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Vacation Leave: What Small Business Owners Need to Know

Manasa Reddigari

Vacation will be top of mind for small business employees around the country this summer. If you haven't already established a vacation leave policy for your small business, click through to learn what it is, how it can benefit your business and how to put in place one of your own.

What is vacation leave?

Vacation leave is time-off that businesses offer their employees as a benefit so that they can go on vacation, rest and relax or attend to personal matters. Generally, vacation equates to paid time-off (PTO), which means an employee is compensated for his time away from work.

However, certain firms permit unpaid leave in addition to or in lieu of PTO. Businesses with paid vacation leave policies often treat unplanned leave of absence from other types of PTO. Unplanned time away from work may include sick leave or bereavement leave.

These businesses offer a defined number of days of paid vacation to each employee that either accrue with each pay period or given automatically at the outset of the year. For these vacation leave policies, the number of days of PTO given may differ between employees with different lengths of service.

However, some firms may choose to lump vacation leave in with other types of leave in a PTO. And still, other firms have a policy of unlimited vacation leave wherein there is no strictly enforced limit on how many vacation days an employee may take each year, as long as it's within reason.

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Am I required to provide vacation leave for my employees?

Neither federal nor state law requires employers to provide either paid or unpaid vacation leave to employees. However, for government contracts to comply with the labor standards of the McNamara O'Hara Service Contract Act (SCA) or the Davis-Bacon and Related Acts (DBRA), vacation fringe benefits or vacation pay may apply to workers under the contract who work under a particular classification and who make a certain amount under the contract.

But for businesses that do offer PTO, some state statutes impose limitations on how companies design their vacation leave policies. For example, in California, businesses have to pay employees for any vacation accrued or earned when they leave a place of employment.

Similarly, California doesn't permit "use-it-or-lose-it" vacation leave policies wherein an employee is forced to forfeit his vacation upon separation from his employer. On the other hand, in Texas, businesses can lawfully create a vacation policy wherein unpaid accrued vacation leave can be forfeited by the employee upon his separation from employment.

Why should I offer my employees PTO?

There's a reason why 76 percent of workers in the private sector receive paid vacation leave despite no legal mandate compelling their employers to offer it. Giving employees paid time to rest and recuperate is a win-win. It makes employees happier and businesses more productive and prosperous. In fact, a study completed by Oxford Economics indicated that if employees took one extra day of earned leave each year, it would result in a whopping $73 billion for the U.S. economy.

How do I design a vacation leave policy?

Decided to implement a formal policy that allows your employees a chance to rest and recover? Here are the four main policy features you should consider:

  • Policy type: You can establish a traditional, bank or unlimited vacation policy. With traditional plans, the most common, vacation leave is but one category among many types of PTO. With bank policies, an employee draws vacation leave from a lump sum of PTO. Unlimited leave policies don't strictly allocate a set minimum or a maximum number of vacation days.
  • Amount of vacation leave: For traditional and bank vacation leave policies, you'll need to establish whether the amount of vacation days is flat (same for all employees) or tiered (varies by tenure). If you choose a tiered system, you'll also need to decide on a specific number of days of vacation employees at various tiers of tenure will receive. Be aware that private industry workers receive an average of ten days of PTO after a year of service, according to BLS statistics.
  • Earnings model: Decide whether vacation leave accrues each pay period or automatically granted to employees at the beginning of the calendar year or the employee's anniversary with the company.
  • Unused days: Do you want to allow employees to carry over unfulfilled PTO? Or forfeit them at the end of the year (a use-it-or-lose-it policy)? Keep in mind that depending on which state you live in, a use-it-or-lose-it policy may not be allowed.

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