Vacation Time and Annual Leave

A vacation, is a period of leave from a regular employment. Most people frequently take a vacation at fixed intervals, either during special holiday observances, such as Valentine’s Day, or for special celebrations or festivals. Many vacations are also spent with family or friends. For most people, a vacation is the one time in their lives when they can relax, have fun and really have an ‘away from work’ experience.

Every business, irrespective of size and sector, must provide vacation leave to its employees as a benefit. Where this is not done, employees should be offered fair and competitive terms and conditions so that they would be willing to take the vacation. A company, which allows its employees to take vacation on their own, rather than being entitled to an annual leave or sick leave benefit, could be sued for discrimination. An employee who feels they have been unfairly disadvantaged because of this breach of contract may seek compensation.

Some employers pay their employees for vacation days. In other cases, the employer reimburses the employee for their expenses related to their vacation. Sometimes the employer pays only part of the employee’s expenses for vacation days. Where the employer pays for all or part of the employee’s expenses for vacation days, the employee is entitled to this payment throughout the year. It is usually the employer’s responsibility to cover these expenses. When the employer does reimburse an employee for expenses for vacation days, the employee is owed a prorated amount for that expense.

Vacation pay is not taxable unless it is cash or is taxable income. This prorated amount is subject to tax until it is received by the employee. An employee should keep records of all receipt payments for vacation pay. These records may be useful in an audit of the pay practices of the employer. An audit could reveal improper vacation pay practices.

If an employee has a valid, unexpired, written contract with the employer that states the employee will be taking a vacation and the employer reimburses the employee for such vacation, the employee may be entitled to receive a prorated amount for that vacation. This prorated amount must be applied to the employee’s gross salary for that period of employment. Where vacation pay is paid solely for an annual leave, the prorated amount must be applied directly to the annual leave package. Where vacation pay is paid partly for a holiday, half of that amount must be applied to the actual vacation and the remaining portion to the annual leave package. The prorated amount must be applied to the expenses for the entire vacation or, if there are separate holidays, to each individual holiday. An employee who has accumulated a large amount of unused vacation time and who plans on returning to work shortly after completing his or her vacation cannot apply for a prorated vacation pay.

The above examples are provided to illustrate the potential difficulty in determining how to use vacation days for employee benefit plans. Generally employees tend to use up their vacation days prior to leaving on vacations. This means the amount of unused vacation days will reduce every year as employees get older and take fewer holidays. To avoid this problem, companies need to have a plan in place to handle unused vacation days so that employees know exactly what they will receive (as opposed to just guessing).