Dear Littler: We Need a Vacation from Our Vacation Policy

Dear Littler,

Recently I became the Chief Financial Officer at a growing company. We are in solid financial shape, but I have concerns about financial liability the company is carrying on its books in the form of unused vacation. In the coming years, our plan is to open new locations in multiple states and to increase employee headcount. Our industry is competitive, so to succeed in these new markets we need to attract top talent. My benefits people tell me this means our company perks – including vacation – need to stand out (FWIW, we also offer paid sick leave that we use to comply with any legal mandates). I want to be generous with our employees, but also need to ensure that the company is stable enough to support itself – and our employees – when economic times are tough. I want to repackage our vacation policy in a way that doesn’t result in employees’ packing their bags, but the whole thing is stressing me out. I need a vacation from our vacation policy!

—Chief Worrying Officer

Dear Chief,

You are right to worry about financial liabilities your company is carrying while also worrying about your employees. In many states, vacation pay can feel like both a benefit and a burden for employers. But worry not, this isn’t our first trip to “vacationland.” Below are some potential things to consider when constructing your vacation policy “itinerary.”

Wear Sunscreen to Protect Against Endless Summers (Use Caps): During a vacation, there are not enough hours in the day to do or see everything that’s on offer, but that limitation helps vacationers prioritize what to do with their time. Similarly, limiting how much vacation employees can accumulate – in a year and overall – can help your company control costs and focus employees on actually taking the vacation they have amassed. When deciding how generous your vacation benefits should be to attract talent, be sure to also consider how much vacation the company is okay with employees using each year, given the demands of your business and operational considerations. If the amount advertised to applicants differs from the amount employees can realistically use, the company might find itself with an employee morale and retention problem (and will continue to experience its current vacation balance issue). 

Apart from statutory paid leave laws (e.g., mandatory sick and safe leave or paid time off), state laws, labor departments, and courts mostly leave employers to decide how much vacation they will permit their employees to accumulate. Keep in mind, however, that some state and local agencies might have opinions concerning how much vacation employees should be able to bank overall, and that figure could be a multiplier of the amount of vacation they accumulate each year under your policy. Accordingly, when setting accrual limits to include in your policy, consider how each cap (annual and overall) relates to the other.

Take Tours Yourself & Become a Tour Guide (Use Leave & Lead by Example): There are countless articles about how bad Americans are at using vacation as a cultural matter. If your employees are sitting on a mountain of vacation hours, this might be why. There are also (too) many articles about U.S. employees who never missed a day of work during decades of employment. This too is cultural, and it might be worth discussing whether this act is heroic or harmful, not only to the employee but also the company. Showing up is important to a business, but being present by itself is less beneficial than being productive. Employers offer vacation so employees have the opportunity not to work and to recharge, so that when they do return to work they are able to give 100% to their job (during working hours). If employees are not taking advantage of vacation offered – especially if those benefits are generous – the employer may feel as if the employee has taken advantage of it by being paid out for all unused vacation at the employee’s final rate of pay (under state law or the vacation policy). In essence, the employee treated vacation not as a benefit to use during employment, but as a financial windfall to experience after employment ended (like a quasi-401(k) where the employee “invested” each hour accrued and saw its value increase over time due to non-use).

What to do, then, when employees will not use their vacation? One option might be to require them to use it, even if they do not want to do so. With the right language and notice to employees, a policy could empower an employer to decide when vacation can be used upon an employee’s request, and when vacation must be used at the employer’s direction. Depending on the nature of a business, another option might be designated “shutdown” periods when either the entire company is on vacation or specific departments or units are. Or, the employer might consider, similar to open enrollment with health benefits, a specific period of time each year during which employees must select (available) future dates on which they will take vacation.

Fostering an environment in which employees are encouraged to use vacation is a good way to ensure they actually use it. That requires management – including those in the C-Suite like you, Chief – to set an example. Take a vacation! If employees see leadership taking time away from work, that signals it’s okay for them to take time off. In addition to the general health and wellness benefit of disconnecting, it could also help eliminate – or at the very least minimize – potential concerns a state labor department might have with your company’s overall vacation cap. If employees regularly use leave, the odds of them “capping out” should be reduced. And if they’re nowhere near the cap because of use, that means the company would not be carrying on its books anywhere near the amount of potential financial liability for unused vacation that might be cause for concern.

What to Do If You Miss the Last Ferry (Revisions): Sometimes you are enjoying yourself so much that you lose track of time. If this happens during a day trip someplace with only one mode of transport in and out, and you miss the last ride, you need to make alternative plans, and fast. Some companies experience a similar sense of panic when they realize that the reality of their vacation policy differs from their plans; oftentimes, it’s how much vacation employees have not used and its monetary equivalent. It’s like leaving with one carry on, returning with an entire set of luggage, and now it’s time to unpack. Because in certain states vacation is treated as a vested benefit, your company may not be able to simply bin the baggage (i.e., wipe excess vacation off your books). But you may consider telling employees that their vacation “suitcases” are full and that they will not be able to accumulate additional hours until they reduce their balance below a certain limit, which you might set at a number (considerably) lower than the overall amount of vacation employees were able to accumulate in the past. If you go this route, be aware that some states require a specific amount of notice to employees before companies can change their vacation policies (advance notice is smart regardless of whether it’s required), and for changes to occur only prospectively. In some states an employer may be able to take a middle-ground approach and cash out a certain set amount of vacation. Although a preemptive payout or pay-down could be a significant one-time expense, in the long term it might end up being more cost-effective because of how the current value of those hours compares to what they would be worth if employees continue holding onto them for years and cash them out later, when they are earning a higher hourly (equivalent) rate.

Buckle Your Seatbelts for Takeoff (Final Thoughts): Chief, it seems like it’s time for your current policy to depart. Whichever course you set, we hope it’s a safe, smooth, and enjoyable flight for your company and employees. At times things might feel turbulent, but if you stay true to your flight path we are confident you’ll land at your intended destination (maybe even ahead of schedule). If you need any additional navigational assistance, we’ll be in the compliance control tower.