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.

5.10.1 Determination

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} .

5.10.2 Allocation

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} .

The determination of income for income tax purposes ^{Footnote 15} and earnings for insurability purposes have no effect on the allocation of vacation pay for EI benefit purposes ^{Footnote 16} .

5.10.3 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

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} .

5.10.5 In any other case

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.

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} .