Employee Vacation Time Could Cost Employers

June 11, 2008

 In a weakening economy, employers should pay attention to their vacation policy.   If you need to cut costs with lay offs, you could end up losing your shirt on pay outs for vacation pay. Employers need to decide and articulate whether vacation is paid if accrued and not taken. Limits should be placed on how much vacation can be accrued, that is, rolled over from year to year. There aren’t requirements to pay accrued, but unused vacation pay unless that is your policy. Employers are free to specify that vacation is a benefit to be taken or used, and if not used, will not be paid. Please consider the following when determining how to handle unused vacation time:

  • Considerations When Paying Accrued but Unused Vacation Pay

If you pay accrued but unused vacation, will you pay it in all circumstances? To the person you just fired for stealing? To the person who quit without notice and is setting up a competing business and taking a few of your key employees to work for him? 

 Your policy can provide that vacation pay will be paid to employees who are laid off but not those who are fired for willful misconduct or who voluntarily quit. This does make your job more complicated, however. Suddenly, at the termination of employment, you are acting as an unemployment compensation referee in making a determination as to the nature of the termination in order to decide whether to pay vacation benefits. 

  • How not Paying Vacation Benefits Can Effect You

A decision against paying vacation benefits can come back to haunt you in a wage payment and collection claim. Vacation pay is considered wages if the employer’s policy is to pay earned but unused vacation. Add the headaches and penalties and attorney fee liability, and that is no vacation. 

  •  Managing Employee Expectations

Is your vacation policy clear? As prices rise, are you prepared to deal with employees who are coping by staying home and continuing to work expecting to be paid for their unused vacation? Also, if you are willing to pay have you considered your budget to pay employees 56 weeks in a year? If you are not planning to pay existing employees, even if they are working 52 weeks a year and take no vacation, be sure to communicate your policy to avoid a misunderstanding.

Also consider the sad situation where an employee hasn’t taken a vacation in years, and you have no policy regarding rollover? If the employee’s entitlement is four weeks a year, at year 13, they may be thinking that they are going to get a year off with pay. Crazy as it seems, you should be sure they understand that is not happening.