Digest of Benefit Entitlement Principles Chapter 5 - Section 10
5.10.0 Vacation pay
Vacation pay is often the regular wages or salary received by an employee while on annual vacation leave. It may be paid on the regular payday or just before going on vacation. Vacation pay may also be calculated as a percentage of wages earned, and either set aside and paid to the employee at fixed times during the year, or paid with every regular pay.
Throughout the country, legislation requires employers to pay vacation pay to employees who work under a contract of service although not all contracts allow for vacation leave or vacation time. The purpose of vacation pay is to allow employees to receive pay during periods of vacation or rest despite the fact that, in reality, not all employees who receive vacation pay are entitled to time off work.
Employers are required to pay a minimum percentage of the employee's gross wages or salary, as vacation pay. A claimant or employer may refer to vacation pay as a bonus, indemnity, or gratuity. However, if the moneys received were in the nature of vacation pay as described above and under the terms of either a verbal or a written agreement, they are treated as such, regardless of what term the employer or employee may give them.
5.10.1 DeterminationVacation pay is income arising out of employment and is earnings at the time it is paid or payable to the claimant (EIR 35(1); FCA A-67-02, CUB 53070; Digest 5.2.0; Digest 5.3.2). An exception occurs when the vacation pay has acquired the character of savings rather than income (CUB 22732). This occurs when an employer, union or agency acts as a trustee. In this case the vacation pay is credited to an employee each pay, but accumulated in a trust fund rather than being paid out (Digest 5.10.6).
EIR 36 is divided into subsections that set out the manner of allocating different types of earnings, under various situations. One of the subsections deals strictly with payments made by reason of a lay-off or separation. 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 (EIR 36(9), EIR 36(10)). 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 specific type of earnings, and the appropriate subsection in the regulations, if the earnings are specifically mentioned. When a specific type of earnings is not mentioned, earnings are allocated pursuant to EIR 36(19).
One of the types of earnings specifically mentioned in EIR 36(8) is vacation pay paid or payable for reasons other than for a lay-off or separation. When the payment is for a reason other than for a lay-off or separation, allocation depends on whether the payment is made for a specific vacation period, or for some other reason (EIR 36(8)(a) & (b)). Vacation pay is allocated weekly and is based on the claimant's normal weekly earnings (EIR 36(8), EIR 36(9), EIR 36(10); Digest 5.6.3).
Vacation pay may be paid:
- by reason of a lay-off or separation (EIR 36(9); Digest 5.10.3)
- for a specific period of vacation (EIR 36(8)(a); Digest 5.10.4)
- on an anniversary date (EIR 36(8)(b); Digest 5.10.5)
- at the claimant's request (EIR 36(8)(b); Digest 5.10.5), or
- included in every pay period (EIR 36(8)(b); Digest 5.10.5)
Sometimes the reason for the payment is not obvious and must be determined before allocation can occur, 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 (EIR 36(9)).
The determination of income for income tax purposes, and earnings for insurability purposes, have no effect on the allocation of vacation pay for EI benefit purposes.
5.10.3 By reason of a lay-off or separation
Sometimes it is necessary to examine the employer's policy, the collective agreement or the separation agreement, in order to determine the specific reason for payment. Usually, on a lay-off or separation, any unused vacation leave is converted to a monetary amount, and paid out to the employee. In these situations, the lay-off or separation has prompted the payment, and it can reasonably be assumed it is the reason for the payment. If this is the case, the vacation pay is allocated under EIR 36(9) and EIR 36(10).
Occasionally, there may be an indication that the real reason for the payment is something other than the lay-off or separation. In other words, it may only be coincidental that the vacation pay is paid at the time of lay-off or separation whereas the real reason for the payment may be, an overlooked anniversary date or a scheduled vacation period. In these cases, the real reason for payment must be clarified, and once determined, it is allocated accordingly (FCA A-217-93, CUB 20723A; Digest 5.10.4)).
The date a payment is actually made is not relevant. For example, vacation pay paid before an actual separation from employment so that it does not affect entitlement to EI benefits, is still deemed to be paid in respect of the separation because the reason for the payment was, for example, a plant closure (CUB 54211). In these cases the fact that the vacation pay was paid earlier, in contemplation of the lay-off or separation, does not change the fact that it is the lay-off or separation that is the true reason for the payment. This principle applies even if the Commission erroneously advised a claimant that payment of vacation pay before separation would not affect the payment of EI benefits (CUB 56521).
With the exception of trust funds, it does not matter when the vacation pay was earned. Rather, what is relevant is what caused it to be immediately payable (Digest 5.10.6). If the lay-off or separation was the reason for payment, then it must be allocated from the week of the lay-off or separation (FCA A-67-02, CUB 53070; Digest 5.6.0). 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.
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 (EIR 36(9)). In addition to vacation pay, the claimant may receive other moneys from the same employer, at the time of lay-off or separation, that must also be taken into account. Those moneys will be combined with the vacation pay, and the total will be allocated using the claimant's normal weekly earnings (Digest 5.12.4).
If the claimant receives earnings from another employment during the weeks of allocation, those earnings will not be taken into account when allocating the earnings from the first employment. In these cases, the total earnings from both employments, allocated to each week, may exceed the normal weekly earnings (Digest 22.214.171.124).
5.10.4 Specific vacation periodEIR 36(8)(a) 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 (CUB 45288).
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 that have been held in trust and are paid to a claimant at the time of general vacation periods (for example in the Quebec construction industry) are not earnings at that time, due to the trust nature of the moneys (Digest 5.10.6).
While still employed, employees are often paid regular wages or salary when taking vacation leave. It is paid on the regular payday or just before going on vacation. This situation falls clearly within this paragraph of the regulation; the regular wage or salary is vacation pay paid or payable for a specific vacation period, and is allocated to the period of leave.
Once the vacation period has been determined, the amount to be applied to that period 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 (EIR 36(8)(a)). Earnings from another employment during the vacation period will be allocated to the same weeks as the vacation pay, meaning the total earnings for each week may exceed the rate of normal weekly earnings (EIR 36(8)(a)(ii); Digest 126.96.36.199).Sometimes vacation pay is calculated as a percentage of total earnings each pay, but is not paid with each pay cheque. Rather, it is paid in a lump sum at different times throughout the employment. Depending on the event that was the real reason for the payment, the entire amount may or may not be allocated. If the vacation period was the real reason for the payment, then the balance left after allocating to the period of vacation (based on normal weekly earnings), is ignored. This is because in these situations, the vacation pay is only paid or payable for the period of 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 any portion of the payment that is not for a specific vacation period is considered to be paid for the specific reason (i.e. event). As such, it will be allocated under the applicable subsection (EIR 36(8)(b); EIR 36(9); EIR 36(10); CUB 21545; Digest 5.10.3; Digest 5.10.5). Should the claimant actually take a vacation, a disentitlement for failing to prove availability may also be applicable (Digest 10.11.2).
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, present, or future (CUB 73991; CUB 31967).
To allocate the vacation pay to these past, present or future vacation periods, the following 3 requirements must be met:
- the vacation period must be scheduled by agreement between the employer and the employee (CUB 66035). This can be a written or verbal agreement. A cancelled vacation period no longer fulfills this requirement (CUB 24228). If it is a future vacation period, that future vacation period must have been scheduled before the payment of the vacation pay (CUB 67739)
- 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 (CUB 73991). Sometimes, contracts list vacation pay and vacation period as 2 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 during the scheduled vacation period (EIA 2(1); Digest 5.3.1). It has long been held that the unemployed cannot be expected to go on vacation (CUB 68591)
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 an anniversary date, it must first be determined whether the vacation pay was paid before or after the vacation leave period.
When the vacation pay is paid after the leave period, allocation of vacation pay is to the leave period 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 was still considered 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 3 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 prior to the payment, 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 on an anniversary date before the leave period, while the claimant is still 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, as a claimant cannot be on vacation leave if they are not employed. This allocation can be reversed if, later, the claimant 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 employee will show whether or not the leave was considered to have been taken. The agreement may indicate that the employee is 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 based on the reason for the payment (such as the anniversary date or date of lay-off or termination) (CUB 24228).
5.10.5 In any other case
EIR 36(8)(b) covers situations such as vacation pay:
- paid because of an anniversary date (CUB 56212)
- paid at the claimant's request (CUB 56514), and
- vacation pay paid with each pay cheque (CUB 17534)
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 or by reason of a lay-off or separation (Digest 184.108.40.206; Digest 5.10.3).
Earnings are not allocated until they are received, as EIR 36(8)(b) specifically requires that they be paid (Digest 5.6.1).
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 (EIR 36(8)). 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 (EIR 36(8)(b)(ii)). Therefore, the total earnings from the same employment may exceed the normal weekly earnings.
220.127.116.11 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 is the date of the anniversary set by the employer, even though administratively, the employer may not be able to pay it until later (EIR 36(8)(b)(i)). Therefore, it is allocated commencing with the week of the anniversary date. Unless there is evidence to the contrary, the week the claimant declares the anniversary vacation pay is the week of the anniversary.
18.104.22.168 Paid on claimant's request
When the claimant has a contractual right 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, for allocation purposes. This is true regardless of when the employer actually processes the payment (EIR 36(8)(b)(i)). The agreement between the employer and employees regarding the payment of vacation pay may be written or verbal. The wording of the agreement determines specifically when the employees have the right to receive the moneys. 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.
22.214.171.124 Paid with each pay cheque
When vacation pay is paid with each pay cheque, it becomes payable in the first week in which work is performed; the same way as wages or salary is payable, as soon as it is earned. However, although wages 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 usually paid 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 change the fact that they became payable as soon as they are earned. Consequently, vacation pay paid as a percentage at the same time as wages or salary is allocated to the weeks it is earned. Vacation pay treated in this manner forms part of the normal weekly earnings of the claimant (Digest 5.6.3). 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, neither salary nor vacation pay are allocated in that week.
5.10.6 Trust funds
Vacation pay that has the character of savings at the time the payment is made to the claimant is no longer considered income and is not allocated. 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 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 (FCA A-619-05; CUB 64729)
- the employer must also set aside the vacation pay each pay period after deducting income tax, CPP, QPP and EI premiums, where applicable
- employees must be beneficially entitled to the vacation pay after it is set aside (CUB 29010)
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 the 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.
The simple existence of a trust fund is not sufficient to qualify the vacation pay as savings. The trustee cannot benefit from the moneys deposited into the fund; only the employees can benefit. 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 (i.e. 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 simply 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 (FCA A-47-90, CUB 15257A).
Employees must have the right to demand payment of the moneys, and are not confined by payout dates as specified in a collective agreement (FCA A-619-05; CUB 64729). People are beneficially entitled to property when they have the right to sue for and recover it (FCA A-352-90, CUB 17974). 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.[April 2021]
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