There is no federal law that entitles private sector employees to paid or unpaid vacation; nonetheless, most employers do give employees time off for vacation, and employees generally consider this to be one of their most important benefits.

Though there is no federal vacation law, there is a steadily growing body of state law—an amalgam of statutes and court decisions—that controls how employers administer vacation time, including whether and how much employees must be paid at termination for accrued but unused vacation.

Employers must know the laws in their state(s) of operation in order to develop a comprehensive, compliant 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.

Accrual is simply the particular method by which vacation time is accumulated; employers may generally set vacation accrual methods however they wish.

For example, some organizations provide all vacation time in a lump sum at the beginning of the calendar year or upon an employee’s anniversary date. Others prefer to have vacation accrue steadily throughout the year—with hours of paid leave earned with each pay period. Some organizations require new employees to work a certain number of days before earning vacation time, while others may offer generous leave benefits immediately upon hire for an attractive sign-on incentive.

(Note: This guidance is specific to vacation time; time off that is to be used for illness may be subject to additional requirements under state and local law.) Additional information on sick leave requirements is available.

Policy example: The following is an example of one method (there are many) of determining vacation accrual during an employee's first year and beyond:

During the first 60 days of employment, no vacation time is earned. Upon completion of the initial 60-day period, vacation is accrued on a pro rata basis, per pay period, according to the following schedule.

In this example, a new employee earns no vacation during the first 60 days of employment and then begins accruing vacation on a pro rata basis (approximately 6.6 hours per month) thereafter, up to a maximum of 10 days per year. Upon 5 years of employment, the accrual rate increases—and the rate may then increase further for subsequent years of service, up to a maximum of 20 days per year for the longest-tenured workers. 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 different job classes and categories—for example, professionals, executives, managers, or supervisors.

Just as employers are generally free to set an accrual method that best suits their organizations’ needs, employers also have wide latitude in other vacation policy areas.

In recent years, a growing number of employers have begun thinking outside the traditional idea of “2 weeks’ vacation” and, instead, have experimented with different vacation arrangements as a strategic tool—a tool to improve competitive recruitment, to reduce turnover in newer hires, and to find the perfect balance of regular work with regular rest and rejuvenation to keep employees engaged, passionate, and focused.

One trend in vacation and paid leave policy is the idea of open leave, sometimes also referred to as flexible leave or unlimited vacation. An unlimited vacation policy is just that—unlimited. Rather than have employees earn a maximum number of days off per year based on tenure with the organization, employees with open leave are permitted to take all the leave they need, for any reason, as long as their work gets done. Leave requests are typically subject to each employee’s immediate supervisor’s approval.

Though it may sound like a recipe for employee abuse and an understaffing disaster, employers often derive considerable benefit from unlimited vacation policies as there is no responsibility to track accrued leave—and generally no liability to pay out such accrued leave as wages upon an employee’s departure from the organization. The concept can also be quite attractive to new hires, who no longer have to put in several years of tenure with the company in order to comfortably take time off without fear of running out. (On the other hand, longer-tenured employees may resent a shift to an unlimited vacation policy.)

However, one downside to unlimited vacation can arise in an unexpected way—when employees are no longer earning or accruing vacation hours as part of their regular pay, workers may lack an idea of how much “unlimited” time is reasonable to take, so they actually take fewer days off. Similarly, when vacation time is “unlimited,” employees and managers alike can lose the sense of respect for and entitlement to time off, defeating the purpose of a restful reset away from the office. In many cases, the hardest-working employees—the ones most in danger of leaving and most in need of time off—will be the least likely to unplug.

For these reasons, some employers that have tested unlimited vacation policies have later reverted to the accrual method, finding that the unlimited vacation option didn’t achieve the intended goal. Of course, other employers have successfully adopted unlimited vacation and have enjoyed the ease of administration it provides.

If considering this type of policy in your workplace, it is important to train management on the benefits of vacation and to ensure that vacation requests are approved fairly and consistently. Some employees will request, and receive, more time off than others—this is unavoidable—but it’s critical that all employees be assured a reasonable, uninterrupted break away from the workplace in order to remain engaged and focused.

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 childcare 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, as noted above, 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 employers, particularly in manufacturing industries, may impose a period of mandatory vacation—often without pay—to serve business operations needs.

For example, some manufacturers will shut down all line operations for 1 week or 2 in the summer and/or winter months to allow equipment maintenance, retooling, updates, and other operational needs. Similarly, some small businesses may find it more cost-effective to close entirely during holidays or times of low revenue. Mandatory vacation without pay may also be a means for employers to reduce corporate costs without resorting to layoffs.

The details of these mandatory vacations, shutdowns, or furloughs will vary based on the reason and organization. Some employers require only a few days, some make the unpaid leave program voluntary, and some ask employees if they are interested in taking the summer off—without pay, but with benefits and guaranteed return to their jobs.

These types of leave are permissible as long as they are administered in a consistent, nondiscriminatory way. Still, employers that wish to force leave must be sure that no conflicting policy or agreement prohibits the company from designating leave time.

Many employers have adopted combined Paid Time Off (PTO) programs in the interest of cutting down on unscheduled absences.

A PTO program combines paid days off, which would otherwise be set in fixed allotments (i.e., vacation, sick time, personal days, and holidays), into a single bank or pool. Employees may then 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 between leave types, and the employer does not have to determine whether an employee’s choice is legitimate.

PTO leave banks may be fashioned in any number of ways. Some questions the employer should consider include:

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.

The 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.

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 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 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.

Payment upon termination. Once earned, wages generally cannot be forfeited or revoked.

This is important in the vacation context because, in many states, earned vacation time is interpreted as being a form of deferred compensation and may also be treated as “wages.”

Sometimes vacation is treated as wages by default, in which case the employer may (unless prohibited by other law) adopt an explicit policy that supersedes that presumption.

In other states, vacation is not considered wages until the employer’s actions(for example, in the form of a contract or policy) create that presumption.

Whether by statute or agreement, if vacation time is considered “wages,” it must typically be paid out at termination.

As noted, in some states, vacation time will only be interpreted as wages if the employer makes a promise—whether in an employment contract, handbook policy, or implied from common practice—that treats vacation as part of compensation in such a way that it becomes an expected part of wages. Employers can avoid this liability by avoiding, or clearly refuting the existence of, such promises and obligations.

In other states, earned vacation is automatically treated as wages; however, employers can also overcome that presumption by clearly setting forth a written policy that, for example, vacation time will not be paid out upon termination, that vacation time does not carry over from year to year, or that vacation time does not accrue above a certain cap.

Note, however, that a handful of states, such as California, prohibit accrued vacation time from being lost or forfeited for almost any reason. In these states, “use it or lose it” policies are prohibited and payout of earned vacation at termination is inevitable.

With these requirements in mind, note that some employers—particularly those in multiple states of operation—simply opt to compensate unused vacation at termination or under certain specified circumstances, regardless of the law. Even in these circumstances, employers may institute accrual caps that reduce vacation payout liability by preventing employees from earning additional vacation time until a portion of their accrued balance is used.