Vacation Pay Ontario: 2026 Calculation Guide for Employers

Vacation Pay in Ontario — Quick Answer

Under the Ontario Employment Standards Act, 2000 (ESA):

• ●4% of gross wages — for employees with less than 5 years of continuous employment
• ●6% of gross wages — for employees with 5 or more years of continuous employment

Vacation pay accrues from the first hour of work. The right to take vacation time kicks in after the employee has completed 12 months of employment.

Vacation Time vs Vacation Pay in Ontario

A common employer mistake in Ontario: failing to step up to 6% on the 5-year anniversary. Set a calendar reminder.

How to Calculate Vacation Pay in Ontario

> Vacation Pay = Gross Wages × 4% (or 6% after 5 years)

Example 1 — Salaried employee under 5 years

• ●Annual gross salary: $58,000
• ●Vacation pay rate: 4%
• ●Vacation pay owed: $58,000 × 0.04 = $2,320 per year

Example 2 — Hourly employee at exactly 5 years

• ●Hourly wage: $24
• ●Annual hours worked: 2,080
• ●Overtime hours: 60 (at 1.5×)
• ●Statutory holiday pay: $1,152
• ●Regular wages: 2,080 × $24 = $49,920
• ●Overtime wages: 60 × $24 × 1.5 = $2,160
• ●Total wages: $49,920 + $2,160 + $1,152 = $53,232
• ●Vacation pay rate: 6%
• ●Vacation pay owed: $53,232 × 0.06 = $3,193.92

Example 3 — Commission-based employee

• ●Base salary: $36,000
• ●Commissions: $48,000
• ●Performance bonus: $5,000
• ●Total wages: $89,000
• ●Vacation pay rate: 4%
• ●Vacation pay owed: $89,000 × 0.04 = $3,560

What Counts as "Wages" in Ontario

The Ontario ESA defines wages to include:

• ●Regular pay (salary or hourly)
• ●Overtime pay
• ●Public (statutory) holiday pay
• ●Commissions earned
• ●Non-discretionary bonuses (tied to hours, sales, production)
• ●Pay in lieu of notice (termination pay)
• ●Severance pay (in some cases)

Not included: - Previously paid vacation pay (no double-up) - Tips and gratuities (Ontario-specific) - Discretionary bonuses (no contractual entitlement) - Expense reimbursements - Living allowances (in most cases)

Payment Methods in Ontario

The Ontario ESA permits three methods:

1. Pay vacation pay before vacation (default)

The employer pays vacation pay as a lump sum during or just before the vacation period, equal to the percentage (4%/6%) of wages earned in the prior year.

2. Pay vacation pay on every pay cheque (with employee agreement)

If the employee agrees in writing or electronically, vacation pay can be added to every pay cheque. Requirements:

• ●The agreement must be documented
• ●Vacation pay must be shown as a separate line item on every pay statement
• ●The employee is still entitled to take their unpaid vacation time

This is common in retail, hospitality, and gig-style work in Ontario.

3. Pay vacation pay annually on a single date

With the employee's agreement, vacation pay can be paid in one annual lump sum on a designated date (typically the employee's anniversary or year-end).

On termination

All vacation pay owed at termination must be paid: - Within 7 days after the employment ends, OR - On the next regular pay day — whichever is later

This payment is reflected in [Block 17 of the ROE](/blog/record-of-employment-canada-guide).

After 5 Years of Service — The Step-Up to 6%

This is the most-missed compliance point in Ontario. On the 5th anniversary of continuous employment with the same employer:

• ●Vacation pay rate increases from 4% to 6%
• ●Vacation time increases from 2 weeks to 3 weeks

The 6% applies to all wages earned on or after the 5-year anniversary date. It does NOT retroactively apply to wages earned before the anniversary.

If your payroll software does not automatically step up vacation pay, build a manual reminder for every employee's 5-year date.

Common Vacation Pay Mistakes in Ontario

1. Missing the 5-year step-up. Most expensive mistake. 2. Not getting written agreement to pay-per-cheque. Without it, you're non-compliant. 3. Treating commissions as non-vacationable. They are wages. 4. Late termination payment. The 7-day rule is firm. 5. Excluding overtime. Overtime is wages. 6. Treating tips as vacationable. They are NOT in Ontario. 7. Failing to show vacation pay separately on pay statements. Required when paid each pay period.

Special Situations

Unpaid leaves (pregnancy, parental, sick)

No wages = no vacation pay accrual during the leave. However, the leave time counts toward the 5-year service threshold for the step-up to 6%.

Multiple jobs with the same employer

If an employee works two roles with the same employer (same CRA business number), all wages combine for the 4%/6% calculation.

Misclassified contractors

If a "contractor" is in fact an employee under Ontario law (the test focuses on control, integration, financial risk, and tools), they are entitled to retroactive vacation pay. This is a common Ministry of Labour finding.

How to Stay Compliant

1. Configure payroll to track vacationable earnings on every pay cycle 2. Get written agreement before paying vacation pay each cheque 3. Show vacation pay as a separate pay statement line item 4. Set 5-year anniversary alerts in your HRIS 5. Pay vacation owed within 7 days of termination 6. Audit annually — total vacation pay should equal 4% (or 6%) of vacationable earnings

How Outsource Bookkeeping Handles Ontario Payroll

For Ontario payroll clients, vacation pay is calculated automatically with the correct rate (stepped up at 5 years), shown clearly on every pay statement, and paid out within the 7-day window on termination. We also generate the correct ROE Block 17 entry.

[Book a free consultation](/contact) to discuss your Ontario payroll needs.

Related Provincial Guides

• ●[Vacation Pay BC](/blog/vacation-pay-bc)
• ●[Vacation Pay Alberta](/blog/vacation-pay-alberta)
• ●[Record of Employment (ROE) Guide](/blog/record-of-employment-canada-guide)
• ●[HST Filing Deadlines in Ontario](/blog/hst-filing-deadlines-ontario)