Vacation is a benefit that employees earn. Some employers will seek to put in place a requirement, either in a collective agreement in a unionized workplace or through a vacation policy, that employees must 'use it or lose it'. Whether a requirement to 'use' vacation by a specified date, typically year end, or 'lose it" is enforceable is a complex issue, especially when it comes to vacation entitlements that exceed the minimum standards set by the Employment Standards Act, SO 2000, c.41 ("ESA").
The ESA provides the foundational framework for vacation time and pay for provincially regulated employees in Ontario. It mandates that employers must pay out any accrued vacation pay upon termination of employment. The ESA also prohibits contracting out of or waiving employment standards, ensuring that employees receive at least the minimum vacation entitlements. However, parties can agree in employment contracts to vacation entitlements that exceed the minimum standards. Recent decisions in Goruk v Greater Barrie Chamber of Commerce and Geluch v Rosedale Golf Assn., highlight that while the ESA prohibits 'use it or lose it' policies for the statutory minimum vacation entitlements, it is not clear whether you can apply such a policy to vacation time above the statutory minimum.
Understanding the ESA and Vacation Entitlements
The ESA sets out the minimum vacation entitlements for employees in Ontario.
Under the ESA, employees with less than five years of employment are entitled to two weeks of vacation time and vacation pay of at least four percent of their wages. For those with five or more years of service, the entitlement increases to three weeks of vacation time and vacation pay of at least six percent of their wages. This vacation time is accumulated during a "vacation entitlement year", which is typically a recurring 12-month period following an employee's first day of work.
Practical Implications for Employers and Employees
Employers in Ontario must be diligent in maintaining accurate records of employees' vacation entitlements and ensuring clear communication of vacation policies.
The ESA mandates that minimum vacation entitlements cannot be subject to a 'use it or lose it' policy as such a policy could have the effect of taking away vacation so that the employee does not receive the minimum entitlement.
A requirement to 'use it or lose it' set out clearly in a collective agreement for vacation benefits has been upheld in labour arbitrations.1
The courts have not clearly said otherwise or in favour of such policies and until then, it seems likely that employers would be able to enforce a 'use it or lose it' policy for vacation entitlements that exceed the ESA minimums, provided the policy is clearly outlined in the employment contract, communicated effectively to employees, and consistently implemented by the employer. There can be distinctions between vacation entitlement for vacation time/leave during a year with specific rules to be met for any requests to carry over unused time/leave versus entitlements to pay in lieu for unused vacation or vacation pay. The description of the benefit as the entitlement to schedule paid time off that expires at the end of a stated period will likely be important to distinguish it from an entitlement to accumulate vacation pay based on a percentage of salary or weeks worked.
Employers who find their standard employment contract or policies lack clarity may wish to consider amending the wording of their contracts and/or policies. Legal advice can assist with this process.
For employees, it is crucial to understand their vacation entitlements under the ESA and their employment contract. Employees should be aware of their employer's vacation policies and ensure they take their vacation time within the required period and/or follow any specified procedures to request carry-overs to avoid forfeiting any earned entitlements.
Conclusion
Understanding the nuances of vacation time and vacation pay policies in Ontario is essential for both employers and employees to ensure compliance with the ESA and to protect their respective rights and obligations. While the ESA provides clear guidelines for minimum vacation entitlements, the application of 'use it or lose it' policies to additional vacation time above the ESA minimums remains a matter of contractual agreement and clear communication – at least until the courts clarify whether such policies are permitted or prohibited.
Footnote
1 Community Living Meaford v Ontario Public Service Employees Union,local 235, 2018 CanLII 101953 (ON LA)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
