Vacations: Policies, Pay Issues, and Regulation Q&A

Q 1: We have several vacation questions. First, do we have to provide paid vacation to our employees? What do most employers do?


A 1: No, paid vacations are not required by law, absent a collective bargaining agreement or some other contract guaranteeing them. That said, nearly all organizations give their employees a period of paid vacation each year. In fact, the Society for Human Resource Management (SHRM) 2014 Benefits Survey indicates that 98% of responding employers provide paid vacation to their employees, either as a stand-alone vacation policy (40%) or as part of a paid time off plan (58%). Employers who offer paid vacation find this benefit increases productivity by giving employees time to “recharge their batteries.” In addition, paid vacation benefits help in recruiting and retaining valuable employees.



Employers often differentiate between full- and part-time employees for paid vacation. According to the Bureau of Labor Statistics “National Compensation Survey: Employee Benefits in the United States, March 2013,” only 36% of part-time employees in private industry received paid vacation. When paid vacation is provided, part-time employees often receive a prorated portion of the vacation amount allowed full-time employees, based upon a formula that takes into account the number of hours worked during the year.


Q 2: The last week of December is slow for us. Can we require employees to take vacation during our low season, or prohibit them from taking vacation during our busy season?


A 2: As a general rule, you may limit employee vacations to specific times of the year, require vacation in certain circumstances, or prohibit vacations during busy months. For example, some organizations require vacations when operations are closed for annual maintenance or in lieu of layoffs. Similarly, you could prohibit employees from taking vacation during a particularly busy period. Accounting firms often limit vacation during tax season, while retailers restrict vacations during the holiday season.


Note, however, you may have to modify these restrictions for employees on leave of absence under the Family and Medical Leave Act (FMLA). The FMLA allows employees to elect, or employers to require, the use of paid vacation for all or part of an FMLA leave. Thus, vacation used during an FMLA leave may not correspond to the employer’s normal requirements for vacation. Employees who have exhausted vacation benefits during an FMLA leave may have to take unpaid time off later because of the employer’s required vacation schedule.


Q 3: Can we limit vacation accrual?


A 3: Most states permit employers to prohibit employees from carrying over unused vacation time into the next year, though a few limit this policy. (Federal law does not address this issue.) For example, New York allows an employer to maintain a “use it or lose it” vacation policy established by employment contract or policy. In Illinois, employers generally must pay employees for unused vacation except that “an employment contract or an employer’s policy may require an employee to take vacation by a certain date or lose the vacation, provided that the employee is given a reasonable opportunity to take the vacation.”


In contrast, California courts have held that employers violate their employees’ implied contract rights when they reduce or cancel vacation pay that employees have already worked for, such as with a “use it or lose it policy.” However, California also allows employers to implement policies suspending the accrual of additional vacation once a certain level of accrued unused vacation is reached. Accordingly, you should consult state law before restricting or modifying vacation benefits.


Q 4: Do we have to pay out unused vacation time at termination?


A 4: You should check state law regarding vacation pay. Federal law does not address vacation pay at termination, but many state statutes include vacation that has accrued under the employer’s policy as

“wages” that must be paid at termination.


A few states, such as California and Illinois, require payment for accrued vacation without allowing the employer to impose any policy restrictions. So, for example, employers in these states may not establish a policy allowing for payment only when an employee leaves in good standing or meets some other prerequisite.


Certain states allow the employer to restrict vacation payments according to their policies even though they also include accrued vacation in “wages” payable at termination. For example, in Iowa, “wages” include vacation payments that are due the employee under an agreement with the employer or under the employer’s policy. Similarly, Kentucky defines “wages” to include “vested vacation” but allows employers to pay out vacation according to policy or past practice. Therefore, in these circumstances, the employee’s right to collect for vacation at termination will still depend on the specific terms of a

vacation policy or agreement.


Other states, such as Florida, Kansas, Missouri, Ohio, and Pennsylvania, do not include vacation pay as “wages” due at termination, but employers may become liable for it if they promise to pay it out under

their policies or according to past practice.


So, if you are in a state that allows employers to set policy on vacation pay at termination, you should have a policy that specifies whether employees will receive the pay, and if so, whether payment is limited to employees who leave in good standing.

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