From the Hotline: Compensation Cut and Paid Vacation

Question: Our company recently cut an employee’s compensation by 20%. Prior to the cut the employee had received 3 weeks’ vacation time and had carried over 2 weeks from the prior year. The employee will now receive compensation when on vacation at the 20% cut in pay. Is this permissible or should the vacation time be paid at the old higher rate?

Answer: The intent of vacation pay is to allow the employee to take a day off while still receiving his pay as if he were working.  Because of this, an employer is only obligated to pay an employee for vacation time taken at the current rate of pay.  If you want to be generous and allow the employee to be paid based on the previously higher rate, you certainly can do this.  However, by law you are not obligated to.  If the employee had been given a pay raise (instead of a pay cut), the employee would be paid at the higher (current) rate for any vacation time taken.