Paid Vacations: A Guide for Small Businesses


While employers are not required to provide employees with paid vacations, most offer at least some vacation time. In fact, according to the Bureau of Labor Statistics (BLS), more than 90 percent of full-time employees receive this benefit. Here are some considerations for offering paid vacations:


  • Pros. Offering paid vacations can help you demonstrate your commitment to your workforce, attract and retain employees, and remain competitive in the marketplace. Paid vacations can also boost productivity and help reduce unscheduled absences by giving employees the ability to schedule their time off.
  • Cons. Employers often cite cost as a significant barrier to providing paid vacations. According to the BLS, for employers with 1 to 49 employees, the average cost of providing paid vacations in March 2014 was about 2.9 percent of employees’ total compensation. Employers should factor the cost of vacations, and other benefits, when establishing salaries. Besides cost, there is also the challenge of tracking leave and maintaining adequate staffing levels.

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  • Vacation versus PTO. Some employers bundle leave into a single paid-time-off (PTO) bank, rather than have separate allotments for sick, vacation, and other personal leave. With a PTO program, employees are typically able to use their accrued time off for any reason. This can make it easier to track time off. Additionally, a PTO plan can reduce unscheduled absences since employees have more flexibility to schedule their time off in advance, rather than calling in “sick” after they have used all of their vacation time.
  • Eligibility. Even if you offer paid vacations to full-time employees, you are generally under no obligation to offer vacation to part-time employees. In fact, only about a quarter of all private sector employers offer paid vacations to part-time employees, according to the BLS. Employers that offer vacation to part-time employees usually do so on a pro rata basis.
  • Accrual versus Frontloading. Employers can allow employees to accrue vacation over the course of the year or frontload vacation (grant all leave at the beginning of the year). While frontloading might be easier to administer, the accrual method can reduce costs if the employee leaves the company during the year. For example, an employee who receives two weeks of frontloaded vacation on January 1 and then quits on January 2 may be entitled to a payout for the unused time (see Carryover and Payout below). Accruals require the employee to earn the time each pay period.


Pay Issues

  • Carryover and Payout. Some states explicitly prohibit policies that force employees to forfeit accrued, unused vacation time (also known as use-it-or-lose-it policies). In these cases, employers must generally allow employees to carry over accrued but unused vacation time/PTO from year to year, or pay employees for the unused time at the end of the year. In some cases, a reasonable cap on accruals may be permitted. Similarly, in these states, employers are required to pay out any accrued, unused vacation at the time of separation. In some other states, employers are allowed to have use-it-or-lose-it policies only if the company has a written policy communicating the rule to employees. For more information on state laws, see the Vacation Pay section of the State & Federal Compliance Database in HR411.
  • Vacations and Overtime. Because paid vacation time is not considered “hours worked,” employers do not need to include it when determining whether overtime is due under federal law. For example, an employee who works 40 hours and then takes one vacation day during the workweek would not be entitled to overtime pay under federal law.


Business Considerations

  • How Much. According to the BLS, the average number of vacation days employers give to employees with one year of service is 10 days. This increases to 14 days for employees with 5 years of service. A small number of employers offer unlimited vacation time, trusting that employees will use their professional judgment when deciding when and how much time off to take. Structure vacation programs consistent with your business needs.
  • Encouraging Use. If your business recognizes the benefits of employees taking scheduled time away from work, make sure supervisors encourage and allow employees to take earned time off. You can also adopt rules or practices that encourage employees to use their vacation time. For example, some employers put a reasonable cap on how much vacation an employee can accrue before they have to use it. In this case, employees have to “use” some of their time in order to earn any additional time. In states that permit use-it-or-lose-it policies, employers may encourage use by limiting the number of days that can be carried over into the next year.
  • Maintaining Adequate Staffing. You generally have the right to control when and how much vacation employees take at any particular time. In your policy, clearly communicate that vacations will be granted based on scheduling needs and may be restricted if necessary. Consider planning for peak periods by establishing an early deadline for submitting vacation requests. Some employers have blackout periods during which vacations are completely off limits or brownout periods when time off is restricted. Whatever strategy you choose, give supervisors guidance on handling time off requests and hold them accountable for ensuring adequate staffing levels.

If you offer your employees paid vacations, put your policy in writing and consider the topics above. To get you started, the Employee Handbook Wizard in HR 411 includes a Paid Time Off policy that you can customize to meet your business needs.

This article was originally published by ADP

This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. ADP does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog.
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