Paid Vacation Basics: What Employers Should Know

Andrew Buck October 7, 2021

Paid vacation days are one of the most sought-after benefits in the workplace. If you want to attract and retain the best employees, then you most likely need to offer a competitive paid vacation package. 

This article will cover the basics about paid vacation days that you should know as an employer. 

We will discuss what it is, if you need to offer it to your team, and how it works. 

We’ll also talk about why it might benefit you as an employer and how it affects productivity (the answer might surprise you). 

What is Paid Vacation?

Paid vacation is the time when employees are away from work, but they’re still getting paid. As the name suggests, employees could go on vacation during this time or use it in any other way that suits their needs. 

Paid vacation is one of the most common benefits provided by today’s businesses to their employees. 

And for a good reason. A whopping 80% of participants in an employee benefits survey reported that they consider vacation benefits when accepting a new job. 

This is especially true for top performers in your industry. They expect to be given paid vacation days, and they’re more likely to choose a company that offers this as a benefit. 

Giving your employees paid annual leave can be good for the business as well. Besides recruiting the best, a good work/life balance will keep your team happy, contributing to a fun, productive, and positive work environment. 

Do Employers Need to Offer Paid Vacation Days?

In the USA, there is no legal requirement to provide paid vacation days. 

But if you or your employees are based outside the USA, you should check your labor laws to make sure you remain compliant and provide any minimum paid vacation required.

For example, employers in the European Union must provide full-time employees a few weeks of paid vacation each year. 

Employees in New Zealand are also entitled to 4 weeks of paid vacation each year if they work regular hours. 

Although there are no federal mandates for minimum paid vacation within the USA, individual state laws are always changing. So be sure to check the regulations in your state for the most up-to-date information. 

How Does Paid Vacation Work?

In most companies, especially US-based, the specifics of paid vacation days will vary depending on your company’s leave policy.

This policy should lay out things such as the total vacation time available to your workers, minimum service required for employees to use paid vacation days, and what happens at the end of the year.

You also need to consider any legal requirements you may have in regards to minimum vacation time.

Minimum Requirements by Law

As discussed above, there could be minimum requirements for paid vacation in the state or country where you have employees or your business is located. 

The first step when crafting your paid vacation policy is to include anything mandated by law to make sure you’re fully compliant with labor laws. 

Your Companies Vacation Policy

Once you’ve met any minimum requirements, it’s up to your leave policy to decide which employees get paid vacation days, how many, and how they can use them.

For context, here are some of the numbers for paid vacation days in the USA, according to a Center for Economic and Policy Research study.

As you can see, even though there are no legal requirements for paid vacation, most employers in the U.S. provide this benefit. 

If you only consider private industry (meaning excluding government workers), the number is even higher. In 2015, more than 90% of private-sector employees received paid leave as a benefit, according to the Bureau of Labor Statistics. 

When deciding how many days you should provide for your employees, you can check what is standard among other similar companies in your industry and craft your benefits package accordingly. 

Further Reading: how much PTO is average? Learn the average number of paid vacation days and paid time off available to workers in the U.S. and around the world.

How to Calculate Paid Vacation Days

As long as you meet the minimum requirements by law, it’s up to your company how you manage your paid vacation package.

You may offer a fixed number of days per year, or calculate it based on time worked.

Let’s take a deeper look at the most common methods to calculate paid vacation days for your team. 

Fixed Annual Paid Vacation Days

Fixed vacation days policy works like this – every employee gets a bank of vacation days at the beginning of the year, which they’re free to use up as they please (pending HR approval). 

The simplest method for the employer to manage, and the most common for full time employees on fixed hours.

For example, you might provide two weeks of paid vacation each year. When a team member requests leave and it gets approved, that time is taken away from the total number of days they have to use. 

This is easy because it doesn’t require any intense calculations. Everyone is clear about the rules, and how many days of paid vacation they have to use.

You just need to manage your vacation calendar to track who’s going to be away and when.

You may also choose to increase the number of vacation days based on years of service, to reward senior workers. For example, you may start out with two weeks’ paid vacation, and increase it after one year, five years, 10 years of service.

The Accrual Method

With the accrual method, employees earn more vacation time as they work more. 

This is common for workplaces and employees that are based on hourly work. Your paid vacation allowance is allocated as a percentage of time worked, rather than a flat number of days per year.

How much vacation time they would earn for how much would expend on your accrual rate. 

For example, let’s say an employee earns 25 days (25*8 = 200 hours) of paid time off for 2000 hours of work during the year (50 weeks * 5 days * 8 hours = 2000 hours).

The accrual rate in this case would be 0.1 hours of vacation time per hour of work (200 / 2000 = 0.1). 

In other words, when an employee works for an hour, they earn 0.1 hours of paid vacation. 

You can still reward seniority and rank with the accrual method. You could provide a greater baseline of vacation days for each additional year spent with the company, and then allow your employees to earn more hours through the accrual method.

Does Paid Vacation Work the Same in Every Workplace?

Outside what is required by law, paid vacation comes down to your company policy. 

You can decide how much vacation time your employees will get, and how they can earn more. 

While it may be tempting to stick to the minimum required by law to minimize expense, consider that vacation days are a powerful benefit to help you attract and retain top talent.

If you’re offering fewer or less flexible benefits than other employers in your industry, it may be hard to hire new, talented employees, or to keep hold of your best people.

Learn More: Learn how to create your team’s Leave Policy, incorporating paid vacation days, sick leave, other types of leave and more.

What Happens to Unused Vacation Days?

Once again, it all comes down to two things – any local laws regulating unused vacation days, and your company’s leave policy.

One of the common ways to do it is that unused days roll over to the next period.

For example, if your employee has 15 days of paid vacation, and only uses 10 in the year, next year they will have 20 paid vacation days available.

Be aware, however, that this can build up to be a large expense. Generally, you’ll have to pay the employee any outstanding vacation time when they leave the job, which can end up being a large payout for long service workers.

An extreme example of this is when the City of Jacksonville, FL had to pay out $401,867 in unused vacation time to their executive director of the Jacksonville Police and Fire Pension Fund. 

An alternative is a use it or lose it policy. With this option, any vacation time not used is forfeited. When the next year (or whichever period your vacation time is based on) starts, the allowance of paid vacation days starts over again.

This offers a way for employers to avoid large payouts, and large expenses that have to be kept on your books (if an employee has a lot of outstanding leave that must either be paid out or taken, the company needs to be able to pay this out at any given time, thus it’s considered an expense for accounting purposes).

The problem is, it’s not seen as a fair way of managing things. Workers don’t like the idea that they’ll lose their benefits just like that. In a way, it unfairly punishes those workers who put in more time at work during the year.

That’s why use it or lose it policies are starting to be banned in some locations in the U.S. and around the world. Even where they aren’t, this type of policy may make it harder to attract and keep talent.

Should You Consider Unlimited PTO?

An alternative way to handle this is to offer unlimited vacation days.

This means that, within reason, workers can take as much time off as they want.

There’s nothing to pay out, as there is no bank of available vacation days.

Unlimited PTO is popular with smaller companies (this is our policy at Flamingo). But even some huge businesses, including Netflix, are on board too.

The key to making this policy work is switching how you view performance in your business, from time spent at work, to actual productivity metrics.

Basically, you tell your workers that as long as they meet deadlines and relevant KPIs, it’s not important how often they’re seen at work. You reward productive workers with greater flexibility and autonomy.

You’ll also still need to have a request and approval process, as well as a way to track when employees are on leave, for scheduling and planning purposes.

Your employees are your company’s greatest resource. Treat them that way.

Try Flamingo free today, and start running your elite team the way it deserves.

Why Should Employers Offer Vacation Days?

The biggest reasons to offer paid vacation are to keep your staff happy and to make sure you hold on to your best employees. 

As we mentioned above, around 90% of private-sector employees in the USA have access to paid vacation. 

So, if you don’t offer any annual leave, then it is unlikely that you’ll be able to hold on to your best employees, let alone recruit other top performers in the future. 

Allowing your employees to take time off from work will keep them happy and healthy, so they’re motivated to do their best at work.

On the other hand, when we are forced to work on and on without a sufficient break, the risk of burnout rises, as well as accompanying health issues and lower productivity.

Further Reading: learn all you need to know about Employee Burnout, its consequences, and how you can avoid it in your business.

Do Paid Vacations Hurt Productivity?

Let’s look at what the data suggests about paid vacation and productivity. 

Project: Time Off, a research group located in Washington, D.C., surveyed more than 4000 U.S. workers in 2018 about their vacation habits each year. 

The research showed that employees who work in companies where vacation is encouraged are much happier and satisfied with their jobs when compared to workplaces where managers are neutral about paid time off. 

When it comes to productivity, employees that are happy and satisfied with their jobs are much more likely to perform better.

Harvard Business Review reports that taking more time off from work can result in greater success and lower stress at work. 

So, if you’re worried about vacation time ruining your employee’s motivation and productivity, don’t be. 

Giving them some time off will help your employees prevent burnout, recharge, and maybe even re-focus on new goals for themselves and the company. 

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