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The “use it or lose it” vacation policy is, for some, a controversial topic today.
This kind of policy can save many employers a lot of money – unlike the City of Jacksonville, FL, who had to pay out $401,867 in unused vacation time to the Jacksonville Police and Fire Pension Fund’s executive directory. Yet some people feel this is unfair to employees, and in some areas, use it or lose it policies are now illegal.
Read on to learn all you need to know about use it or lose it vacation policies, and whether this is the right approach for your business.
A use it or lose it vacation policy means that employees forfeit any accrued vacation time left unused at the end of a specified period (usually a year).
For example, if an employee has 15 days of PTO per year, and only used 10, the additional 5 days will be lost at the end of the year.
The following year, they’ll start again with 15 days’ PTO. With most other vacation policies, the unused vacation time carries over to the next year, and the employee will have 20 days of PTO.
Related: Stay on top of your team’s outstanding vacation time with Flamingo’s user-friendly Vacation Tracker for Slack teams.
There are a couple of major benefits to companies with use it or lose it vacation policies.
The first is that the company avoids situations where they’re left on the hook for huge amounts of accrued vacation pay.
One of the most extreme examples of this is the Jacksonville story we mentioned in the introduction.
The executive director of the Jacksonville Police and Fire Pension Fund had not used any of his paid vacation time between 2011 and 2014 when he quit the position.
The city was required to pay out this unused vacation days with the employee’s final wages, which amounted to just over $400,000.
This example may be extremely, but unused vacation pay does become a significant financial liability for many businesses that allow vacation time to accrue indefinitely.
The other way that a use it or lose it policy is beneficial is that it encourages employees to actually take their vacation time, instead of putting it off to let their vacation pay stack up.
Many employees stockpile their vacation time and rarely ever take time off, which puts them in danger of overwork and burnout.
A use it or lose it vacation policy prevents stockpiling, and may result in employees taking more frequent vacations.
How about the other side of the coin? Let’s look at a few potential disadvantages for businesses implementing use it or lose it vacation.
There’s a debate over whether use it or lose it vacation policies are fair or ethical.
The reason for this is that employees may be forced to forfeit part of their earned employee benefits. Some people feel that it’s unfair to take away accrued vacation pay – particularly when other employees get full use of their benefits if they take all their vacation days.
The question of fairness may lead to unhappy employees.
Imagine you feel like you’re working hard all year, so hard that you didn’t even take a vacation. At the end of the year, you’re told that your PTO benefits from that year are now expired.
Then you look at another employee, who took all their PTO and has no unused vacation time. This person gets the full benefit, along with having worked less during the year.
It’s easy for an employee to see this as unfairly punishing those who put in more work for the company.
The other side of this is that you can see a rush of people trying to get their vacation time in before it expires.
This can result in a ghost town near the end of the year, as anyone with outstanding PTO takes it all at once.
While it may not be a problem for all companies, some will find this results in missed deadlines or trouble serving customers.
And if the alternative means telling some employees that they can’t go on leave, you risk upsetting people if their leave request is declined and their vacation time expires as a result.
The practice of “use it or lose it” vacation policies is not legal everywhere.
For example, Canada prohibits use it or lose it vacation policies.
There are no federal laws in the United States that prevent you from using this a policy. But some states have their own restrictions.
The Colorado Supreme Court has ruled that employers can’t force employees to forfeit earned vacation time. We should note the ruling also specified that employers are not required to offer paid time off at all in the first place.
California law also prohibits use it or lose it vacation policies, though California employers are allowed to put a cap on accrued vacation time.
Here are a few examples of states that regulate use it or lose it vacation in the United States. Be sure to check the labor laws in your state, or any other states where you have employees.
You can also check out international labor laws in this list of leave laws by country. If you’re unsure of the labor laws in your area, please consult an employment attorney.
So, to the question of whether or not such a policy is a good idea for your business.
There is no “one size fits all” answer. Each business is different, with its own unique needs. There’s also the question of local labor laws, which may or may not allow forfeit of unused vacation time.
Generally speaking, this type of policy is good for the business, and for employees. But it’s important to manage it the right way.
Yes, by making unused vacation time expire, you reduce the financial liability on the business. But you want to approach it a different way – as a way to incentivize employees to take leave.
There’s a big problem in a lot of companies with employees not taking their paid time off. More than half of all US employees don’t use all their vacation time.
This is a major cause of employee burnout and work-related stress. Vacation time is vital for employees to be able to rest, recover, and switch off from work for a while in order to stay fresh.
So, the key to use it or lose it is to actively push employees to take their vacation time, and make sure they have the opportunity to do so during the year, before it expires.
You may also want to include it in your written policy that the deadline to take vacation time may be extended if you’re forced to decline a leave request close to the end of the year, to avoid cases where employees feel they’ve been dealt an unfair hand.
Further Reading: All you need to know about Flexible Time Off Policies, and whether they’re right for your business.
Let’s say you don’t want to implement a strict use it or lose it policy, or it’s not legal in the area you’re operating. What alternatives are there?
Unlimited PTO works in a similar way. With unlimited PTO (aka unlimited vacation, open PTO), there’s no accrued vacation pay, as there’s no hard limit on vacation time in the first place.
You may find this works better. Though there can be the same issues of perceived unfairness with unlimited PTO, if some employees take significantly more time off than others.
Otherwise, if you allow vacation time to roll over to the next year, you can still take measures to avoid large sums accruing, thought not strictly expiring.
This can include actively monitoring the amount of vacation time each employee has has remaining. When an employee crosses over a certain limit, you may suggest they take time off.
This helps reduce the financial liability of unused leave, as well as keeping employees fresh and well-rested with regular vacations.
Learn More: Key Unlimited PTO Statistics to Know in 2023
Whatever type of vacation policy you run in your business, a robust system to track leave is important.
This helps you keep a handle on unused vacation days, accrued vacation time, and ensure that you can offer paid vacation without it becoming a liability.
Slack-based teams can do this with Flamingo. Flamingo is the most user-friendly vacation tracker for Slack. It lets you manage everything within Slack, and keep on top of leave types like:
Flamingo makes it easy for employees to request time off, and easy for employers or managers to track accrued vacation time.
It’s free to use indefinitely for small teams, with transparent user-based pricing for larger teams. Try it free today:
Flamingo makes managing your team’s paid time off a breeze.