Digest of Benefit Entitlement Principles Chapter 5 - Section 10
5.10.0 Vacation pay
Initially, vacation pay was nothing more than the regular wages or salary received by an employee while being on an annual leave. It was paid on the regular pay day or just before going on vacation. While this practice is still in effect for some employees, vacation pay, now, is often calculated as a percentage of wages earned and paid to the employee at fixed times of the year or it is included with every regular pay cheque.
Throughout the country, legislation requires employers to pay vacation pay to employees who work under a contract of service whereas not all contracts allow for vacation leave or vacation time. There is a minimum amount that employers must pay as a percentage of the employee's gross wage or salary.
The purpose of vacation pay is to allow employees to receive pay during periods of vacation or rest. However, in reality, not all employees who receive vacation pay are entitled to time off work for vacation leave.
Vacation pay may be described by a claimant or an employer as a bonus, indemnity or gratuity. However, if the moneys received were in the nature of vacation pay, as described above, either under the terms of a verbal or a written agreement, they are treated as such irrespective of what the employer or employee may wish to call the money.
Vacation pay is income arising out of employment Footnote 1 and is earnings at the time it is paid or payable to the claimant. An exception occurs when the vacation pay has acquired the character of savings rather than income Footnote 2 . This occurs when an employer, union or agency acts as a trustee; the vacation pay is credited to an employee and is accumulated in a trust fund Footnote 3 .
Regulations 36(8), 36(9) & 36(10)
Describe the manner of allocating vacation pay
Regulation 36 is divided into subsections that set out the manner of allocating different types of earnings under various situations. One of the subsections is based strictly on whether a payment is made by reason of a lay-off or separation and this subsection must be used regardless of the nature of the earnings and the period in respect of which they are purported to be paid or payable. Therefore, all earnings must be examined to determine whether the reason for their payment is due to a lay-off or separation.
When the earnings are not paid or payable by reason of a lay-off or separation, choosing the appropriate period of allocation is based on the type of earnings if those earnings are specifically mentioned in another subsection Footnote 4 . Vacation pay paid or payable for reasons other than for a lay-off or separation is one of those types of earnings which are specifically mentioned Footnote 5 .
Additionally, when the reason for the payment is other than for a lay-off or separation, allocation depends on whether the payment is made for a specific vacation period Footnote 6 or for some other reason Footnote 7 . Vacation pay is allocated weekly and is based on the claimant's normal weekly earnings. Footnote 8
Vacation pay may be paid: by reason of a lay-off or separation Footnote 9 ; for a specific period of vacation; Footnote 10 on an anniversary date; Footnote 11 at the claimant's request; Footnote 12 or at the end of every pay period Footnote 13 . Sometimes the reason for the payment is not obvious and must be determined before allocation can commence as the real reason for the payment may be different from the circumstances that prompted the payment. The payment of vacation pay may also coincide with another event giving the appearance that it was made for other reasons. The real reason for the payment must be determined as allocation is on that basis. When the payment of vacation pay coincides with the lay-off or separation and where there is no evidence to the contrary, it is assumed that the vacation pay was paid or payable by reason of a lay-off or separation Footnote 14 .
5.10.3 By Reason of a lay-off or separation
Regulation 36(9) & 36(10)
Describe the manner of allocating vacation pay when it is paid or payable by reason of a lay-off or separation
If the reason for the payment of vacation pay is the lay-off or separation, then it must be allocated under these subsections. Sometimes it is necessary to examine the employer's policy, the collective agreement or the separation agreement in order to determine the reason for payment.
Usually, on a lay-off or separation any unliquidated vacation leave is converted to a monetary amount and is paid out to the employee. In these situations, the lay-off or separation has prompted the payment and it can be reasonably assumed it is also the reason for the payment.
In rare circumstances, there may be an indication that the real reason for the payment is something else and it must be clarified. In other words, it may only be coincidental that the vacation pay is paid at lay-off or separation. The real reason may be, for example, an overlooked anniversary date Footnote 17 or a scheduled vacation period. Footnote 18 Once the real reason is determined, it is allocated accordingly Footnote 19 .
The date of payment is not relevant. For example, vacation pay paid before separation so that it would not affect entitlement to EI benefits was still deemed to be paid in respect of the separation because the reason for the payment was the closure of the plant Footnote 20 . That the vacation pay was paid in contemplation of the lay-off or separation is equated to being paid by reason of a lay-off or separation Footnote 21 . This principle applies even if the claimant was erroneously advised by the Commission that payment before separation would not affect the payment of EI benefits Footnote 22 .
With the exception of trust funds Footnote 23 , it does not matter when the vacation pay was earned, but rather, what caused it to be immediately payable. If the lay-off or separation was the reason, then it must be allocated from the week of the lay-off or separation Footnote 24 . Also, the regulation is not restricted to allocating only the current year balance of vacation pay but rather, any balance that is owed to the claimant Footnote 25 .
Once it is determined that the vacation pay is paid or payable by reason of a lay-off or separation, it must be allocated on the basis of normal weekly earnings to consecutive weeks commencing with the first week of the lay-off or separation.
In addition to vacation pay, the claimant, on lay-off or separation, may receive other moneys from the same employer that must be taken into account. They will be combined with the vacation pay and the total sum will be allocated using the claimant's normal weekly earnings Footnote 26 .
If the claimant receives earnings from another employment during the weeks of allocation, those earnings will be allocated to the same weeks Footnote 27 . In these exceptional cases, the total earnings allocated to each week may exceed the normal weekly earnings.
5.10.4 Specific vacation period
Describes the manner of allocating vacation pay when it is paid or payable for a specific vacation period.
To apply this paragraph of the regulation, the vacation pay must be paid or payable for a specific period of vacation leave that is agreed to, either verbally or in writing, between the employer and the employee. Non-working days cannot be considered a specific vacation period unless there was an agreement between the employer and the employee that they were to be considered as a period of vacation leave Footnote 28 .
If the claimant's place of employment shuts down every year for a general vacation period, this period is deemed to be the claimant's vacation period unless there are indications to the contrary. Moneys paid to a claimant at the time of general vacation periods in the Quebec construction industry were not earnings at that time due to the trust nature of the moneys Footnote 29 .
While still employed, employees are often paid regular wages or salary when taking vacation leave. It is paid on the regular pay day or just before going on vacation. Clearly, this situation comes within this paragraph of the regulation; the regular wage or salary is vacation pay paid or payable for a specific vacation period and is to be allocated to that period of leave.
Once the vacation period has been determined, the amount to be applied thereto will be made on the basis of normal weekly earnings to consecutive weeks commencing with the first week of the claimant's vacation period and ending with the last week of the vacation period. Footnote 30 Earnings from another employment during the vacation period will be allocated to the same weeks as the vacation pay, that is, the total earnings for each week may exceed the rate of normal weekly earnings Footnote 31 .
Sometimes vacation pay is calculated as a percentage of total earnings and is not paid out with each pay cheque, but rather in a lump sum at infrequent times throughout the employment. Depending on the event that was the real reason for the payment, the balance may or may not be allocated. If the vacation period was the real reason for the payment, then the balance will be ignored. In these circumstances the vacation pay is only paid or payable for the leave. If the payment is caused by other events such as, the claimant's request for payment of the vacation pay, an anniversary date, or a lay-off or separation, then the balance is considered to be paid for these events, and so will be allocated under the subsection that applies. Footnote 32 Should the claimant actually take a vacation, a disentitlement for failing to prove availability may also be applicable Footnote 33 .
188.8.131.52 Specific vacation period payment coinciding with other circumstances
Sometimes the payment of vacation pay may coincide with a lay-off or separation, or an anniversary date payment when, in fact, the real reason for the payment is to compensate for a specific vacation period. These specific vacation periods may be past, Footnote 34 present, or future Footnote 35 .
To allocate the vacation pay to these past, present or future vacation periods, all of the following three requirements must be met:
- the vacation period must be scheduled by agreement between the employer and the employee Footnote 36 . This can be a written or verbal agreement. A cancelled vacation period no longer fills this requirement Footnote 37 . If it is a future vacation period, that future vacation period must be scheduled before the payment of the vacation pay; Footnote 38
- there must be a connection between the payment of the vacation pay and the entitlement to a vacation period, that is, claimants are entitled to a vacation period for which they are entitled to pay Footnote 39 . Sometimes, contracts list vacation pay and vacation period as two different entities, not connected in any way. It is not required that the claimant be paid at the same time leave is taken; and
- the claimant must be employed Footnote 40 while taking the leave. The Federal Court ruled that the unemployed cannot be expected to go on vacation Footnote 41 . This decision involved the payment of vacation pay on an anniversary date but rather than allocating from that date, it was allocated to scheduled leave periods.
In order to decide whether the vacation pay may be allocated to a specific vacation period rather than by reason of a lay-off or separation or the anniversary date, it must first be determined whether the vacation pay was paid before or after the leave period.
When the vacation pay is paid after the leave period, allocation of vacation pay is to the leave period only if the past leave period was unpaid, scheduled and taken. "Taken" means that the employer recognized that the claimant was on vacation leave without pay and so, was considered to be an employee.
When the vacation pay is paid before the leave period, the allocation of vacation pay to a future leave period depends on whether or not the claimant is unemployed at the time of payment and if unemployed, whether the lay-off is temporary or indefinite. However, in all of these situations, the vacation period must also meet the three requirements noted above in order to have the vacation pay allocated to the unpaid future vacation period. That is, the vacation period must have been scheduled, there must be a connection between the payment and the entitlement to the vacation period, and the claimant must be employed at the time that the vacation was taken.
If the vacation pay is paid before the leave period and it is paid on an anniversary date while employed, the vacation pay is allocated to the future leave period. This may later be reconsidered and the allocation reversed.
If the vacation pay is paid on an anniversary date that either coincides with a lay-off or occurs during a lay-off, allocation depends on whether the lay-off is temporary or indefinite. If the lay-off is temporary, and the claimant is expected to be back at work by the time the leave period arrives, the vacation pay is allocated to the future leave period. This may later be reconsidered and the allocation reversed.
If the lay-off is indefinite, the vacation pay is allocated from the anniversary date. This allocation can be reversed if, later, the claimants can show that they did in fact return to work and take the scheduled leave.
Situations where the vacation pay was allocated to a future leave period may later be reconsidered should the Commission become aware that leave was not taken. Generally, agreements between the employer and the employees will show whether or not the leave was considered to have been taken. The agreement may indicate that the employees are allowed to have their leave moved ahead to another future period, or cancelled for an indefinite period, or because of a permanent separation. If the leave was moved ahead to another future period, the principles outlined in "Vacation pay paid before the leave period" apply. If the leave was cancelled for an indefinite period or due to a permanent separation, the vacation pay should be allocated from the anniversary date Footnote 42 .
5.10.5 In any other case
Describes the manner of allocating vacation pay when it is paid for any reason other than a lay-off or separation or a specific vacation period.
This paragraph of the regulation covers such situations as: paid because of an anniversary date; Footnote 43 paid because of the claimant's request; Footnote 44 and vacation pay paid with each pay cheque Footnote 45 .
However, the real reason for the payment must be determined to ascertain if other paragraphs or subsections of the regulation apply. Vacation pay may appear to be paid upon the claimant's request or on an anniversary date when, in fact, it is paid or payable for a specific vacation period Footnote 46 or by reason of a lay-off or separation Footnote 47 .
Although by policy, earnings are not allocated until they are received, this paragraph of the regulation specifically requires that they be paid Footnote 48 .
Once the vacation pay is paid, the regulation requires that it be allocated to the period for which it is payable. The allocation begins with the week for which the vacation pay is payable and is based on the claimant's normal weekly earnings Footnote 49 . Contrary to other subsections, if the claimant receives other earnings from the same employment for the weeks of allocation, they will be allocated to the same weeks Footnote 50 . Therefore, the total earnings from the same employment may exceed the normal weekly earnings.
184.108.40.206 Paid because of an anniversary date
When the vacation pay is paid because of an anniversary date, the first week for which it is payable Footnote 51 is the date of the anniversary even though administratively, the employer may not be able to pay it until later. Therefore, it is allocated commencing with the week of the anniversary date. Unless there is evidence to the contrary, it can be assumed that the week that the claimant declares the anniversary vacation pay is the week of the anniversary.
220.127.116.11 Paid on claimant's request
When the claimant has a contractual right Footnote 52 to be paid vacation pay on request, the date for which the claimant has requested the payment be made is considered to be the first week for which it is payable Footnote 53 for allocation purposes. This is true regardless of when the employer actually processes the payment. Generally, unless there is information to the contrary, the week that the payment is declared by the claimant is considered to be the first week for which the payment was requested.
18.104.22.168 Paid with each pay cheque
When vacation pay is paid with each pay cheque, the first week for which it is payable Footnote 54 is as soon as the work is performed, that is, in the same way as the wage or salary is payable, as soon as it is earned. However, although a wage or salary, and in this case the vacation pay, is justly and immediately due to a person as soon as it is earned, it would not be realistic for an employer to pay the wages or salary on a continuous basis (each hour or day). Therefore, the wages or salary and the corresponding vacation pay are paid at a time other than when the work is actually performed, usually at regular intervals: in most cases, weekly, biweekly, semi-monthly or monthly. The fact that these earnings are not paid as soon as the work is performed does not make them less payable as soon as they are earned. Consequently, the vacation pay, paid as a percentage and at the same time as the wages or salary, is allocated to the weeks it is earned. It is considered that they form part of the normal weekly earnings of the claimant Footnote 55 . The vacation pay is proportionate to the wages or salary earned in each week. Therefore, when no work is performed in a week of a pay period, no salary and no vacation pay are to be allocated in that week because nothing is earned.
5.10.6 Trust funds
Vacation pay that has acquired the character of savings at the time of the payment to the claimant, is no longer considered income and so is not allocated Footnote 56 . This occurs when an employer, union or agency acts as a trustee and the vacation pay is accumulated in a trust fund. The vacation pay is considered to be earnings at the time it is credited to each pay period.
All of the following requirements must be met in order for the vacation pay to be considered as savings when it is paid to the claimant:
- The moneys must be set aside and kept separate from the employer's control and operations, that is, in a trust fund. Footnote 57
A mere "book entry" in the employer's books is insufficient. The vacation pay must not only be kept separate but the employer must show what steps have been taken to put these funds beyond the needs and control of his operation. This means that there must be separate accounts that cannot be accessed by the employer for running his business. A simple bank account would not suffice without taking measures similar to a trust (like some type of signed deed), to ensure that the moneys can only be used to pay out the vacation savings of the employees. The signed deed usually shows that one person undertakes to keep another's money for certain specific purposes. However, the existence of a trust fund is not, in and of itself, sufficient to qualify the vacation pay as savings. The trustee cannot benefit from the moneys deposited into the fund. Only the employees can benefit Footnote 58 . It cannot be considered as a trust account if the employer can borrow, interest-free, from the employees' supposedly separate account.
For an arrangement to be considered a true trust as those terms are ordinarily used, the money held in the trust must be identifiable or traceable. These terms mean that there should be a paper trail (documents) to show the flow of specific amounts of money from the employer to the fund to the employee. Also, it should not be held in a general fund that holds types of moneys other than vacation pay, because it is not possible to identify what is and is not vacation pay.
Some provincial labour standard legislations specify that vacation pay accruing to an employee is deemed to be held in trust by the employer. The existence of such a law is not enough to deem that the vacation pay is held in trust for the employees Footnote 59 .
- The employer must also set aside the vacation pay each pay period after deducting income tax, CPP, QPP and EI premiums, where applicable Footnote 60 .
- Employees must be beneficially entitled to the vacation pay after it is set aside.
That is, they can demand payment of the moneys Footnote 61 and they are not confined by the payout dates as specified in the collective agreement Footnote 62 . People are beneficially entitled to property when they have the right to sue for and recover it Footnote 63 . One indication that the moneys are being held on behalf of the employees is that the separate account pays interest and, like a savings account, the interest is payable to the employees Footnote 64 .
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