Vacation Pay vs Vacation Time - What's the Difference? – Humi

Many employees and employers across Canada think of Vacation Time Off and Vacation Pay together, as if they are a single employer requirement. Most of us have experienced taking a vacation day and receiving vacation pay as compensation for our time off from work. So, it may come as a surprise that these two things are actually separate.

Each province and territory set out separate legal minimums for both the Vacation Time Off and Vacation Pay that an employee is entitled to. As an employer, it’s important to understand the difference and to have policies that ensure you’re meeting or exceeding the legislated minimum requirements for your province.

Humi has designed our Time Off and Payroll Integration system in a way that allows users to meet the legal minimum requirements for both Vacation Time and Vacation Pay, or set up Vacation Time and Vacation Pay policies that are more generous than the legal minimums.

This article will help you understand the difference, and offer some examples of how you can set both up in Humi. We’ll cover:

The difference between Vacation Time and Vacation Pay
Vacation Time and Pay Requirements by Jurisdiction
Examples of how to set up your Vacation Time & Pay Policies in Humi

What’s the difference between Vacation Time and Vacation Pay?

The purpose of vacation entitlement is to provide the employee with time off of work without financial loss. The employer finances the time off of work by calculating vacation pay on top of an employee’s regular wages or salary.

Vacation Time

All jurisdictions in Canada mandate that an employee must take time off work each year unless their employment type is exempt.
With Vacation Time, an employee accumulates time off based on calendar time elapsed. For example: if an employee works for one year, they’ll earn two weeks of vacation.
This requirement ensures that all employees receive vacation time away from work.

Vacation Time Exemptions

Some jurisdictions, including the Northwest Territories, Nova Scotia, Ontario, Prince Edward Island, Saskatchewan, and the Yukon, allow the employee(s) to waive their right to take time off under certain circumstances.

If you operate in one of these provinces and your employee(s) is considering waiving their right to time off, we recommend checking with your Employment Standards Office before agreeing to any exemption.

Vacation Pay

All jurisdictions in Canada mandate that employees earn vacation pay on top of their regular salary or wages.
Vacation Pay is calculated as a percentage (or fraction) of the employee's vacationable earnings. Each jurisdiction in Canada defines whether an earning type is “vacationable” or not. You can check out which Income Types in Humi are considered “vacationable” by each province by clicking here.
This requirement ensures that all employees receive vacation pay, which can then be used to replace their earnings while taking time off work.
With Vacation Pay, an employee accumulates dollars based on a percentage of their earnings. For example: if an employee earns $1,000 in a week, and earns Vacation Pay at a rate of 4%, one week of work will have accumulated $40 of Vacation Pay.

Vacation Time and Pay Requirements by Jurisdiction

Every province and territory in Canada has its own employment standards legislation that specifies the minimum amount of Vacation Time and Vacation Pay an employer must provide their employees.

To help get you started, we've compiled a list of Vacation pay requirements by province to help you quickly and easily locate the information you need.

Important Note

The information included in the article linked above is based on legislation compiled by the National Payroll Institute, and released in December 2023. It is subject to change. Check the employment standards in your jurisdiction for the most up-to-date information.

How Humi Helps You Meet Requirements

Humi is designed so that employers can use the Time Off Module to manage the vacation time requirements of their employees, and the Payroll Module to manage the Vacation Pay requirements of their employees.

These can be configured to manage the legal minimum requirements or to manage a “greater right or benefit” policy that an employer has implemented.

Understanding “Greater Right or Benefit”

As an employer, you are required to provide your employees with legislated minimum vacation time and pay for the province in which they are employed.

Many employers choose to establish a vacation policy that exceeds the legislated minimum. This is known as providing a “greater right or benefit” to the employee.

If a company chooses to do this, they are bound to that policy by employment standards.

Common Vacation Time and Pay Policies

Every company is unique and so are the ways they choose to meet the necessary vacation minimums. To help you decide what the right setup is for your business, we’ve put together a few common scenarios for vacation time and vacation pay policies that may apply to you.

The examples below will focus on the specific fields within the set-up flow, to help you understand how this ties together with the legislation.

Are you new to Time Off?

If you are looking for an in-depth article explaining how to set up your Time Off Types and Policies in Humi, check out the Time Off Module Overview.

The following scenarios assume that your business has Connected Time Off to Payroll.

The Situation:

The employee receives the legal minimum for both vacation time and vacation pay.
The employee works in Ontario, they work 40 hours per week, and they have been employed for 1 year.
In Ontario, an employee is entitled to two weeks of annual vacation, and 4% vacation pay.

How to Configure Your Settings:

To set up the Vacation Time Off:
1. Create a new Time Off Type for Vacation
2. In the field Do you pay your employees for this Time Off Type? select Paid Time
3. In the field Connect to a Payroll Income Type, select Vacation Payout - Time Off
4. Create a new Time Off Policy under the Vacation Type
5. In the field Days/Hours Accrued Per Year, enter 80 hours or 10 Days
To set up the Vacation Pay:
1. In People, head to the employee’s profile and click on the Job & Pay tab
2. Scroll down to the employee's compensation and enter 4% in the field Vacation pay percentage
3. Next, scroll down to Vacation Pay Method and click Edit in the top right corner
4. Select "Accrued vacation pay will be banked in Humi and be paid out when this employee takes vacation"
5. Click Save, and you're done!

What To Expect from Scenario One:

Every pay period the employee will accrue Vacation Pay equal to 4% of the vacationable earnings they earned during the pay run. This vacation pay balance will be tracked in Humi.
The employee will accrue Vacation Time equal to 80 hours over the course of a year. Your employee can request vacation time using the Time Off module, and you can use this to track and ensure they take the required minimum of two weeks of vacation time per year.
When a vacation request is approved, the vacation hours are automatically added to the employee's pay for the appropriate pay period. Humi payroll automatically calculates the value of the vacation hours by multiplying them against the employee's Regular Pay rate.
When the Pay Run is Approved, the employee's Vacation Pay balance is reduced by the value of the vacation hours calculated on the pay run.

The Situation:

An employee is entitled to “four weeks of paid vacation” according to their employment agreement.
The employee works in Alberta, they work for 40 hours per week, and they have been employed for two years.
In Alberta, the employee is legally entitled to a minimum of two weeks of vacation time, and 4% vacation pay. The employment agreement promises “four weeks of paid vacation” which exceeds the legal minimum.
In scenarios like this, many employers choose to track vacation time only, because they have a high level of confidence that if they were audited by the Employment Standards department in their jurisdiction, the four weeks of paid vacation time would exceed the minimum vacation pay requirement as well.

How to Configure Your Settings:

To set up the Vacation Time Off:
1. Create a new Time Off Type for Vacation
2. In the field Do you pay your employees for this Time Off Type? select Paid Time
3. In the field Connect to a Payroll Income Type, select Vacation Payout - Time Off
4. Create a new Time Off Policy under the Vacation Type.
5. In the field Days/Hours Accrued Per Year, enter 160 hours or 20 days
To set up the Vacation Pay:
If your business chooses to track the employee’s time off only, and not track Vacation Pay then the next part is simple:
1. In People, head to the employee’s profile and click on the Job & Pay tab
2. Scroll down to the employee's compensation and enter 0% in the field Vacation pay percentage or leave it blank
3. Next, scroll down to Vacation Pay Method and click Edit in the top right corner
4. Select "Accrued vacation pay will be banked in Humi and be paid out when this employee takes vacation"
5. Click Save, and you're done!

What To Expect from Scenario Two:

The employee will accrue Vacation Time equal to 160 hours over the course of a year. Your employee can request vacation time using the Time Off module, and you can use this to track and ensure they take the required minimum of two weeks of vacation time per year.
When a Vacation Request is Approved, the vacation hours are automatically added to the employee's pay for the appropriate pay period. Humi payroll automatically calculates the value of the vacation hours by multiplying them against the employee's Regular Pay rate.
When the Pay Run is Approved, the employee's Vacation Pay balance is reduced by the value of the vacation hours calculated on the pay run.
The employee's Vacation Pay balance will always show a negative balance because no Vacation Pay is accruing. You can disregard the Vacation Pay Balance.

This type of vacation policy has benefits and drawbacks:

The Benefits include it being easy to administer, and straightforward to explain.

If an employee's rate of pay changes, but you still want them to take all of their vacation time at their full rate of pay, you do not have to make any adjustments or changes to their vacation pay balance.

The Drawbacks include the risk that an employee earns irregular vacationable earnings, and as a result, the four weeks of paid vacation is not sufficient to meet the vacation pay requirements. For example, if an employee receives a significant portion of their income as Commission, or work-related Bonus these types of earnings are considered “vacationable” earnings, and need to have vacation pay calculated. If your policy of four weeks of paid vacation only replaces the employee's regular salary, you may be at risk of paying less than 4% vacation pay.

Danger Zone

Humi strongly recommends that before implementing a vacation policy where vacation pay is not tracked, you review your jurisdiction's legislative requirement, and your company policies and procedures to ensure that you protect your business from an audit risk.

The Situation:

An employee works part-time, is paid hourly, and has a variable schedule. On average the employee works 5 days per week.
The employee has their vacation pay accrual paid out every pay run. The employee is working in Manitoba and is receiving the legal minimum vacation entitlement.
In Manitoba, an employee is entitled to two weeks of annual vacation, and 4% vacation pay.

How to Configure Your Settings:

To set up the Vacation Time Off:
1. Create a new Time Off Type for Unpaid Vacation
2. In the Paid Time Setting, select Unpaid
3. Create a new Time Off Policy under the Unpaid Vacation Type.
4. In the field Days/Hours Accrued Per Year, enter 160 hours or 20 days
To set up the Vacation Pay:
For this scenario, there are two parts to the setup.
1. First, go to People and head to the employee’s profile and click on the Job & Pay tab
2. Scroll down to the employee's compensation and enter 4% in the field Vacation pay percentage
3. Next, head to the Vacation Pay Method and select Pay out accrued vacation pay with every payroll
4. This will ensure that the employee earns both the vacation time and pay they are entitled to

What To Expect from Scenario Three:

Every pay period the employee will receive “Vacation Pay” equal to 4% of the vacationable earnings they earned during the pay run. This will ensure that you are meeting your vacation pay requirements.
The employee will accrue vacation time equal to 10 days over the course of a year. Your employee can request vacation time using the Time Off module, and you can use this to track and ensure they take the required minimum of two weeks of vacation time per year.
By marking the Vacation policy as “Unpaid” in Time Off, you are ensuring that the Time Off hours do not flow into payroll.

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We hope this article has helped you understand your vacation pay requirements, and how to set up Humi to match your company policies. The legislated vacation requirements are complex, so it is important to have a policy that is well-documented and can be communicated clearly to your employees.