Vacation Pay in Ontario Explained: 4%, 6%, Examples, Final Pay, and Employer Mistakes
Plain-English Ontario vacation pay guide for employers. Learn ESA 4% and 6% rules, five-year threshold, final pay, 2024 agreement update, examples, and common mistakes.
Overview
Last reviewed: May 2026 Jurisdiction: Ontario Applies to: Most provincially regulated Ontario employers, subject to exemptions and special rules.
This 2026 employer guide reflects Ontario ESA vacation pay rules as reviewed in May 2026, including the 4% and 6% vacation pay rules, the five-year threshold, final-pay timing, and the June 21, 2024 vacation pay agreement clarification.
Vacation pay sounds simple.
Then real workplace situations make it complicated.
An employee works part-time. A salaried employee earns commission. A nonprofit pays vacation pay on every paycheque. A manager forgets that an employee reached five years of service. A worker resigns after only a few weeks. A long-service employee is terminated and final pay has to be calculated quickly.
These are the moments where Ontario vacation pay mistakes happen.
Under Ontario’s Employment Standards Act, 2000, vacation pay is a minimum employment standard. Employers can usually provide more generous vacation benefits, but they generally cannot provide less than the ESA minimum.
This guide explains Ontario vacation pay in plain English for employers, payroll teams, HR managers, small businesses, nonprofits, charities, and anyone responsible for employee policy manuals.
It is not written as a legal textbook. It is a practical employer guide.
By the end, you should understand:
- how Ontario vacation pay works
- the difference between vacation time and vacation pay
- when 4% applies
- when 6% applies
- what happens when an employee reaches five years of service
- what wages may need to be included
- what amounts are excluded
- how vacation pay works when employment ends
- common employer mistakes
- what should be updated in your Ontario employee policy manual
This article provides general information only and is not legal advice. Employers dealing with a specific payroll dispute, termination, vacation pay complaint, unionized workplace, employment contract issue, or complex compensation arrangement should get legal advice.
Quick Answer: How Does Vacation Pay Work in Ontario?
Ontario vacation pay is generally calculated as a percentage of an employee’s gross wages, excluding vacation pay.
For employees with less than five years of employment, vacation pay is generally at least 4% of gross wages earned in the vacation entitlement year or stub period.
For employees with five or more years of employment, vacation pay is generally at least 6% of gross wages earned in the vacation entitlement year or stub period.
| Employee’s period of employment | Minimum vacation time | Minimum vacation pay |
|---|---|---|
| Less than 5 years | 2 weeks | 4% of gross wages, excluding vacation pay |
| 5 years or more | 3 weeks | 6% of gross wages, excluding vacation pay |
Important note: Vacation time is generally earned after completing a vacation entitlement year. An employee becomes entitled to three weeks of vacation time for the vacation entitlement year in which they reach five years of employment, and for each completed vacation entitlement year after that. Vacation pay, however, is earned as wages are earned.
A simple way to remember it:
Vacation time is the time away from work. Vacation pay is the money earned for vacation.
They are connected, but they are not the same thing.
Sources
Vacation Time vs. Vacation Pay
Many employer mistakes begin with confusing vacation time and vacation pay.
Vacation time means the employee’s time away from work.
Vacation pay means the money the employee earns for vacation.
An employee may earn vacation pay even if they do not complete a full vacation entitlement year. Ontario’s ESA vacation guide explains that even if an employee works only one hour, the employee is still entitled to vacation pay of at least 4% or 6%, depending on length of employment.
Example
An employee works for only two weeks and then resigns.
The employer may think:
“They did not stay long enough to get vacation.”
That may confuse vacation time with vacation pay.
The employee may not have completed a full vacation entitlement year, but they still earned wages. Because vacation pay is earned as wages are earned, the employer should review whether vacation pay is owed on those wages.
Employer takeaway
Do not assume vacation pay is owed only after one full year.
Vacation time and vacation pay should be tracked carefully from the start of employment.
Sources
Ontario Vacation Pay: 4% and 6% Rules
Ontario’s ESA minimum vacation pay percentages are:
- 4% for employees with less than five years of employment
- 6% for employees with five or more years of employment
The percentage is applied to gross wages, excluding vacation pay, earned during the vacation entitlement year or stub period.
Example: 4% vacation pay
An employee has worked for the employer for two years.
They earned $42,000 in gross wages during the vacation entitlement year.
Minimum vacation pay:
$42,000 × 4% = $1,680
Example: 6% vacation pay
An employee has worked for the employer for seven years.
They earned $52,000 in gross wages during the vacation entitlement year.
Minimum vacation pay:
$52,000 × 6% = $3,120
Employer takeaway
If your payroll system does not automatically flag employees approaching five years of service, you may underpay vacation pay.
What Counts as Wages for Vacation Pay?
This is one of the most important vacation pay questions for Ontario employers.
Ontario vacation pay is calculated on gross wages, excluding vacation pay. Gross wages can include regular earnings such as salary, hourly wages, commissions, overtime pay, public holiday pay, termination pay, allowances for room and board, domestic or sexual violence leave pay, and bonuses or gifts that are non-discretionary or are related to hours of work.
For practical employer purposes, review whether vacation pay should be calculated on:
- regular wages
- hourly wages
- salary
- commissions
- overtime pay
- public holiday pay
- termination pay
- non-discretionary bonuses or gifts
- bonuses or gifts related to hours of work
- allowances for room and board
- domestic or sexual violence leave pay
Example
A sales employee earns:
- $45,000 base salary
- $10,000 commissions
- $1,500 overtime pay
If those amounts are wages for ESA vacation pay purposes, the vacation pay calculation may need to include them.
For an employee with less than five years:
$56,500 × 4% = $2,260
For an employee with five or more years:
$56,500 × 6% = $3,390
Employer takeaway
Do not calculate vacation pay only on base salary without checking whether commissions, overtime, public holiday pay, termination pay, non-discretionary bonuses, or other included wage types should be part of the vacation pay base.
Sources
- https://www.ontario.ca/document/your-guide-employment-standards-act-0
- https://www.ontario.ca/page/workplace-health-and-safety
What Does Not Count as Wages for Vacation Pay?
Ontario’s ESA vacation guide also lists amounts that do not count as wages for vacation pay purposes.
For employer policy purposes, be careful with:
- vacation pay paid out or earned but not yet paid
- tips and gratuities
- discretionary bonuses or gifts that are not related to hours of work, production, or efficiency
- expense reimbursements
- travel allowances
- living allowances
- employer benefit plan contributions
- benefit-plan payments
- federal employment insurance benefits
- severance pay
Important distinction
Vacation pay is payable on termination pay, but not on severance pay.
That distinction matters when employment ends. If an employee receives termination pay, vacation pay should be calculated on that termination pay where applicable. If the employee receives ESA severance pay, vacation pay is not calculated on severance pay.
Employer takeaway
Do not include vacation pay paid out, vacation pay earned but not yet paid, tips, discretionary bonuses unrelated to hours of work, production or efficiency, benefit-plan payments, or severance pay in the vacation pay base.
Sources
The Five-Year Threshold: Where Employers Make Mistakes
The five-year threshold is one of the most common vacation pay mistakes in Ontario.
Ontario’s vacation guide explains that an employee who reaches the five-year employment threshold partway through the vacation entitlement year or stub period is entitled to vacation pay calculated at 6% of all wages earned in that vacation entitlement year or stub period.
That means the employer may need to adjust the whole vacation entitlement year, not only wages earned after the exact anniversary date.
Example
An employee’s vacation entitlement year runs from January 1 to December 31.
The employee reaches five years of employment on July 1.
The employee was paid 4% vacation pay on each paycheque from January to June.
Once the employee reaches the five-year threshold, the vacation pay entitlement for that vacation entitlement year increases to 6% on all wages earned in that year.
That means the employer may need to top up the earlier 4% vacation pay by an additional 2% for wages earned before the five-year threshold was reached.
For payroll practicality, the additional 2% top-up should be paid on the pay day for the pay period in which the employee reaches the five-year threshold.
Common employer mistake
The employer says:
“We will start paying 6% after the anniversary date.”
That may not be enough.
If the employee reaches five years partway through the vacation entitlement year or stub period, the 6% rate may apply to the entire year or stub period.
Employer takeaway
Run a monthly report of employees approaching five years of employment.
Do not wait until an employee complains.
Sources
When Should Vacation Pay Be Paid?
Ontario’s general rule is that vacation pay earned during a completed vacation entitlement year or stub period must usually be paid in a lump sum before the employee takes vacation time.
Ontario’s ESA vacation guide lists exceptions. For example, vacation pay may be paid on each paycheque as it accrues if the employee has agreed electronically or in writing, and the wage statement clearly shows vacation pay separately or the employer provides a separate statement.
Ontario’s guide also explains that vacation pay can be paid at another time if the employee agrees electronically or in writing, and it includes special timing rules for direct deposit and shorter vacation periods.
Important: 2024 ESA clarification on vacation pay agreements
Effective June 21, 2024, Ontario clarified that an employee must make an agreement with the employer for vacation pay to be paid in a way other than the usual lump-sum payment before vacation.
For practical compliance, employers should keep this agreement in writing or electronically.
This matters in common arrangements such as:
- paying vacation pay on each paycheque as it accrues
- paying vacation pay by salary continuance during vacation
- paying vacation pay at another agreed time
- using a different vacation pay timing arrangement from the default lump-sum-before-vacation approach
Common payment options
Employers often handle vacation pay in one of these ways:
- Pay vacation pay before the employee takes vacation.
- Pay vacation pay on each paycheque as it accrues, with proper written or electronic agreement.
- Pay vacation pay at another agreed time, with proper written or electronic agreement.
- Pay according to direct deposit timing rules where applicable.
Common employer mistake
An employer pays vacation pay on every paycheque because:
“That is how we always do it.”
But the employer never gets the employee’s written or electronic agreement.
That can create compliance risk.
Better approach
Your policy manual and onboarding process should explain:
- how vacation pay is paid
- whether vacation pay is paid before vacation or on each paycheque
- whether written or electronic agreement is required
- how vacation pay appears on wage statements
- who employees should contact with vacation pay questions
Employer takeaway
If vacation pay is not paid as a lump sum before vacation, do not rely on habit, verbal assumptions, or “this is how payroll has always done it.” Keep a clear written or electronic agreement and make sure vacation pay is properly shown on the wage statement or a separate statement where required.
Sources
Vacation Pay When Employment Ends
When employment ends, the employee is entitled to vacation pay that has been earned and not yet paid.
It is useful to separate two related deadlines:
- Termination pay deadline: Termination pay must be paid either seven days after employment is terminated or on the employee’s next regular pay date, whichever is later.
- Unpaid vacation pay deadline: Unpaid vacation pay must be paid within seven days of employment ending or by what would have been the employee’s next pay day, whichever is later.
Vacation pay is also payable on termination pay, but not on severance pay.
Example: employee under five years
An employee resigns after three years.
They earned $8,000 in wages during the current partially completed vacation entitlement year.
They have no unpaid vacation pay from previous years.
Vacation pay owing:
$8,000 × 4% = $320
Example: employee with five or more years
An employee is terminated after six years.
They earned $20,000 during the current partially completed vacation entitlement year.
They have no unpaid vacation pay from previous years.
Vacation pay owing:
$20,000 × 6% = $1,200
Example: vacation pay on termination pay
An employee receives $4,000 in termination pay.
If the employee is at the 4% vacation pay level:
$4,000 × 4% = $160
If the employee is at the 6% vacation pay level:
$4,000 × 6% = $240
Employer takeaway
Your termination checklist should include:
- unpaid vacation pay from previous years
- vacation pay earned in the current partially completed year
- vacation pay on termination pay
- no vacation pay on severance pay
- termination pay deadline: seven days after employment is terminated or the next regular pay date, whichever is later
- unpaid vacation pay deadline: seven days after employment ends or the next pay day, whichever is later
Sources
Vacation Pay Examples for Employers
Example 1: Part-time employee under five years
A part-time employee earns $16,000 in a vacation entitlement year and has less than five years of employment.
Vacation pay:
$16,000 × 4% = $640
Example 2: Long-service part-time employee
A part-time employee has worked for seven years and earns $16,000 in a vacation entitlement year.
Vacation pay:
$16,000 × 6% = $960
Example 3: Employee crosses five years mid-year
An employee starts the vacation entitlement year with four years of service and reaches five years during the year.
They earn $50,000 during the year.
Vacation pay:
$50,000 × 6% = $3,000
The employer should not simply pay 4% before the anniversary and 6% after the anniversary without checking the ESA rule.
Example 4: Employee leaves before using vacation
An employee resigns before taking vacation time.
If vacation pay has been earned but not paid, it must be paid out when employment ends.
The employer should not say:
“You did not take vacation, so we do not owe vacation pay.”
That is not the right approach.
Example 5: Nonprofit pays vacation pay on every paycheque
A nonprofit employs part-time community program staff with changing schedules.
The organization pays 4% vacation pay on each paycheque.
That may be allowed, but the employer should make sure employees have electronically or in writing agreed to that arrangement and that vacation pay is shown separately on the wage statement or a separate statement.
Example 6: Commission employee
A commissioned employee earns wages that include commissions.
The employer calculates vacation pay only on base salary.
That may underpay vacation pay if commissions are wages that should be included in the vacation pay base.
Example 7: Bonus plan review
An employer pays year-end bonuses.
Before excluding bonuses from the vacation pay calculation, the employer should review whether the bonus or gift is non-discretionary or related to hours of work.
If it is discretionary and not related to hours of work, production, or efficiency, it may be excluded. If it is non-discretionary or related to hours of work, it may need to be included.
Sources
Vacation Pay Mistakes Ontario Employers Should Avoid
Mistake 1: Paying 4% forever
Employees with five or more years of employment are generally entitled to 6%.
Mistake 2: Ignoring the mid-year five-year threshold
If the employee reaches five years partway through the vacation entitlement year or stub period, the 6% entitlement can apply to all wages earned in that year or period.
Mistake 3: Forgetting vacation pay when employment ends
Earned but unpaid vacation pay must be paid out when employment ends.
Mistake 4: Forgetting vacation pay on termination pay
Vacation pay is payable on termination pay.
Mistake 5: Paying vacation pay on every paycheque without proper agreement
If vacation pay is paid on each paycheque as it accrues, the employer should ensure the arrangement is properly agreed to electronically or in writing and properly shown on wage statements or a separate statement.
Mistake 6: Excluding commissions, overtime, termination pay, or non-discretionary bonuses without checking
Some wage types may need to be included in the vacation pay base.
Employers should carefully review commissions, overtime pay, public holiday pay, termination pay, non-discretionary bonuses or gifts, and bonuses or gifts related to hours of work.
Mistake 7: Copying a vacation policy from another province
Vacation rules vary by jurisdiction. Ontario employers should use Ontario-specific wording.
Mistake 8: Treating vacation time and vacation pay as the same thing
They are connected, but they are different.
Mistake 9: Not documenting vacation pay timing
If vacation pay is handled in a way that requires employee agreement, keep the written or electronic agreement.
Mistake 10: Missing the June 21, 2024 vacation pay agreement clarification
If vacation pay is paid in a way other than the usual lump-sum payment before vacation, the employee must make an agreement with the employer.
For practical compliance, employers should keep that agreement in writing or electronically.
This matters when vacation pay is paid on each paycheque, by salary continuance during vacation, or at another agreed time.
Sources
Ontario Vacation Pay Compliance Checklist
Use this checklist as a practical employer review.
Vacation entitlement
- Confirm each employee’s vacation entitlement year.
- Confirm whether a stub period applies.
- Confirm whether the employee has less than five years or five or more years of employment.
- Track employees approaching the five-year threshold.
- Confirm vacation time entitlement: two weeks or three weeks minimum.
- Confirm when the employee becomes entitled to three weeks of vacation time.
- Confirm whether the employee has unused vacation time from earlier years.
Vacation pay calculation
- Apply 4% for employees with less than five years of employment.
- Apply 6% for employees with five or more years of employment.
- Apply 6% correctly when the employee reaches five years partway through the vacation entitlement year or stub period.
- Pay any required 2% top-up on the pay day for the pay period in which the employee reaches the five-year threshold.
- Include wages that must be included.
- Exclude amounts that should not be included.
- Review commissions, overtime, public holiday pay, termination pay, and bonuses carefully.
- Review non-discretionary bonuses or gifts.
- Review bonuses or gifts related to hours of work.
- Exclude discretionary bonuses or gifts not related to hours of work, production, or efficiency.
- Exclude vacation pay paid out or earned but not yet paid.
- Review whether vacation pay has already been paid.
Payment timing
- Confirm whether vacation pay is being paid in the default lump-sum-before-vacation method.
- If not, keep the employee’s written or electronic agreement.
- Review vacation pay timing arrangements against the June 21, 2024 ESA clarification.
- Confirm whether vacation pay is paid before vacation.
- Confirm whether vacation pay is paid on each paycheque.
- Keep written or electronic agreements where required.
- Show vacation pay properly on wage statements or a separate statement.
- Review direct deposit timing rules.
- Review special rules for vacation taken in periods of less than one week.
Termination and final pay
- Pay all earned but unpaid vacation pay when employment ends.
- Confirm the termination pay deadline.
- Calculate vacation pay on termination pay.
- Do not calculate vacation pay on severance pay.
- Confirm the unpaid vacation pay deadline.
- Pay unpaid vacation pay within seven days of employment ending or by the next pay day, whichever is later.
- Include vacation pay in the termination checklist.
- Keep final pay records.
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What to Update in Your Ontario Policy Manual
Your Ontario vacation policy should explain:
- vacation entitlement year
- stub period, if applicable
- vacation time entitlement
- vacation pay percentage
- when employees move from 4% to 6%
- when the 2% top-up is paid if the employee reaches five years partway through the vacation entitlement year
- how vacation is requested
- how vacation is approved
- when vacation pay is paid
- whether vacation pay is paid on each paycheque
- whether written or electronic agreement is required
- how vacation pay appears on wage statements
- how vacation pay is handled when employment ends
- how vacation pay is handled on termination pay
- that vacation pay is not payable on severance pay
- who employees contact for vacation questions
A vague policy like “employees receive vacation according to employment standards” may not be enough for practical HR administration.
Employers should make the process clear.
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Vacation Pay FAQ for Ontario Employers
This FAQ summarizes the most common Ontario vacation pay questions employers ask. Each answer reflects general information only and is not legal advice. For specific situations — especially terminations, complex compensation arrangements, exemptions, or payroll disputes — employers should seek legal advice.
What is vacation pay in Ontario?
Vacation pay is money employees earn for vacation under Ontario’s ESA. It is generally calculated as 4% or 6% of gross wages, excluding vacation pay, depending on length of employment.
What is the minimum vacation pay in Ontario?
The minimum is generally 4% of gross wages for employees with less than five years of employment and 6% for employees with five or more years.
When does vacation pay become 6% in Ontario?
Vacation pay generally becomes 6% when the employee has five or more years of employment. If the employee reaches five years partway through the vacation entitlement year or stub period, the 6% may apply to all wages earned in that year or period.
When does an employee become entitled to three weeks of vacation time in Ontario?
An employee generally becomes entitled to three weeks of vacation time for the vacation entitlement year in which they reach five years of employment, and for each completed vacation entitlement year after that.
Do part-time employees get vacation pay in Ontario?
Yes. Part-time employees generally earn vacation pay as they earn wages, subject to ESA rules.
Does an employee earn vacation pay if they work only a short time?
Yes. Ontario’s ESA vacation guide says that if an employee works even one hour, they are still entitled to vacation pay of at least 4% or 6%, depending on length of employment.
Is vacation pay paid on termination pay?
Yes. Vacation pay is payable on termination pay.
Is vacation pay paid on severance pay?
No. Vacation pay is not payable on severance pay.
When must vacation pay be paid after employment ends?
Earned but unpaid vacation pay must be paid within seven days of employment ending or by what would have been the employee’s next pay day, whichever is later.
Is the termination pay deadline the same as the vacation pay deadline?
Termination pay must be paid either seven days after employment is terminated or on the employee’s next regular pay date, whichever is later. Unpaid vacation pay must also be paid within seven days of employment ending or by what would have been the employee’s next pay day, whichever is later.
Can vacation pay be paid on every paycheque?
Yes, but the employee must make an agreement with the employer if vacation pay is paid on each paycheque as it accrues instead of being paid as a lump sum before vacation.
For practical compliance, the agreement should be kept in writing or electronically. Vacation pay should also be clearly shown separately on the wage statement or on a separate statement.
Can an employee give up vacation time?
An employee may be able to give up some or all vacation time only with the employer’s electronic or written agreement and approval of the Director of Employment Standards. However, this does not remove the employer’s obligation to pay vacation pay. Employees may give up vacation time, but not the right to vacation pay.
Does vacation pay apply to commissions in Ontario?
Yes, commissions can be included in gross wages for vacation pay purposes.
Employers should review commissioned roles carefully and avoid calculating vacation pay only on base salary without checking whether commissions should be included in the vacation pay base.
Does vacation pay apply to overtime pay in Ontario?
Yes, overtime pay can be included in gross wages for vacation pay purposes. Employers should include overtime in the vacation pay review instead of assuming it is excluded.
Are bonuses included in Ontario vacation pay calculations?
Some bonuses or gifts may be included.
Ontario’s vacation pay rules include bonuses or gifts that are non-discretionary or related to hours of work. Discretionary bonuses or gifts that are not related to hours of work, production, or efficiency are excluded.
Employers should review bonus plans carefully before deciding whether vacation pay applies.
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Is this article legal advice?
No. This article is general information for employers. For specific situations, especially terminations, complex compensation arrangements, exemptions, or payroll disputes, employers should seek legal advice.
Sources
How Canada Policy Manual Helps
Vacation pay is one of the most common places where outdated policies create risk.
Canada Policy Manual helps Ontario employers create province-specific employee policy manuals that explain vacation time, vacation pay, payroll practices, final pay, and employee rights in clear workplace language.
For small businesses, nonprofits, charities, and growing employers, this helps reduce confusion and makes HR administration easier.
A strong policy manual does not replace legal advice.
But it can help employers avoid outdated templates, inconsistent payroll practices, and unclear HR procedures.
Need an Ontario Employee Policy Manual That Reflects Vacation Pay Rules?
Canada Policy Manual helps Ontario employers create practical, province-specific employee policy manuals with clear vacation, payroll, final pay, and employee acknowledgment language.
Create Your Ontario Policy Manual
Keep Your Ontario HR Policies Clear, Current, and Easier to Manage
If your employee handbook has not been reviewed recently, it may not reflect current Ontario ESA vacation pay rules, payroll practices, final pay requirements, or five-year vacation pay thresholds.
Canada Policy Manual helps employers build clear, province-specific policy manuals designed for real workplaces — including small businesses, nonprofits, charities, and growing teams.
Start Your Canada Policy Manual Today
Sources Used for This Guide
This guide was prepared using Ontario employment standards materials and employer compliance references, including:
- Ontario Employment Standards Act, 2000
- Ontario Your Guide to the Employment Standards Act: Vacation
- Ontario Your Guide to the Employment Standards Act: Recent changes
- Ontario Your Guide to the Employment Standards Act: Payment of wages
- Ontario Your Guide to the Employment Standards Act: Termination of employment
- Ontario ESA termination and severance guidance
- Ontario ESA public holidays guidance
Employers should verify current requirements before making employment decisions because employment standards rules can change.
Sources
Key Takeaways
- Ontario vacation pay is generally at least 4% of gross wages (excluding vacation pay) for employees with less than five years of employment, and at least 6% for employees with five or more years.
- Vacation time and vacation pay are different. Vacation pay is earned as wages are earned — even an employee who works only one hour can be entitled to vacation pay.
- If an employee reaches the five-year threshold partway through the vacation entitlement year or stub period, the 6% rate can apply to all wages earned in that year or period — not just wages earned after the anniversary.
- For practical payroll, the 2% top-up should be paid on the pay day for the pay period in which the employee reaches the five-year threshold.
- Vacation pay is payable on termination pay, but not on severance pay.
- Effective June 21, 2024, Ontario clarified that paying vacation pay in any way other than the usual lump sum before vacation requires an agreement with the employee — keep it in writing or electronically.
- When employment ends, earned but unpaid vacation pay must be paid within seven days of employment ending or by what would have been the employee's next pay day, whichever is later.
- Commissions, overtime, public holiday pay, termination pay, non-discretionary bonuses or gifts, and bonuses or gifts related to hours of work may need to be included in the vacation pay base — don't calculate on base salary alone without checking.
Disclaimer: This article provides general information only and is not legal advice. Employers dealing with a specific payroll dispute, termination, vacation pay complaint, unionized workplace, employment contract issue, or complex compensation arrangement should get legal advice.