI | Ontario.ca — ESA Record-Keeping
Related Pages: HR Compliance Checklist Ontario | Employment Contracts Ontario | Severance Pay Ontario | HR Consulting Services