Oct 06, 2025
You're an Ontario business owner and you've hired your first employee (nice) but how do you actually pay them for the couple weeks they take off?
The goal of this guide is to break that down for you in a few simple steps - and show you how to put Vacation pay on autopilot for the future.
Who Gets Vacation Pay in Ontario
In Ontario, all employees—full-time, part-time, hourly, and salaried—are entitled to vacation time and vacation pay. This applies no matter what their job category or whether they’re covered by an employment contract, union agreement, or collective agreement.
The only real difference is how much vacation entitlement an employee has, which depends on their period of employment:
- Less than 5 years: minimum 2 weeks of vacation time and 4% of gross wages as vacation pay.
- 5 years or more: minimum 3 weeks of vacation time and 6% of gross wages as vacation pay.
Even commissioned-based workers and employees with irregular work hours must receive vacation pay.
Federal Rules
At the federal level, the Canada Labour Code sets minimums for employees working in federally regulated industries (think banks, telecom, transportation). Those rules are broadly similar but sometimes provide additional vacation entitlements based on years of service.
Employers under federal jurisdiction must also keep detailed records of vacation pay and vacation time, and provide statements to employees showing earnings, vacation pay accrued, and outstanding vacation balances.
Ontario Specific Rules
In Ontario, vacation rules fall under the Employment Standards Act (ESA). Key points:
- Vacation Entitlement Period: This is the 12-month period an employee works before earning their vacation entitlement. Employers can also set an alternative vacation entitlement year if written in the employment contract.
- Stub Periods: If an employee starts mid-year, you need to calculate a pro-rated vacation entitlement (sometimes called stub period vacation).
- Timing of Vacation Pay: You can either include vacation pay with every paycheque or pay it out when the employee actually takes their vacation time.
- Public Holidays: Vacation pay is separate from public holiday pay (like Canada Day). You must calculate each one correctly.
- Unused Vacation: If an employee doesn’t use their vacation, they’re still entitled to vacation pay payouts.
The Ministry of Labour (Ontario.ca) is very clear: employers must maintain accurate records of vacation time and vacation pay for at least three years.
How to Calculate Vacation Pay in Ontario
The vacation pay formula is straightforward:
Vacation pay = Gross wages × Vacation pay percentage
- Gross wages include regular earnings, non-discretionary bonuses, and commissions.
- They do not include discretionary bonuses, expense reimbursements, or tips not controlled by the employer.
Examples:
- Employee A (2 years of service): $50,000 gross wages × 4% = $2,000 vacation pay.
- Employee B (7 years of service): $50,000 gross wages × 6% = $3,000 vacation pay.
If an employee works only part of a year (a stub period), you apply the vacation pay percentage to their earnings for that shorter period.
Many payroll systems like Wagepoint or Humi have built-in vacation pay calculators that automate this process, but you’re still legally responsible for ensuring the calculations are correct.
How to Pay Employees Vacation Pay
You have a few options:
- With each paycheque: Vacation pay shows up as a separate line item on the wage statement (best for hourly and part-time workers).
- When vacation is taken: You pay out vacation pay when the employee actually takes their week(s) of vacation time.
- Once per entitlement year: Some employers issue a lump-sum vacation pay payout, but you must document this clearly in the employment contract or policy.
Payment must be made by direct deposit, cheque, or another method that complies with employment standards.
Best practice: Keep clear vacation policies in your employee handbook, track accruals in your payroll system, and issue a separate statement showing records of vacation pay and balance of vacation time. This not only ensures compliance but also builds a positive employer-employee relationship.
How To Put Vacation Pay on Autopilot
When you run payroll in Wagepoint, the platform bakes it right into the process. Here’s how it works in practice:
- Set the Employee’s Vacation Entitlement
- When you add an employee, you choose their vacation pay rate (usually 4% for employees with less than 5 years of service, or 6% for those with 5+ years).
- You can also select whether vacation is paid out with each paycheque or held until the employee actually takes their days of vacation.
- Automatic Accrual
- As each payroll runs, Wagepoint calculates vacation pay accrual as a percentage of the employee’s gross wages (including regular wages, overtime, commissions, and non-discretionary bonuses).
- That accrual builds up in the system, so you always have a live balance of how much vacation pay is owed.
- Vacation Pay Records
- Each employee’s statement of earnings clearly shows vacation pay earned, taken, and outstanding.
- Wagepoint automatically maintains the vacation pay records required by Ontario’s Employment Standards Act.
- Paying Out Vacation
- If vacation pay is paid on each cheque, it appears as a separate line item labelled “Vacation Pay.”
- If vacation pay is held until time off is taken, you simply log the employee’s vacation period in Wagepoint, and the system pays out the correct week of vacation pay (or pro-rated single vacation days).
- Reports for Compliance
- Wagepoint generates reports showing calculation methods, vacation pay practices, and balances from the current vacation entitlement year or previous vacation entitlement year.
- These reports make it easy to handle unused vacation time, termination vacation pay, or any audits from the Ministry of Labour.
Bottom line: Wagepoint turns what would normally be a manual headache - calculating, recording, and paying vacation pay - into an automated, compliant process. You can focus on running your business instead of chasing vacation pay calculations across spreadsheets.
