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Mandatory cash-out of vacation and compensatory leave

From: Employment and Social Development Canada

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The mandatory (that is, automatic) cash-out process for excess leave resumed effective March 31, 2022 as announced in the Vacation and Compensatory Leave Cash-Out for 2022-2026 bulletin released by the Treasury Board of Canada Secretariat (TBS) on December 22, 2021.

Under most collective agreements and/or terms and conditions of employment, there is a maximum allowable carry-over of vacation and/or compensatory leave from one year to the next.

Normally, excess leave is automatically paid out annually, in accordance to the provisions of the collective agreement and/or terms and conditions of employment.

From 2016 to 2021, this automatic payment was paused due to issues related to the Phoenix pay system. This means that you may have accumulated vacation or compensatory leave beyond what you would normally have.

What does this mean for you

Effective March 31, 2022, if your vacation or compensatory leave balance is higher than the maximum carry-over amount allowed as per your collective agreement and/or terms and conditions of employment:

*Note that the 20% of the leave balance excess will be paid out gradually over a period of 5 years (that is, from 2022 to 2026) and is rounded to the nearest hour.

Provisions for executives pertaining to vacation leave

The same process for the payment of excess leave will be applied to executives. No matter how many years of service you have, until March 31, 2026, the maximum vacation leave carry-over for executives will be 262.5 hours (7 weeks).

Exclusions to the mandatory cash-out process

The automatic payment of your excess leave may be paused if:

  1. you are in a pending transfer situation:
    • your pay and leave files have not been transferred to Employment and Social Development Canada (ESDC) from your previous department by March 31
    • you are leaving ESDC and your file is not transferred to your new department by March 31
  2. your leave balances are wrong or in the process of being reviewed for accuracy
  3. you are on Leave Without Pay (LWOP) and in receipt of a social benefit (Employment Insurance (EI), Disability Insurance (DI), Long term Disaiblity (LTD)

Tax waivers

The mandatory leave cash-out payments are subject to the tax waiver provisions from the Canada Revenue Agency (CRA) and/or Revenu Quebec.

To make a request to CRA, employees are to complete and submit form T1213 and to make a request to Revenu Quebec, form TP-1016-V.

Employees can request a tax waiver letter from the CRA and/or Revenu Québec and send this tax waiver letter to the Pay Centre.

Tax waivers should be submitted with a Pay Action Request (PAR) using the following:

IMPORTANT

Scenarios

Important: for the scenarios 1 to 4 listed below, we are using the example of the maximum carry over limit of 262.5 hours of vacation leave, as per most employees at ESDC. Scenarios 5 to 8 are specific to compensatory leave. While the cash-out process is very similar to the cash-out process for vacation leave, the cash-outs are determined after the period available to use carried over compensatory leave. These periods, as well as the carry over amounts, vary across leave plans and Collective Agreements. Travel Status and Lieu Days are to be processed in the same way as compensatory leave. Since most collective agreements have a deadline of September 30 for the use of compensatory time, the scenarios for compensatory leave are using this deadline. Please refer to your collective agreement for further information, including to determine your mandatory cash-out deadline as well as your maximum carry over amount.

Scenario 1: You finished the 2022 to 2023 year below the carry-over limit

On March 31, 2023, you finished the 2022 to 2023 fiscal year with a closing vacation (that is, annual leave) balance below your maximum allowable carry-over.

On March 31, 2023:

  • you will not be subject to the mandatory cash-out as your balance is below the allowable limit
Scenario 2: You finished the 2021 to 2022 year below your carry-over limit. In 2022 to 2023, you used less vacation than you earned and you finished the 2022 to 2023 year above the carry-over limit

You finished the 2021 to 2022 year with a closing vacation leave balance of 260 hours (2.5 hours below the allowable limit).

In 2022 to2023, you earned 112.5 hours of vacation leave, and only used 75 hours. Thus, you finished the 2022 to 2023 with 297.50 hours (35 hours over your allowable limit).

On March 31, 2023:

  • you will be cashed out 100% of the leave excess that you earned and did not use in the 2022 to 2023 year (297.50 minus 262.50 = 35 hours)
  • you are not subject to the 20% cash-out over 5 years
Scenario 3: You finished the 2021 to 2022 year above the carry-over limit. You used more vacation than you earned in 2022 to 2023

You finished the 2021 to 2022 year with 400 hours in your vacation leave bank (137.5 hours over the allowable limit).

In 2022 to 2023, you earned 112.5 hours of vacation leave, and used 150 hours. Thus, you finished the 2022 to 2023 with 362.50 hours (100 hours over your allowable limit).

On March 31, 2023:

  • you are not subject to the 100% cash-out for earned but unused leave in the 2022 to 2023 year
  • you will be cashed-out 20% of the excess leave that you received in previous years and didn't use (20% of 100 hours = 20 hours)

You would still have the remaining excess leave (80 hours) available to use after the first cash-out on March 31, 2023. If you do not use it, the next year, you will be paid 16 hours (20% of the 80 hours of excess leave). You will be paid 20% of the hours of excess leave every year until 2026, or until you have used the remaining hours.

Scenario 4: You finished the 2021 to 2022 year above your carry-over limit. You also did not use all your earned leave for 2022 to 2023.

You finished the 2021 to 2022 year with 362.50 hours in your vacation leave bank (100 hours over the allowable limit).

In 2022 to 2023, you earned 112.5 hours of vacation leave, and used 75 hours. Thus, you finished the 2022 to 2023 year with 400 hours (137.5 hours over your allowable limit).

On March 31, 2023:

  • you will be cashed out 100% of the leave excess that you earned and did not use in the 2022 to 2023 year (112.50 minus 75 = 37.50 hours)
  • in addition, you will be cashed-out 20% of the excess leave that you received in previous years and didn't use (362.50 minus 262.50 = 100 hours; 20% of 100 hours = 20 hours)

You would still have the remaining excess leave (80 hours) available to use after the first cash-out on March 31, 2023. If you do not use it, the next year, you will be paid 16 hours (20% of the 80 hours of excess leave). You will be paid 20% of the hours of excess leave every year until 2026, or until you have used the remaining hours.

Scenario 5: You finished the 2022 to 2023 year below the carry-over limit.

On March 31, 2023, you finished the 2022 to 2023 year with a closing compensatory leave balance below your maximum allowable carry-over.

On September 30, 2023:

  • you will not be subject to the mandatory cash-out as your balance is below the allowable limit
Scenario 6: You finished the 2021 to 2022 year below your carry-over limit. You finished the 2022 to 2023 year above the carry-over limit.

You finished the 2021 to 2022 year with a closing compensatory leave balance of 35 hours (2.5 hours below your allowable limit, which is set at 37.50 hours).

In 2022 to 2023, you earned 22.5 hours of compensatory leave, and only used 5 hours by the deadline for compensatory time (e.g., September 30, 2023), as indicated in your relevant collective agreement. Thus, you finished the 2022 to 2023 year with 52.50 hours (15 hours over your allowable limit).

On September 30, 2023:

  • you will be cashed out 100% of the leave excess that you earned and did not use in the 2022 to 2023 year (52.50 – 37.50 = 15 hours)
  • you are not subject to the 20% cash-out over 5 years
Scenario 7: You finished the 2021 to 2022 year above the carry-over limit. You used more compensatory leave than you earned in 2022 to 2023.

You finished the 2021 t0 2022 year with a closing compensatory leave balance of 175 hours (137.50 hours over the allowable limit in your collective agreement).

In 2022 to 2023, you earned an additional 52.5 hours of compensatory leave, and used 75 hours by March 31, 2023. You used an additional 75 hours by the deadline for compensatory leave stipulated in your relevant collective agreement (e.g., September 30, 2023).

Thus, you finished the 2022 to 2023 year with 77.50 hours of compensatory leave (40 hours over your allowable limit).

On September 30, 2023:

  • you are not subject to the 100% cash-out for earned but unused leave in the 2022 to 2023 year
  • you will be cashed-out 20% of the excess leave that you received in previous years and didn't use (20% of 40 hours = 8 hours)

You would still have the remaining excess leave (40 - 8 = 32 hours) available to use after the cash-out on September 30, 2023. If you do not use it, you will be paid 20% of the hours of excess leave every year until 2026, or until you have used the remaining hours.

Scenario 8: You finished the 2021 to 2022 year above your carry-over limit. You also did not use all your earned leave for 2022 to 2023.

You finished the 2021 to 2022 year with a closing compensatory leave balance of 40 hours. In 2022 to 2023, you earned an additional 60 hours of compensatory leave, and used 15 hours by March 31, 2023. You used an additional 10 hours by the deadline for compensatory leave stipulated in your relevant collective agreement (for example, September 30, 2023).

Thus, you finished the 2022 to 2023 year with 75 hours of compensatory leave.

As your collective agreement does not have provisions for compensatory leave to be carried over between fiscal years, the 75 hours mentioned above are subject to the mandatory cash out process.

On September 30, 2023:

  • you will be cashed out 100% of the leave excess that you earned for 2021-22 and did not use by September 30, 2023 (60 – 15 – 10 = 35 hours)
  • in addition, you will be cashed-out 20% of the excess leave that you received in previous years and didn't use (20% of 40 hours = 8 hours)

You would still have the remaining excess leave (40 - 8 = 32 hours) available to use after the cash-out on September 30, 2023. If you do not use it, you will be paid 20% of the hours of excess leave every year until 2026, or until you have used the remaining hours.

What can you do to prepare

Employees

Remember: Time away from work is good for your physical and mental well-being. You are encouraged to use your vacation and compensatory leave every year.

Managers

Please ensure you have completed the steps available from the iService page in the ‘What managers need to do?’ section before the applicable cash-out deadline.

Frequently asked questions (FAQs)

All employees

How do I confirm my leave balance and/or submit an exclusion request?

A self-service function in myEMS (Peoplesoft) allows employees, who have leave over their allowable limit per their collective agreement or terms and conditions of employment, to attest to the accuracy of their leave balances and report/request an exclusion to their manager.

Managers will be required to approve the amount calculated for cash-out, if applicable. Please note that the Pay Centre will be responsible for manually issuing the payments.

How do employees currently on leave (for example, paid/unpaid leave) confirm their leave balance and/or submit an exclusion request?

For employees who are on leave and do not have access to myEMS (Peoplesoft), managers will be able to validate and approve the amount calculated for the cash-out on their behalf, after discussing with them.

Do managers need a section 34 delegation to confirm/validate/approve the cash-out amount?

Managers are able to approve the cash-out requests submitted by employees. Section 34 delegation is only needed to approve exclusions.

I am close to the carry-over limit for compensatory leave from the 2022 to 2023 fiscal year. How am I affected by the mandatory cash-out if I earn compensatory leave for the 2023 to 2024 year and exceed the carry over limit?

You will not be subject to the mandatory cash-out of compensatory leave this year as your balance for 2022 to 2023 is below the allowable limit. However, you may be subject to a mandatory cash-out for compensatory leave if your balance for 2023 to 2024 remains above the allowable limit after the deadline stipulated in your collective agreement.

What will be the impact on temporary employees such as terms less than 3 months, casuals, students or part-time workers?

Casual workers, persons hired for a term of less than 3 months, part time workers and students are not entitled to vacation leave and are rarely granted compensatory leave. They are therefore unlikely to be impacted by this exercise.

Is One Time Vacation included as part of the mandatory leave cash-out process?

One Time Vacation is not considered as part of the cash-out process.

Which department will be responsible for the leave cash-out for employees who are seconded out?

Leave balances are always maintained by the home organization.

When an employee moves from a separate agency to the Core Public Administration (CPA), are they required to cash out all leave in excess of the allowable limit?

An employee transferring into the CPA from a separate agency will be able to carry-over their excess leave balances beyond the allowable limit, as per their collective agreement or terms and conditions of employment. However, they will be subject to the 5-year reduction plan should they continue to have excess vacation leave above the carry-over limit.

Will there be any managerial discretion to defer the payouts for an employee who may have been planning to take most of their excess banked leave next year for events such as an extended trip that might not have been possible this year due to lingering COVID-19 restrictions?

No. There is no managerial discretion to the mandatory leave cash-out.

If an employee has chosen a retirement date prior to the end of the 5-year horizon and planned to use up all their vacation and/or compensatory leave just before they leave the department, can they be granted an exclusion from the mandatory cash out process?

There is no managerial discretion to the mandatory leave cash-out.

Has consideration been given so that employees may take the entire balance as a one-time cash out?

Most collective agreements and terms and conditions of employment allow for a voluntary cash-out of leave. Employees may request a voluntary cash-out according to the terms of their collective agreement and management approval.

Does the collective agreement need to be amended to be able to pay the excess leave in the current year?

No amendment of the collective agreement is required. A Memorandum of Understanding has been signed with Bargaining Agents in order to obtain their agreement to the lift of the moratorium.

When can I expect my mandatory leave cash-out payment?

The Public Service Pay Centre is responsible for issuing the mandatory cash-out payments. Compensatory leave cash-out for the fiscal year 2021-2022 (for the September 30, 2022 deadline) will be issued by the Pay Centre by March 1, 2023.

Vacation leave cash-out for the fiscal year 2022-2023 will be issued before December 31, 2023. However, several factors may influence the timing of the payments, such as workload and the complexity of cases.

At what rate will the mandatory leave cash-out be paid?

The rate of pay that will be used to pay out the mandatory leave cash out is outlined in the relevant collective agreement or terms and conditions of employment.

What happens if a group receives economic increases to their rate of pay after a leave cash-out has taken place?

Should a rate of pay be revised (for example signing of a new collective agreement), then the leave cash-out amount will be revised by the Public Service Pay Centre.

If employees are on leave of absence and receiving a social benefit (EI, DI, LTD), and are in excess of leave, will a payment be required to be made?

No, the section 34 Manager can request for these employees to be excluded from the mandatory cash-out process for the current year

I plan to take compensatory leave towards the end of September and a few days into October. How does that affect my cash-out?

If your collective agreement stipulates that you have until September 30 of the following fiscal year to use leave earned in a given year, then only leave used up to September 30, 2023 will be deducted from your remaining 2022 to 2023 balance before assessing whether you may be subject to a cash-out on September 30, 2023.

I will be retiring in the next 2 years, how does this cash out affect me?

To determine whether and how receiving a cash out will affect your pension, please contact the Pension Centre.

How will the payment of excess vacation or compensatory leave affect my income taxes?

Lump sum payments are taxable, and may impact your overall tax rate if the payment is large enough to change your tax bracket. You may wish to request a reduction of income tax withheld at source from the Canada Revenue Agency and/or Revenu Québec. If requested, and once you have received the applicable tax waiver from CRA and/or Revenu Québec, they must be submitted to the Pay Centre with a PAR, using the appropriate work and sub types (Work type= Deductions; Sub type= One-time tax exemption).

For questions about tax waivers, please consult a qualified and accredited personal financial advisor.

I have both excess vacation and compensatory leave to be cashed out. Will the payouts for these types of leave be processed at the same time?

In such a situation, the Pay Centre will create 2 separate cases: one for the vacation leave cash-out and another one for the compensatory leave cash-out (including travel status and lieu days). These 2 cases will be processed separately.

Will I see the leave cash-out payment in the same cheque as my regular pay?

The leave cash-out payment will be issued as a separate payment, so you should not see this in the same cheque as your regular pay.

Executives

While the questions below are specific to executives (EX), some of the questions above will also apply, as executives are also considered employees.

What modifications were made to the Terms and Conditions of Employment for Executives for the purposes of the cash out?

The following changes were completed:

  • the new leave carry-over allowance is 7 weeks (262.5 hours) where normally it’s based on vacation leave entitlements
  • an executive, with approval of the delegated manager, may carry-over up to an additional 4 weeks of earned but unused vacation leave credits. This amount may be applied only toward the unused portion of vacation leave accumulated during the fiscal year it is earned
  • leave granted as exceptional leave with pay may be carried over into the next fiscal year and does not need to be used within 6 months of being granted
  • the provision regarding the period executives have to reduce any excess leave (in other words 3 years) that was carried-over on appointment from a position not subject to the Directive has been suspended
Why can executives exceptionally carry over up to an additional 4 weeks (150 hours) vacation?

As per the current provision A.II.4.3.2.3 in the Terms and Conditions for Executives, executives may carry over up to 1 additional year’s entitlement of earned but unused vacation leave beyond the permitted maximum accumulation. With the temporary modifications to the Terms and Conditions for Executives, executives may continue to carry over additional vacation leave, up to a maximum of 4 weeks (150 hours), which is the minimum earned vacation leave entitlement for an executive. This amount may be applied only toward the unused portion of vacation leave accumulated during the fiscal year it is earned.

To whom do executives direct a request to carry up to the additional 4 weeks (150 hours) of leave for exceptional circumstances?

As per the current provision A.II.4.3.2.3, executives would need to seek approval of their delegated manager. To ease the administrative burden and given operational requirements, for fisal year 2022 to 2023, the Department will exceptionally be applying an automatic carry-over of earned but unused leave (in other words, for the current fiscal year) in excess of the carry over limit up to 4 weeks of vacation leave for all executives.

What do managers of executives need to undertake prior to March 31, 2023?

Before March 31, 2023, managers of executives will need to:

  • determine operational needs for fiscal year 2023 to 2024 and feasibility of approving a significant amount of vacation leave
  • review individual executive leave situations (for example balance of vacation leave)
  • hold a discussion with each executive regarding excess leave and jointly establish a plan to reduce excess leave during fiscal year 2023 to 2024
What should be considered by executives in preparation for their meeting with their manager?
  • Balance of vacation leave remaining and potential to use that leave in fiscal year 2023 to 2024
  • Other leave and/or training anticipated for fiscal year 2023 to 2024
  • Employment status by the end of fiscal year 2023 to 2024 (in other words, potential for retirement)
  • The tax implications of taking a voluntary cash out versus following the mandatory cash out process
  • Mandatory cash out will occur at the end of the 5 years
  • Management leave taken in fiscal year 2022 to 2023
What happens if an executive does not want to carry over the additional 4 weeks (150 hours) of leave?

If after discussing with their manager, an executive in excess of 7 weeks (262.5 hours) does not wish to have the additional carry-over of 4 weeks (150 hours) of earned but unused vacation leave for this fiscal year, they will be able to submit a request to the Executive Compensation Team.

I was appointed to a position under the EX group in January 2023. At the end of fiscal year 2022 to 2023, I still had remaining compensatory leave credits. Will these leave credits be subject to the cash-out during the fiscal year 2023 to 2024?

The compensatory leave hours will not be subject to the mandatory cash-out out exercise since employees appointed under the EX Group are not entitled to compensatory leave. Therefore, any compensatory leave credits earned in the previous position should have been cashed out upon your appointment to the EX position.

If you have remaining compensatory leave in your leave balance, your manager should contact the Executive Compensation Team.

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