State:

National
Although there is no federal law that entitles private sector employees to paid or unpaid vacation, most employers do give employees a paid vacation, and most employees consider it to be one of their most important benefits. There is a growing body of state law--both statutes and court decisions--that does govern how employers administer vacation time, including whether and how much employees must be paid at termination for accrued but unused vacation.
Employers must know their own state laws in order to develop a comprehensive policy covering eligibility, accrual, carryover, forfeiture, administration, pay upon termination, and integration of vacation policy with other state laws, and to ensure strict compliance and consistency of administration. The policy should be communicated to employees at the time they begin work (in a number of states, this is required).
Accrual is simply the particular method by which vacation time is accumulated; in most states, employers may set accrual methods up however they wish. Many companies require employees to work a certain number of months before earning any vacation credits.
Following is one method (there are many) of determining accrued vacation during an employee's first year.
No vacation days are earned during the first 2 months of employment. After this 2-month period, 1 day of vacation is earned for each full month worked, up to a maximum of 10 days for that calendar year. More than 50 percent of a month may be counted as 1 month for these purposes. Before the completion of 6 months of service, only accrued vacation days may be taken. On January 1 of the following calendar year, each employee who has then completed 6 months of service will again earn 1 day per month up to 10 days. After January 1 following the completion of a full year of service, the following schedule applies:
Length of Service as of January 1Days Accrued
1 through 4 years10 days
5 through 10 years15 days
11 years 16 days
12 years17 days
13 years18 days
14 years19 days
15 years20 days
In this way, the new employee effectively earns no vacation during the first 2 months of employment, and 1 day of vacation for each full month thereafter, up to a maximum of 10 days in the first year. After 5 years of employment (or whatever period of service is required), employees can then earn 11/2 days per month up to a maximum of 15 days.
Note: To avoid confusion, it is essential to have a cutoff day (e.g., June 30 or December 31) when vacation accrual for that year ceases.
Employers should decide and communicate in advance whether they will allow vacation days to be carried over, how many, and for how long. It is perfectly acceptable to have a different or more generous vacation policy for professionals, managers, or supervisors.
Employers that incorporate vacation policies into a flexible benefits plan may allow workers to “sell” vacation days in exchange for other benefits or “buy” vacation days by giving up other benefits. For instance, an employee with a working spouse who has good medical coverage might give up some of his or her medical insurance in exchange for an extra week's vacation. Or an employee with small children might “sell” back some time in exchange for a child care subsidy. There are endless possible combinations, and employees like the freedom of choice. While a benefits program of this kind can be difficult to administer at first, if structured correctly, it may come at little additional cost to the employer. On the other hand, it is very important for employees to take vacation time and use it to rest and recover and not think about work; employers should encourage them to do so.
Some other common vacation practices include:
• Granting employees an extra day's pay, or an extra day's credit, if a holiday falls during a vacation
• Substituting sick leave if employees suffer an extended illness during vacation
Note: The IRS has ruled that employees in a particular company could transfer unused vacation pay to their 401(k) plans. However, the ruling applied only to the company that requested it, and very few companies qualify to implement such a method under 401(k) plan restrictions. So far, this is not a viable option for most employers.
Some large employers mandate that their employees take extra time off as vacation without pay in order to cut corporate costs without resorting to layoffs. Some employers require only a few days; some make their unpaid leave programs voluntary; and some ask employees if they are interested in taking the summer off--without pay, but with full benefits and a guaranteed return to their jobs. Another option is to work part time during the summer with half pay and full benefits.
Employers that wish to force leave must be sure that no policy prohibits the company from designating leave time and should have policies stating that employee leave must be taken at times convenient to the company.
The federal FMLA requires employers to provide up to 12 weeks of unpaid leave to eligible employees for a variety of reasons related to family and medical care. Generally, leave taken under the federal FMLA is unpaid. However, employees may be eligible to receive money or pay while they are on FMLA leave by substituting paid vacation, sick, personal, or other paid leave time for unpaid FMLA leave time. FMLA regulations provide that if an employee chooses to substitute accrued paid leave for FMLA leave, he or she may do so. If an employee does not choose to substitute accrued paid leave, the employer may require the employee to substitute accrued paid leave for unpaid FMLA leave pursuant to the employer’s established policies for use of paid leave.
For example, an established employer-paid vacation policy could require that vacation must be used in minimum increments, as follows:
Under an employer’s policy, paid vacation leave can be used only in 8-hour increments. If an employee has a 2-hour FMLA absence, the employee can choose to take 8 hours of FMLA leave and receive vacation pay for the entire time, or the employee can choose to take 2 hours of unpaid FMLA leave. If the employer requires the substitution of paid time off while on FMLA leave, the employer must waive its 8-hour minimum increment rule and permit the employee to use 2 hours of vacation for the 2-hour FMLA absence.
The employer may require that an employee comply with its established leave policies for use of paid leave, even if they are more (or less) stringent than the FMLA’s rules. However, when an employee chooses, or an employer requires, substitution of accrued paid leave, the employer must inform the employee that he or she must satisfy any procedural requirements of the paid leave policy only in connection with the receipt of such payment. This notice is provided in the federal Form WH-381 (Eligibility and Notice of Rights and Responsibilities). If an employee does not comply with the additional requirements in an employer’s paid leave policy, the employee is not entitled to substitute accrued paid leave, but the employee remains entitled to take unpaid FMLA leave.
Some employers are opting for Paid-Time-Off (PTO) programs, believing that such programs cut down on unscheduled absences. A PTO program combines days off, which would otherwise be set in fixed allotments (i.e., vacation, sick time, personal days, and holidays), into a bank or pool. Employees may take as many days as they need within the employer's cap or limit, for any reason. The concept of a specific number of sick days or vacation days is omitted; the employee does not have to make a choice, and the employer does not have to determine whether the choice is legitimate.
PTO leave banks may be fashioned in any number of ways. Some questions the employer should decide are:
• What types of absences will be included? For example, will the absences include simply sick, vacation, and personal time, or will jury duty, educational time, or funeral leave be included?
• How many days will be available?
• What happens to unused leave at the end of the year?
• What about when an employee terminates with time remaining in the bank?
Some state laws consider vacation time the equivalent of wages; therefore, it must be paid at termination. In some states, court decisions have said that if an employer offers paid vacation and the employee has earned it by working through the accrual period, the time must be compensated at termination. A number of states prohibit accrued vacation time from being lost (“forfeited”) for almost any reason. Some states do not require that unused vacation be compensated at all. Some employers opt to compensate unused vacation regardless of the law, or under certain specified circumstances.
According to surveys of employee benefits, standard vacation practice for employers is:
Two weeks. Employees receive 2 weeks of vacation after 1 year of work.
Three weeks. Most employers require employees to work for 5 full years to qualify for 3 weeks of vacation.
Four weeks. Most employers require 10 or more years of work to qualify for 4 weeks of vacation.
Five weeks. About one-third of survey respondents offer a fifth week, but more than half of them make eligibility conditional on 20 or more years' service.
Reviewed February 2016.
Related Topics:
National
Although there is no federal law that entitles private sector employees to paid or unpaid vacation, most employers do give employees a paid vacation, and most employees consider it to be one of their most important benefits. There is a growing body of state law--both statutes and court decisions--that does govern how employers administer vacation time, including whether and how much employees must be paid at termination for accrued but unused vacation.
Employers must know their own state laws in order to develop a comprehensive policy covering eligibility, accrual, carryover, forfeiture, administration, pay upon termination, and integration of vacation policy with other state laws, and to ensure strict compliance and consistency of administration. The policy should be communicated to employees at the time they begin work (in a number of states, this is required).
Accrual is simply the particular method by which vacation time is accumulated; in most states, employers may set accrual methods up however they wish. Many companies require employees to work a certain number of months before earning any vacation credits.
Following is one method (there are many) of determining accrued vacation during an employee's first year.
No vacation days are earned during the first 2 months of employment. After this 2-month period, 1 day of vacation is earned for each full month worked, up to a maximum of 10 days for that calendar year. More than 50 percent of a month may be counted as 1 month for these purposes. Before the completion of 6 months of service, only accrued vacation days may be taken. On January 1 of the following calendar year, each employee who has then completed 6 months of service will again earn 1 day per month up to 10 days. After January 1 following the completion of a full year of service, the following schedule applies:
Length of Service as of January 1Days Accrued
1 through 4 years10 days
5 through 10 years15 days
11 years 16 days
12 years17 days
13 years18 days
14 years19 days
15 years20 days
In this way, the new employee effectively earns no vacation during the first 2 months of employment, and 1 day of vacation for each full month thereafter, up to a maximum of 10 days in the first year. After 5 years of employment (or whatever period of service is required), employees can then earn 11/2 days per month up to a maximum of 15 days.
Note: To avoid confusion, it is essential to have a cutoff day (e.g., June 30 or December 31) when vacation accrual for that year ceases.
Employers should decide and communicate in advance whether they will allow vacation days to be carried over, how many, and for how long. It is perfectly acceptable to have a different or more generous vacation policy for professionals, managers, or supervisors.
Employers that incorporate vacation policies into a flexible benefits plan may allow workers to “sell” vacation days in exchange for other benefits or “buy” vacation days by giving up other benefits. For instance, an employee with a working spouse who has good medical coverage might give up some of his or her medical insurance in exchange for an extra week's vacation. Or an employee with small children might “sell” back some time in exchange for a child care subsidy. There are endless possible combinations, and employees like the freedom of choice. While a benefits program of this kind can be difficult to administer at first, if structured correctly, it may come at little additional cost to the employer. On the other hand, it is very important for employees to take vacation time and use it to rest and recover and not think about work; employers should encourage them to do so.
Some other common vacation practices include:
• Granting employees an extra day's pay, or an extra day's credit, if a holiday falls during a vacation
• Substituting sick leave if employees suffer an extended illness during vacation
Note: The IRS has ruled that employees in a particular company could transfer unused vacation pay to their 401(k) plans. However, the ruling applied only to the company that requested it, and very few companies qualify to implement such a method under 401(k) plan restrictions. So far, this is not a viable option for most employers.
Some large employers mandate that their employees take extra time off as vacation without pay in order to cut corporate costs without resorting to layoffs. Some employers require only a few days; some make their unpaid leave programs voluntary; and some ask employees if they are interested in taking the summer off--without pay, but with full benefits and a guaranteed return to their jobs. Another option is to work part time during the summer with half pay and full benefits.
Employers that wish to force leave must be sure that no policy prohibits the company from designating leave time and should have policies stating that employee leave must be taken at times convenient to the company.
The federal FMLA requires employers to provide up to 12 weeks of unpaid leave to eligible employees for a variety of reasons related to family and medical care. Generally, leave taken under the federal FMLA is unpaid. However, employees may be eligible to receive money or pay while they are on FMLA leave by substituting paid vacation, sick, personal, or other paid leave time for unpaid FMLA leave time. FMLA regulations provide that if an employee chooses to substitute accrued paid leave for FMLA leave, he or she may do so. If an employee does not choose to substitute accrued paid leave, the employer may require the employee to substitute accrued paid leave for unpaid FMLA leave pursuant to the employer’s established policies for use of paid leave.
For example, an established employer-paid vacation policy could require that vacation must be used in minimum increments, as follows:
Under an employer’s policy, paid vacation leave can be used only in 8-hour increments. If an employee has a 2-hour FMLA absence, the employee can choose to take 8 hours of FMLA leave and receive vacation pay for the entire time, or the employee can choose to take 2 hours of unpaid FMLA leave. If the employer requires the substitution of paid time off while on FMLA leave, the employer must waive its 8-hour minimum increment rule and permit the employee to use 2 hours of vacation for the 2-hour FMLA absence.
The employer may require that an employee comply with its established leave policies for use of paid leave, even if they are more (or less) stringent than the FMLA’s rules. However, when an employee chooses, or an employer requires, substitution of accrued paid leave, the employer must inform the employee that he or she must satisfy any procedural requirements of the paid leave policy only in connection with the receipt of such payment. This notice is provided in the federal Form WH-381 (Eligibility and Notice of Rights and Responsibilities). If an employee does not comply with the additional requirements in an employer’s paid leave policy, the employee is not entitled to substitute accrued paid leave, but the employee remains entitled to take unpaid FMLA leave.
Some employers are opting for Paid-Time-Off (PTO) programs, believing that such programs cut down on unscheduled absences. A PTO program combines days off, which would otherwise be set in fixed allotments (i.e., vacation, sick time, personal days, and holidays), into a bank or pool. Employees may take as many days as they need within the employer's cap or limit, for any reason. The concept of a specific number of sick days or vacation days is omitted; the employee does not have to make a choice, and the employer does not have to determine whether the choice is legitimate.
PTO leave banks may be fashioned in any number of ways. Some questions the employer should decide are:
• What types of absences will be included? For example, will the absences include simply sick, vacation, and personal time, or will jury duty, educational time, or funeral leave be included?
• How many days will be available?
• What happens to unused leave at the end of the year?
• What about when an employee terminates with time remaining in the bank?
Some state laws consider vacation time the equivalent of wages; therefore, it must be paid at termination. In some states, court decisions have said that if an employer offers paid vacation and the employee has earned it by working through the accrual period, the time must be compensated at termination. A number of states prohibit accrued vacation time from being lost (“forfeited”) for almost any reason. Some states do not require that unused vacation be compensated at all. Some employers opt to compensate unused vacation regardless of the law, or under certain specified circumstances.
According to surveys of employee benefits, standard vacation practice for employers is:
Two weeks. Employees receive 2 weeks of vacation after 1 year of work.
Three weeks. Most employers require employees to work for 5 full years to qualify for 3 weeks of vacation.
Four weeks. Most employers require 10 or more years of work to qualify for 4 weeks of vacation.
Five weeks. About one-third of survey respondents offer a fifth week, but more than half of them make eligibility conditional on 20 or more years' service.
Reviewed February 2016.
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