Small Business Vacation Policies

LAST REVIEWED Apr 03 2019 9 MIN READ

By The Human Interest Team

Over 25% of workers say vacation time and paid time off are the most important non-salary factors when considering a job offer, according to Accountemps. Knowing that time off is something employees seek, it’s surprising to learn that research from Project Time Off indicates that employees left a total of 658 million vacation days unused in 2015.

Why would employees not use their time off? Some employees (65% according to the report) said they don’t take time off because they don’t hear about, receive mixed messages, or are discouraged from taking time off. At smaller companies and startups, employees may even feel more pressure to not take time off as needed due to a larger relative contribution to the business, as opposed to if they worked at a big corporation.

To ensure your employees take the time off they need to be productive, you need to select a model and create a policy that works for both employees and your small business.

Select a vacation policy: Traditional, bank system, unlimited

There are several ways you can handle time off. When considering these options, look at what will work for your company as well as how your competitors or other employers in the area handle time off in their organization. This will help you determine a reasonable, and competitive, time off model for your business.

Traditional policies offer paid time off (PTO) for specific categories such as vacation, sick and personal days. According to SHRM’s Paid Time-Off Benefits Survey, 46% of small businesses use the traditional model for time off.  

Paid time off banks group days off into one sum and employees may use the “bank” of time as needed for sick, personal, or vacation days. Top reasons for why this type of plan appealed to employers surveyed by WorldatWork included recruiting benefits, ease of administration, and cost savings.

Unlimited time off puts discretion for the amount of time off used in employees’ hands. It’s an approach that’s popular with some startups like those in this article. But one business management author argues that unlimited time-off negatively impacts employees:

“Unlimited paid time off is a publicity stunt,” writes Marks. “Most companies know that their best employees aren’t going to take advantage of it. And by leaving the policy open and ‘up to the employee’ managers are now creating a different kind of competitive environment, one that encourages taking less time off, rather than more. This type of silly policy doesn’t benefit the employee. It actually benefits the employer more. It creates more competition to take fewer days off.”

Unlimited time off can be done, but it requires some upfront work. Here’s a related article: Unlimited Paid Time Off for Startups: Pros and Cons

Create a clear policy

Once you’ve determined the time off model you’ll use, you need to create a policy that outlines the time period for your policy, how days are awarded, a structure for the number of days allotted, and how to handle unused days.

Select a time period:

  • Anniversary year: time off is based on the date the employee started work with the company.

    • Disadvantage: you must administer and manage based on many individual dates of hire.

  • Calendar year: distribute time off on an annual basis, rather than managing multiple start dates.

    • Disadvantage: you’ll need to pro-rate time off based on the calendar date of hire for the first year.

Determine time off award method:

  • Grant: time off award is made at the beginning of anniversary or calendar year.

    • Disadvantage: if someone leaves, you may need to payout a large grant balance of unused time off.

  • Accrual: time off accumulates at a specific rate (e.g., one day per 40 hours worked), or after a specific amount of time post-hire.

    • Disadvantage: newer employees want to receive a time off balance rather than waiting for it to accrue.

Define amount of days:

  • Tiered: the amount of time off given is dependent on allotments for different groups of employees (e.g., tiers based on tenure).

    • Disadvantage: there is the potential for negative perceptions about who receives more time off.

  • Flat: time-off is the same amount for all employees regardless of tenure or position.

    • Disadvantage: employees won’t be enticed to stay.

Plan for unused days:

  • Carryover: depending on state law some employers allow unused days to carry over to the next year, but limit the number of days and specify a timeframe in which they must be used.

    • Disadvantage: this requires administrative time and effort to manage.

  • Payout: depending on state law, you may need to pay out accrued (or granted) time-off when the employment relationship ends.

    • Disadvantage: if unpaid time off balances are large, the payout can be significant.

Note that some states have time off policy requirements specifically around unused time off. Currently there are 24 states with laws regarding payment of accrued vacation time  This article is a great place to start if you’re wondering about any vacation payout requirements in your state. The best approach is to solicit advice and input from a local HR or legal professional when creating your policy.

Find the right vacation policy for your small business

Decisions about your time off policy depend on your employee population, geographic location, industry, and your budget. Federal law doesn’t stipulate that employers provide paid time off. That doesn’t mean small business owners shouldn’t offer it as a benefit, but you should help employees understand the benefit you’re providing.

A successful policy offers employees a benefit that helps them meet personal needs and encourages everyone to seek work-life balance. Clear communication from your leaders about the importance of taking time away from work makes it more likely that employees will take advantage of this benefit and make the most out of the total pay package you offer. With the right plan, employers can have a positive impact on employees’ lives while still hitting your business goals.

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