Ontario vacation pay and entitlement rules

Picture a new hire finishing their very first shift. They’ve already earned vacation pay in Ontario. They haven’t earned a single day off, and they won’t until they complete a full 12-month vacation entitlement year. Those are two different clocks, and the Employment Standards Act, 2000 (ESA) starts them on different days. The pay clock starts at hour one and the time clock starts a year later. 

Treating them as one is an easy mistake to make, usually with good intentions and a spreadsheet that quietly disagrees with the statute. Employment standards officers can inspect payroll records without a complaint ever being filed, and employers must keep accurate records of vacation pay calculations, dates taken and accrued balances, so it pays to get both clocks right.

This guide follows them from first shift to final pay: the 4% and 6% calculations, who decides when vacation happens, what changes at termination and where “use it or lose it” policies stand, plus three recent court decisions. Everything is current as at 3 November 2026.

Understanding the Ontario Employment Standards Act (ESA) framework

The ESA sets the vacation floor for provincially regulated employers in Ontario. Federally regulated employers, such as banks and telecoms, follow the Canada Labour Code instead, and other provinces set their own percentages. Our Ontario Employment Standards Act guidelines cover the wider rulebook.

Three principles are worth settling early. Neither side can contract out of ESA standards, so a signed waiver changes nothing about the statutory minimum. Contracts can go higher, and once a better deal exists by contract or precedent, you’re legally bound to honour it. And the paper trail is yours to keep: record vacation pay calculations, dates taken and accrued vacation pay, and tell employees plainly how the policy works.

Vacation time vs. vacation pay: What’s the difference?

Vacation pay is the money an employee earns to fund time off, and vacation time is the days they’re actually allowed to be away. The ESA treats them as separate entitlements, which is why they run on separate clocks.

The pay clock starts with the first hour worked. The time clock waits for a full 12-month vacation entitlement year, or for a stub period if you use a different cycle. An employee in month eight has vacation pay accumulating and no statutory vacation time to take. A manager who says “you’ve got two weeks coming” at that point is promising more than the ESA requires. That’s fine when it’s deliberate and risky when it’s accidental, because a benefit established by precedent can bind you.

Full-time, part-time, casual and hourly employees all earn both, and our guide to vacation pay for part-time workers explains how accruals work when schedules don’t look standard.

Statutory vacation time entitlements in Ontario

With less than 5 years of continuous employment, an employee is entitled to at least 2 weeks of vacation time per vacation entitlement year. At 5 years, the minimum rises to 3 weeks, and that is where vacation entitlement in Ontario stops by statute.

A vacation entitlement year is a recurring 12-month period over which vacation is earned. It typically starts on the hire date. Many employers prefer a shared cycle such as the calendar year, and our advice is to pick one, since separate anniversaries only work until the team outgrows one person’s memory. A shared cycle gives new hires a pro-rated stub period, the stretch between their start date and the start of your cycle. Someone who starts on 1 September under a calendar-year cycle has a 4-month stub period, so they first earn about a third of a full year’s vacation time.

Service and vacation time keep accumulating through active and inactive periods, including temporary layoffs, sickness, injury and statutory leaves, as long as there’s no break in employment. An employee can forgo earned vacation time only with the employer’s written agreement and the approval of the Director of Employment Standards, and even then the vacation pay stays owed.

If keeping a separate entitlement year for every employee sounds like a second job, a demo will show you how Employment Hero automates vacation accruals.

How to calculate vacation pay in Ontario

Vacation pay in Ontario is at least 4% of gross wages for employees with less than 5 years of employment and at least 6% from 5 years on, calculated on wages earned in the vacation entitlement year or stub period. Gross wages are what the employee earned in that period before deductions, excluding any vacation pay already paid. They include:

• Regular earnings
• Sales commissions
• Non-discretionary bonuses or gifts tied to hours worked, production or efficiency
• Overtime pay
• Public holiday pay

The percentages are the weeks in disguise: 2 weeks is about 4% of a 52-week year and 3 weeks is about 6%. Someone earning $52,000 in a vacation entitlement year has earned $2,080 in vacation pay at 4% or $3,120 at 6%. Vacation pay in Ontario after 10 years stays at 6%, because the ESA has only two tiers.

Unpaid statutory leave is the one place the clocks separate completely, since vacation time keeps accumulating while vacation pay accrues at $0 because no gross wages are earned. If you want to check a figure before you pay it, our vacation pay calculator does the math.

Mistakes on the pay side also have a long memory. In Diarez v. David Murphy et al. (2025 ONSC 4486), decided on 31 July 2025, Ontario’s Divisional Court said that a claim for unpaid ESA vacation pay isn’t discoverable simply because the money wasn’t paid when due. Under the Limitations Act, 2002, the limitation period runs from when the employee knew, or reasonably ought to have known, about the claim. An old shortfall can resurface later than you’d expect, and a clean record is your best answer.

If you’d like every balance, approval and payout in one record, we’ll show you how approved leave goes straight to payroll.

Paying out vacation pay: timing and methods

Vacation pay doesn’t have to arrive as a lump sum before vacation starts when the employee is paid wages by direct deposit on their regular pay day. Two other arrangements are allowed, and each needs the employee’s written agreement: paying vacation pay on every pay cheque as it accumulates, or agreeing on a different payment time. With none of those in place, the default is payment before the vacation begins.

Vacation scheduling and employer authority

Employers decide when vacation happens. You can decline a specific date to keep the business running, and if an employee never books their time, you can schedule it for them. That authority comes with a deadline, because the time clock has a hard stop: employers are responsible for making sure employees take earned vacation time within 10 months after the vacation entitlement year ends.

The ESA also governs how you schedule:

• Block scheduling. Vacation must be scheduled in a block of 2 weeks or in two 1-week blocks. You can’t assign random single days unless the employee requests it in writing and you agree in writing.
• Public holidays during vacation. A qualifying employee must receive a substitute day off with public holiday pay within 3 months of the holiday, or within 12 months if they agree in writing.

Vacation carry-over and “use it or lose it” policies

“Use it or lose it” sounds firm, and for statutory vacation time it fails. Employers can’t cancel, wipe or force employees to forfeit ESA minimum vacation, and Goruk v. Greater Barrie Chamber of Commerce is a case lawyers commonly cite on the point.

Above the statutory minimum, the contract takes over. If you grant a fourth or fifth week, you can attach forfeiture or carry-over terms to those extra days, provided the policy is clear and in writing. How far such a rule can stretch still depends on contract wording and clear communication, so have a lawyer read it before it reaches the handbook. Our view is that the extra weeks belong in writing, separate from the statutory ones, so nobody has to guess which days are protected. Our guidance on handling unused vacation pay covers what to do with balances that carry over.

Vacation pay and time upon termination of employment

Termination is where both clocks stop and the pay clock presents its bill. Under section 11(5) of the ESA, outstanding vacation pay is due “not later than seven days after the employment ends or on the day that would have been the employee’s next regular pay day, whichever is later.” Two rules sit alongside that deadline. Employers can’t schedule vacation during a statutory notice of termination period, and recovering vacation pay advanced before a resignation requires the employee’s prior written consent and compliance with employment standards legislation.

Two recent Court of Appeal decisions have also clarified how termination clauses get read. In May 2025, in Bertsch v. Datastealth Inc. (2025 ONCA 379), the court upheld a clause that limited the employee to ESA minimums and named vacation pay among them. On 6 August 2026, in Baker v. Van Dolder’s Home Team Inc. (2026 ONCA 568), heard alongside Li v. Wayfair Canada ULC, the court held that wording like “at any time” doesn’t automatically void a termination clause. The clause has to be read as a whole, and it has to preserve the ESA minimums, including statutory vacation pay and notice. If your contract templates were written before these decisions, ask employment counsel to take a fresh look.

Keeping both vacation clocks in view

Follow the clocks and most of the rules fall into place. Pay accrues from hour one at 4% or 6% of gross wages, and time has to be taken within 10 months of the entitlement year ending. Anything above the minimum follows your contract, and whatever is owed gets paid by the termination deadline. Doing that for one employee is a tidy afternoon. Doing it for every employee, year after year, is where a spreadsheet starts to lose arguments with the statute.

Want both clocks running from the same system as your payroll?