accrued vacation time

What Employers Should Know About Accrued Vacation Time Payouts

Vacation Time in America

When it comes to vacation time and more specifically, accrued vacation time, a lot of employees don’t use what’s available to them. Many employers offer accrued paid vacation time, but for whatever reason, U.S. employees are reluctant to use what they earn.

One reason is that even though the time might be available, employees tend to feel like in practice it’s frowned upon for them to take a vacation. Another reason is that employees might feel like their workload doesn’t allow them to take the time. There is also just a pervasive culture in the U.S. that taking time off isn’t necessarily a good thing.

Employers increasingly see this isn’t the case, and they want to encourage more employees to take time off and used their accrued paid time. This sounds counterintuitive at first, because wouldn’t employers want employees to be working and making money for the business?

Yes, but vacation is important too. When employees take vacations, and they return refreshed and recharged, they’re going to be more productive and more engaged. It’s good for mental and physical health, and healthy employees help create a healthy, competitive business.

There’s also the fact that if employees don’t use their paid, accrued time, their employee may end up having to pay it out if they’re fired, or they leave the company. That can be extremely expensive, and also somewhat complex.

The following are some things to know about paying out for unused vacation time by employers.

Vacation Accruals

While businesses aren’t required by federal law to provide paid or unpaid vacation time, more than 90 percent of employers do offer vacation time to their employees. Most have their own accrual schedules they create internally.

An employee might earn one vacation day a month, or they might earn a few hours each pay period they’re with the company. A lot of companies also do a tenure-based accrual system where employees can accrue more time the longer they work at a company. For the first five years there may be one accrual bracket, and then that might go up from years six through 10, and then there may be another bracket for employees there longer than that.

Companies can put a cap on how much vacation time their workers can accrue, and this is one way some employers ensure employees are using their time. For example, if an employee comes to a cap where they haven’t used all their vacation time, they might not be eligible to earn more until they use what they already have.

Use-It-or-Lose-It Policies

While federal law doesn’t say a lot about how employers should handle vacation time, state laws do in some cases. Some states allow for use-it-or-lose-it policies. This just means that if an employee doesn’t use their accrued vacation by a certain time, such as year’s end, they lose that time.

However, some states prohibit this. If an employee accrues vacation time and they don’t use it, it has to be paid out if the employee quits or is fired. In these states that don’t allow for use-it-or-lose-it policies, the vacation time an employee accrues is seen as earned wages, so to not provide a payout for unused time would be viewed as wage theft under the state law. In these states, many employers will use caps on vacation accruals, which prevents them from having to take away vacation time, but can also limit the payouts they’re responsible for when an employee leaves.

In some states, there are even more specific guidelines which outline the ratio that employers can use for these caps. It’s important for employers to know the ins and outs of their state laws regarding employee accrued vacation time.

24 U.S. states have laws that dictate how unused vacation time has to be handled. Employees in these states typically have the right to get a payout for their accrued vacation time. Some states also make it illegal to put policies in place that make employees use their vacation time within a certain time frame.

It should be noted, that sick days are different than vacation days. If an employee leaves a company or is fired, employers aren’t required even under state law to pay accrued sick time, unless it’s specifically stated in a contract.

Some of the states that prohibit use-it-or-lose-it vacation policies include California, Illinois, Maryland, Michigan, New York, Ohio and Rhode Island, among others.

Encouraging Employees To Take Vacation Time

It can be really expensive for businesses in the states requiring payouts for accrued vacation time following an employees’ separation from the company. One of the only things employers can do to avoid writing out big final paychecks is to try and encourage employees to take the vacation time they’ve earned.

It’s important not only to save on payouts, but it’s also essential for employee wellness, engagement, and productivity. The following are some tips employers can follow that don’t force employees to take their accrued vacation time, but that do encourage it:

  • Company leaders are going to have to set the example. If employers know they have vacation time available, but they don’t see company leaders taking time off, they’re going to think they shouldn’t either. So many businesses have a policy about vacation time that doesn’t reflect their actual culture. Senior management needs to lead by example.
  • Look at the promotion of using vacation time as an internal PR strategy. You want to make sure your policies are well-publicized and that everyone knows what’s available to them. Remind them that you encourage the use of vacation time, and you welcome them using it. Regularly talk about vacation time with employees, and train them on internal policies. You can also make a business case to your employees as to why you really do want them to use vacation time.
  • Have policies in place for how work gets done when employees are on vacation. An employee isn’t likely to feel comfortable taking a vacation if they think they’re going to come back to a mountain of work. Cross-training is a good way to ensure that work gets done even when a key employee is away.
  • Send out memos during the time your business wants to most encourage employees to take time off. This can help prevent scheduling conflicts related to peak seasons for the business, and of course, provide a reminder to employees that they have accrued vacation time.

Finally, consider using a self-service leave tracker that employees can access. This allows them to check and see how much vacation time they have available, and also do things like submitting requests for time off quickly and easily. A leave tracker is a good way to facilitate not only more streamlined and organized scheduling but also to encourage employees to take time off.


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