I thought I'd share a hypothetical case similar to one I'm working on where accrued and unpaid vacation pay has become the battleground for a messy 'without cause' termination.

The top executive in this organization was recruited 7-8 years ago but no formal offer of employment was ever created or signed by either party.  A very, very bad idea.

For various reasons, the Board of Directors decided to end the employment relationship and agreed to pay a nice, but not extravagant, settlement that met all the conditions of the Employment Standards Act (ESA) and the common law.  They contracted a professional consultant (me) to assist them with this.  Point in their favour!

Turns out that the employee hadn't taken their 6 weeks of alloted vacation time over most of his tenure -- various payouts had been made but there was still nearly $50k outstanding in accrued and unpaid vacation pay according to the employee and confirmed by the Auditor.  Auditor will get wrist slapped -- repeatedly -- and will then be schooled in how to account for and report vacation liabilities.

What went wrong here?

• No employment contract forced us to rely on the ESA and precedent in the employment relationship -- this will require a detailed ($$$) examination of Board minutes and correspondence to resolve.
• No record of vacation time taken was kept.  Some was claimed and paid but there is strong evidence that the employee took vacation days without formally logging them as vacation pay.  Again, an employment agreement would have addressed this.
• Under the ESA employers are required to pay accrued vacation pay within 10 months of the end of the vacation period.  Exemptions are possible here provided both parties agree in writing to delay payment.  Contrary to popular belief, vacation pay cannot be legally 'banked' for use later without a written request by the employee and agreement by the employer.  I consider such agreements a very bad idea in most cases.
• Vacation pay must be paid as a separate line item on the employee's pay stub.  Simply continuing to pay their salary while they are away on vacation can lead to some very nasty consequences.  Even having signed vacation request forms is insufficient evidence that vacation has been paid.  In another case from the early '90's a 25-year employee of a company was awarded every dime of vacation pay they had earned over the years because the employer had failed to record 'vacation pay' as a separate line item on his paycheque.  This, despite the fact that the company had signed vacation request forms for all vacation days that the employee had taken.
• Don't assume that Auditors/Accountants know anything about the Employment Standards Act.  I frequently find that they don't and they fail to properly accrue payroll liabilities.  Board members and organizations without HR people on staff often get caught on this, everything is fine and then...
• Please make sure your employees take their vacation time each year without fail.  It's good for them emotionally and physically and it's your legal obligation as a responsible employer.

The employer in this case will likely end up paying the statutory vacation pay (2 weeks less amounts paid), the 6 weeks/year claimed by the employee less any days he didn't work that we can document, and all the attendent legal, accounting, and consulting fees.

I will whittle the amount down as much as legally possible but it will be an expensive, messy end to an otherwise straightforward termination.

PLEASE check that your organization is not breaking any of these ESA rules and HR best practices!