Many factors affect accurate payroll processing such as hours worked, applicable taxes, and HR benefits. One such HR benefit is paid vacation time for employees. Correct processing of vacation hours can impact an employees paycheck. Here is a question and answer format which provides beneficial information to consider on vacation benefits and how it affects payroll processing.
Another employer asks, “Many of our employees rarely use their vacation time, so they rack up weeks and weeks of unused vacation. This really hurts us when they leave because we often owe them big amounts for the unused vacation. Should we adopt a use-it-or-lose-it vacation policy?”
A. Generally, under “wage and hour” laws and court decisions, employers don’t have to give their employees a paid vacation benefit. But if employees earn paid vacation under an organization’s established policy, the employer owes them the paid vacation or paid wages in lieu of the vacation.
Two Reasons Employers Usually Give Employees a Paid-Time-Off Benefit:
1. To attract and keep qualified employees. By having an attractive benefit package (including paid vacation) employers stay competitive with other employers in their field.
2. To refresh and recharge employees. Employees need a break from work. Granting them paid time-off for vacations gives them a chance for rest and relaxation. They’ll come back to work refreshed.
Before examining the use-it-or-lose-it issue, consider these questions:
- Do you allow employees to carry over vacation time from one year to the next? If so, how much? If you don’t allow carryover, do you pay your employees for any unused vacation time? (Note: Does your state require employers to pay employees for earned unused vacation? Generally, courts view earned vacation pay as “compensation due” the employee. Courts take a dim view of employers who promise employees paid time off and then take it away.)
- How will you treat holidays which fall during an employee’s vacation? Will they get an extra day off?
- Will you allow pay in lieu of taking vacation time? Will you require employees to take some vacation each year?
A Use-It-or-Lose-It Policy
So keeping these considerations in mind, how about telling employees they will lose accrued, earned vacation unless they use the vacation by a certain date or within a certain, limited time? This is a risky policy at best, and in some states it is not legal.
For example, some years ago, in California, a terminated employee sued his employer for $24,200 because of a use-it-or-lose vacation policy. The employee claimed he had 22 weeks of unused vacation accumulated over 13 years in two separate stints at the company. The California Court of Appeals declared the policy a violation of state laws protecting employee’s wages. (When an employer promises an employee vacation, this becomes part of the employee’s compensation for time put in. Even though vacation is deferred — earned now, taken later — it is compensation due the employee.) The California court said an employer can’t promise employees vacation and then take it away, even if the employer has a policy in it’s employee handbook stating this is how it will be done.
Other Approaches to Consider
Employers have options other than a use-it-or-lose-it policy. Here are three:
1. Allow carry over of unused vacation time, but put a lid limit (for example, 80 hours) on the total hours an employee can earn and accrue.
2. Require employees to take some vacation time each year (for example, one week).
3. If at the end of a year, an employee has accrued the maximum vacation time and taken the required time off but still has some unused time, then pay that employee for unused days.
Be sure to check your state’s law to determine if the options or policies you choose are permitted.
[NOTE: Information and guidance in this story is intended to provide accurate and helpful information on the subjects covered. It is not intended to provide a legal service for readers’ individual needs. For legal guidance in your specific situations, always consult with an attorney who is familiar with employment law and labor issues.]