The “Nice” Mistake That Costs You 4%

I see many Canadian business owners holding thousands of dollars in “Vacation Liability” on their balance sheet for employees who haven’t worked in 6 months.

Usually, this happens because of a simple payroll setting error. The owner wants to be supportive during a maternity or parental leave, and the payroll admin is afraid to touch the payroll system.

The result? You might be paying Vacation Accrual on unpaid leave when the government standard often says you don’t have to,.

The Concept: Time vs. Money

To understand the rules, you need to separate “Vacation” into two different buckets. In BC and Ontario, vacation is two things happening at once:

1. The Time (Seniority): The right to take weeks off.

2. The Pay (Cash): The money you get while you are off (usually 4% or 6% of your wages).

When an employee is on unpaid leave, these two buckets split apart.

• The Time Bucket keeps filling up. Your employee is “continuously employed” and earns their seniority,.

• The Pay Bucket usually stops because the flow of wages has stopped.

The Standard Rule (Section 58)

You don’t need a law degree to understand this; you just need a calculator.

According to the British Columbia Employment Standards Act (Part 7, Section 58), vacation pay is calculated as a percentage of “total wages” earned during the year.

The government’s logic is simple: Vacation pay is meant to replace your wages while you relax. If you are on unpaid leave and earning $0 in wages from the company, the calculation is:

$0 (Wages) x 4% (Vacation Rate) = $0 Accrual.

The Government of BC explicitly states in their policy interpretation: “The leave of absence does not affect accrued vacation time, it just reduces the amount of vacation pay the employee will receive”.

The Important Exception: “Check Your Contract”

Before you rush to change your payroll settings, you must check one specific document: The Employment Contract.

The government rules (Section 58) are the minimum. However, your specific contract is the final word,.

• Scenario A (The Standard): Your contract says vacation is paid “in accordance with the Employment Standards Act.”

    ◦ The Result: You likely follow the $0 Rule. You do not owe accrual on unpaid leave.

• Scenario B (The Exception): Your contract explicitly promises “3 weeks of paid vacation per year” regardless of hours worked.

    ◦ The Result: You have promised more than the minimum. You likely do owe the accrual because you signed a contract agreeing to it,.

Why this matters: If you fall into “Scenario A” but your payroll software is set up for “Scenario B,” you are paying a phantom expense by accident.

The Fix: A 3-Minute Payroll Check

We recommend all business owners do a quick “Health Check” on their payroll settings (Wagepoint, ADP, PayWorks, etc.).

1. Check the Status: Ensure employees on leave are actually marked as “On Leave” in the system.

2. Check the Accrual: Verify if your system is calculating 4% on standard salary (wrong) or actual wages paid (right).

3. Communicate: When an employee returns, clarity is kindness. Let them know: “You kept all your seniority for vacation time, but since vacation pay is a % of wages, you didn’t accrue cash while you were away”.

Stop The Leaks

Payroll settings are boring, but they are expensive if you get them wrong. At BrightenCPA, we don’t just balance books; we stop operational leaks.

Need a Payroll Health Check? Contact us to ensure your settings match BC and Ontario compliance rules.