How can you make your vacation policy work best for your company?

For starters, take inventory. Many vacation policies have been built in pieces over the years. Companies should study the policies they already have in place and make sure they still meet the needs of their employees. In some cases, the way in which various time-off program segments are combined can make a significant impact on costs and employee productivity.


Identify the totality of time-off program costs and establish a formal tracking plan. Once companies have a comprehensive inventory of their vacation policies, they need to identify all the related costs and establish a formal plan for tracking and managing them.


Keep up with current trends in offering vacation benefits. A less generous vacation policy may make it difficult to hire new employees or keep current ones, while a more generous vacation policy can be a valuable recruiting tool.


Know the differences in state law. In some states, accrued but unused vacation cannot be forfeited; in others, it can. Employers must plan ahead and understand that state law will differ depending on where they operate.


If vacation is not forfeited, then employers might consider capping the carry-over of accrued vacation time. When employees reach a certain number of hours, an employer may stop them from accruing more until they take vacation, depleting their balance. This helps control vacation accrual and encourages employees to take their earned time off. However, this approach should be balanced against the employee-relations benefit of having a vacation policy with no cap, which rewards committed workers.


Lastly, understand your rights. Subject to state and federal law, employers generally have the right to force vacations when employees accumulate a specific amount of time off or when they want to achieve certain business needs. Also, employers generally have the right to deny vacation time. If four people in a department all want time off in the same week, it could create a business hardship, so employers may have the right to deny time off as appropriate.


Options for unused vacation time. Many employers maintain vacation programs under which an employee is entitled to a specified amount of paid time off each year based

on his or her years of experience. If the vacation time is not taken by year-end, employers usually adopt one of three strategies, as permitted by state law: unused vacation is

forfeited; the employer pays the employee the equivalent of the unused vacation; or some or all of the unused days are carried over to the next year. Some employers are creative with their vacation policies. They may use a vacation buy-back program (as permitted by state

law), which typically affords an employee the opportunity to cash out his or her unused vacation benefits. This may incentivize employees to work rather than take unnecessary vacation. Others use vacation-donation programs, which lets workers donate their accrued vacation

hours to fellow employees who have experienced a catastrophic illness or injury and who have exhausted all their accrued time, resulting in a prolonged, unpaid leave of absence. The program is a positive employee-relations tool that supports workers who want to help their colleagues.


Pay at time of separation. Accrued vacation pay may be given to a terminating employee. Some states require it, and some do not. Be sure to check your state’s laws to know your rights.


What factors should be considered when designing or redesigning a vacation policy? What follows is a categorized list of questions to answer that will assist in the design or redesign of a vacation policy:



• How is the amount of vacation each employee receives determined?

• Do part-time staff earn vacation?

• If so, is it earned under the same entitlement as full-time staff?

• Is there a difference in entitlement based on rank (e.g., between managers and non-management staff)?

• Is there a relationship between seniority and amount of vacation received?

Pay calculation

• If an employee routinely receives a special pay, like shift differential, will that also be paid during vacation?

• On what basis is vacation pay calculated for employees who do not work regularly scheduled hours?


• How are vacations scheduled?

• What if more employees than an employer can afford to have absent want vacation at the same time?

• Are there times during the calendar year that vacation must be taken or cannot be taken?

• Is there a waiting period before a new employee can take vacation?

• Can an employee split vacation and/or take it in daily or hourly increments?


• Can vacation entitlement be carried over from year to year?

• If yes, is there a maximum amount of either the total accumulation or the amount that can be carried over from one year to the next?

• Can an employee take all of his or her earned vacation at one time, which could be three or four weeks, or is the

employee limited to a certain amount of time?

Vacation time is an opportunity for workers to rest and return to work rejuvenated.

Time off can increase productivity, boost morale and instill

an appreciation for the benefits of working for a company.

Not surprisingly, vacation time has become a practically

universal benefit. Almost all employers offer it, and it’s

usually paid. In fact, a Bureau of Labor Statistics survey of

private industry shows that a large majority of employees

are given paid vacations.


Here is the breakdown:


• 77 percent of all workers

• 91 percent of full-time workers

• 37 percent of part-time workers

• 87 percent of workers in management, professional and related occupations

• 59 percent of workers in service occupations

• 87 percent of unionized workers

• 76 percent of nonunionized workers

• 70 percent of workers in small establishments (less than 100 workers)

• 85 percent of workers in larger establishments (100 or more workers)

Certainly, a lot of thought and preparation goes into creating an effective, rewarding company vacation policy. More than just a payroll processor, ADP TotalSource® provides clients with the latest human-resources advice on a wide variety of issues, including programs for employees’ time off. ADP TotalSource can work with employers to achieve a state-compliant vacation policy and assist them with tracking time off. Visit or call 800.447.3237 to learn more.

As seen in TotalSource® magazine, The Bottom Line.

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