Vacation pay in Ontario: What employers must pay

Published Thursday 23 July 2026

Table of contents

• What is vacation pay in Ontario?
• How to calculate vacation pay
• When do you have to pay vacation pay?
• What happens on termination in Ontario?
• What records must employers keep?
• Keep vacation pay compliant the simple way
• Simplify vacation pay and payroll with Xero
• FAQs on vacation pay in Ontario

Key takeaways

• Ontario employers must pay 4% vacation pay to employees with less than five years of service and 6% to those with five or more years, calculated on eligible gross wages earned during the vacation entitlement year.
• You can pay vacation pay on each paycheque, when vacation time is taken, or at another agreed time, but employees must still take their minimum vacation time within 10 months after the end of the entitlement year regardless of when pay is issued.
• When an employee reaches five years of service, split the entitlement year and apply 4% to wages earned before the anniversary and 6% to wages earned after, keeping clear records of the calculation.
• On termination, pay all earned and unpaid vacation pay by the final pay deadline and provide a written breakdown showing gross wages, rates applied, and total vacation pay owing.

What is vacation pay in Ontario?

In Ontario, the Employment Standards Act (ESA) sets out the minimum rights and responsibilities for most employees and employers, including an entitlement to a minimum of two weeks of vacation time per year. Vacation pay is separate from vacation time in that you owe both vacation pay (money) and vacation time (days off) to eligible employees.

Employees with less than five years of employment are entitled to two weeks of vacation time, and after five years of employment, this increases to three weeks. For employees with less than five years of employment, vacation pay must be at least 4% of their yearly gross wages, while for those with five or more years of service, the rate increases to at least six per cent. This applies to full-time, part-time, and casual employees alike.

Your employment contract or collective agreement can offer more generous terms, but you can never provide less than the ESA minimums. Independent contractors are not entitled to vacation pay because they are not employees.

For detailed ESA vacation rules, visit the Ontario government's vacation guide.

How to calculate vacation pay

Calculating vacation pay in Ontario starts with identifying the correct percentage rate based on years of service, then applying it to the employee's gross wages earned during the vacation entitlement year.

The vacation entitlement year is the 12-month period you define for tracking vacation, which can be a calendar year, your fiscal year, or the anniversary of the employee's hire date. You must use a consistent period for each employee.

Gross wages include regular pay, overtime, commissions, bonuses, and public holiday pay. They exclude tips, discretionary bonuses, expense allowances, and prior vacation pay already paid out. The ESA provides a detailed list of what counts and what does not.

Follow these steps each pay period to calculate vacation pay accurately:

1. Choose the correct rate

Determine whether the employee has worked for you for less than five years (4% rate) or five or more years (6% rate). This calculation is based on continuous service with your business, not total work experience. The rate applies to all eligible gross wages earned during the vacation entitlement year, regardless of how many hours the employee works per week.

2. Determine ESA gross wages for the period

Include all eligible earnings such as regular pay, overtime, commissions, performance bonuses, and public holiday pay. Exclude tips, discretionary bonuses like holiday gifts, expense reimbursements, and any vacation pay you have already paid out.

3. Multiply gross wages by the vacation pay rate

Apply the percentage to the gross wages earned during the pay period. For example, if an employee earns $1,000 in gross wages and is entitled to 4% vacation pay, the calculation is $1,000 × 4% = $40. This amount represents the vacation pay earned for that specific pay period.

4. Pay or accrue the vacation pay

Choose your payout method based on your business needs and cash flow preferences. You can add the vacation pay to each paycheque, hold it until the employee takes vacation time, or pay it as a lump sum at another agreed time. Whichever method you choose, ensure you track the amounts accurately and communicate the approach clearly to employees.

Crossing 5 years of service

When an employee reaches their fifth anniversary, their vacation pay percentage increases from 4% to 6%. You must split the entitlement year into two parts and apply different rates to each portion.

Apply 4% vacation pay to gross wages earned before the anniversary and 6% to gross wages earned on and after the anniversary. Keep clear records of the split calculation and ensure your payroll system applies the correct rate to each portion of the year.

When did 6% vacation pay start in Ontario?

The 6% vacation pay rate has been part of Ontario's Employment Standards Act for many years. The ESA has long required employers to provide three weeks of vacation time and 6% vacation pay to employees who have completed five years of continuous service with the same employer.

If you have employees past the five-year mark, you are already required to apply the higher rate. There is no separate enrolment or opt-in process. The rate change is automatic once an employee completes their fifth year of service.

What counts in gross wages

Understanding what to include and exclude from gross wages is essential for accurate vacation pay calculations. The ESA provides specific guidance on which earnings count toward vacation pay entitlements.

Typical inclusions for calculating vacation pay include:

• regular hourly or salaried pay
• overtime pay, commissions
• performance bonuses
• public holiday pay
• shift premiums
• allowances

Common exclusions include:

• tips and gratuities
• expense reimbursements and allowances
• vacation pay already paid
• discretionary bonuses such as holiday gifts

When do you have to pay vacation pay?

Ontario employers have a few ways to pay vacation pay, and you can choose the option that works best for your business.

• Add to each paycheque. Include the vacation pay amount on every pay stub. This is common in industries with high turnover or casual employment. Employees see the vacation pay clearly itemized, but they still must take their vacation time separately.
• Pay when vacation time is taken. Hold the accrued vacation pay and pay it out when the employee takes their vacation days. This method aligns payment with time off and is straightforward for employees to understand.
• Pay at another agreed time. You and the employee can agree to another timing for paying accrued vacation pay. This is less common but can simplify administration if the arrangement is documented clearly.

Whichever method you choose, remember that paying vacation pay does not replace the requirement to provide vacation time. Vacation time earned for a vacation entitlement year must be taken within 10 months after that year is completed. Employees must still take their minimum vacation days (two weeks for under five years, three weeks for five or more years) regardless of when pay is issued.

Also, if a public holiday occurs during an employee's vacation, they are entitled to a substitute day off with public holiday pay, which must be taken within three months of the holiday unless the employee agrees otherwise in writing.

Can employees forgo vacation time?

Employees have a minimum vacation entitlement under the Employment Standards Act (ESA), and you have to make sure they take at least that time off. Even if an employee asks to work through their vacation, you must ensure they take at least their statutory minimum time off.

However, you can implement a use-it-or-lose-it vacation policy for any vacation entitlement above the ESA minimums. For example, if your contract offers four weeks but the ESA requires only two, you can require employees to use the extra two weeks or lose them, but only if you provide clear written notice in the employment contract or policy document.You cannot apply a use-it-or-lose-it rule to the statutory minimum vacation time.

What happens on termination in Ontario?

When an employee leaves a job, they must be paid any vacation pay they have earned but not taken. This payment must be made within seven days of employment ending or by the employee's next regular payday, whichever is later. This includes any vacation pay accrued but not yet paid during the current entitlement year, any banked vacation pay from previous years, and vacation pay calculated up to and including the last day of employment.

If the employee crossed the five-year service mark during their employment, apply the split rate calculation: 4% on gross wages earned before the anniversary and 6% on wages earned after.

Provide a written breakdown showing how you calculated the vacation pay. Include the gross wages, the rate applied, and the total amount owing. This transparency helps avoid disputes and demonstrates compliance.

Pay vacation pay on time to stay compliant and avoid complaints to the Ministry of Labour or potential penalties.

What records must employers keep?

Employers are required to keep detailed records of vacation time and pay for each employee, and this information must generally be kept for five years after the record was made. Records to keep include:

• Vacation entitlement year: Document the start and end dates of each entitlement year, plus any stub period, which is the period from the hire date to the start of the first full entitlement year
• Vacation time: Track vacation days earned, taken, and remaining, and record the dates vacation was taken and whether it was paid or unpaid
• Vacation pay: Record vacation pay earned, paid, and accrued, with dates and the payout method used, such as per paycheque, lump sum, or when taken
• Rate changes: Note when an employee reaches five years of service and the vacation pay rate increases from 4% to 6%, and show the split calculation for that entitlement year.
• Employee statements: Provide employees with a statement at least once per vacation entitlement year showing vacation time and pay earned, taken, and outstanding.

Store employment contracts, pay stubs, and vacation records securely. Make records available to employees on request and to Ministry of Labour inspectors during audits.

Keep vacation pay compliant the simple way

Ontario's vacation pay rules are clear. Applying them correctly across multiple employees, pay periods, and service milestones takes time and attention. Automating calculations, tracking accruals, and paying on time with payroll software built for compliance means you can focus on running your business instead of double-checking spreadsheets.

With the right payroll system, you can automatically apply the correct 4% or 6% vacation pay rate based on each employee's years of service. You can track vacation accrual per pay run and show clear balances on pay stubs. You can also automate payouts when employees take vacation or at another agreed time.

Simplify vacation pay and payroll with Xero

You can use Xero payroll to automate vacation pay calculations, track accruals, and keep clear records for every employee, so you stay compliant with Ontario rules. Integrating payroll with your accounting system centralizes records, reduces manual data entry, and ensures vacation pay liability is reflected accurately in your financial statements.

Ready to simplify vacation pay and payroll? Get one month free.

FAQs on vacation pay in Ontario

Below are answers to common questions Ontario employers have about vacation pay rules, calculations, and compliance.

Can I pay vacation pay instead of time off?

No. Vacation pay and vacation time are separate entitlements under the ESA. Paying the money does not replace the requirement to provide time off. Employees must take their minimum vacation days within 10 months of earning them. You can only pay out vacation time in lieu of time off if the employee agrees in writing and the employment ends.

Do part-time and casual employees get vacation pay?

Yes. All employees covered by the ESA are entitled to vacation pay, regardless of whether they work full-time, part-time, or casual hours. The same rates apply: 4% for under five years of service and 6% for five or more years. Calculate vacation pay on their actual gross wages earned during the entitlement year.

Is 4% the same as 2 weeks?

Not exactly. The 4% vacation pay rate approximates two weeks of pay for a full-time employee working 52 weeks per year (2 ÷ 52 ≈ 3.85%), but the ESA sets the minimum at 4%. Similarly, 6% approximates three weeks of pay (3 ÷ 52 ≈ 5.77%). The percentage applies to gross wages, so the dollar amount will vary based on actual earnings, overtime, and commissions.

Can employers force vacation time?

Yes, with conditions. Employers can schedule when employees take vacation, but you must provide reasonable notice and consider the employee's preferences where possible. You cannot require employees to take vacation during a temporary layoff or in lieu of notice of termination. Any scheduling must respect the ESA's requirement that vacation be taken within 10 months of the end of the entitlement year.

What about contractors?

Independent contractors are not entitled to vacation pay because they are not employees under the ESA. If you engage someone as a contractor, ensure the relationship is genuinely independent and not an employment relationship in disguise. Misclassifying employees as contractors can result in significant penalties, back pay, and liability for unpaid vacation pay and other entitlements.