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It’s common to give employees a yearly leave allowance. But what happens when the year ends, and a team member still has unused vacation days? Or when staff leave the company with annual leave still outstanding?
Some companies institute a “use it or lose it” vacation policy to deal with these situations. It’s a policy that can save the company a lot of money in unpaid leave days, but also one that comes under a bit of scrutiny.
There’s no doubt that the cost of outstanding leave can be great – like 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.
Yet the legality of these policies can vary, and it may not actually be the most effective way to run your business.
In this article, we’ll take an in-depth look into the “use it or lose it” vacation policy, why some companies choose to implement it, if there are legal concerns, and also if your company should consider a use it or lose it vacation policy.
Just like the name suggests, use it or lose it vacation policy means that employees lose any vacation days they don’t use within a specified period, usually by the end of the year.
With a use it or lose it policy you don’t have to compensate employees for any unused vacation days if they quit or get fired, even if they were paid days off.
Employees also don’t get to carry over any paid or unpaid leave days into the next year (or any other accrual period).
The biggest reason why a company would institute use it or lose it is to avoid ending up in a situation where they have to pay out a large sum to an employee for accrued paid time off if they quit or get fired.
One of the most extreme examples of this is the Jacksonville story we mentioned before.
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.
Because he had accrued unused time off that was supposed to be paid leave, the city had to pay his wages for that unused time instead.
With his wages and accrued hours at the time, the payout for unused time off amounted to just over $400,000.
While this might be an extreme example, unused vacation liability can become a significant burden for any business if they don’t specify guidelines in their leave policies.
The days can stack up and result in a huge one-time payment when staff decides to cash out their remaining days, or leave the business.
The reason that this happens is that some companies allow carryover of accrued paid time off. Meaning that employees can accumulate paid vacation time over multiple years.
And when it’s time for them to leave the company, they end up with a large bank of unused paid time off, and the company can be obligated to pay an equivalent amount in wages.
The practice of “use it or lose it” vacation policies is not legal everywhere.
For example, In Canada it is prohibited by law to implement 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 that the ruling also specified that employers are not required to offer paid time off at all in the first place.
Here are a few other examples of a few major states that regulate use it or lose it policy in the United States. Be sure to check the labor laws in your state, or any other states where you have employees.
Legislation outlawing use it or lose it vacation policies are not just based on arbitrary decision making. There is a significant question over whether these policies are fair on workers.
One can argue that, as long as the terms of your company’s leave policy are clearly laid out and explained to employees, businesses should be within their rights to have a use it or lose it vacation policy.
Yet this still may be seen in a negative light, as it means employees are set to lose their earned benefits at the end of the year.
Also, regardless of ethics or legality, it may not actually be smart to put this kind of policy in place.
Why would this policy be a bad thing for your business? Here are some ideas.
Employee morale – it’s not a nice feeling to forfeit a benefit that you’ve earned. Your staff may come away with a negative mindset when their outstanding leave days are wiped at the end of the year.
It can also introduce questions of fairness. Let’s say your leave policy allows for 15 vacation days. One staff member takes all their vacation days, whereas another only takes 10. The second employee may feel slighted when they both go back to the same allowance at the start of the next year.
Increased turnover – ultimately, you want to keep your employees happy and excited so they keep performing for you at a high level.
If they perceive that your vacation policies aren’t optimal, or there’s a sense of unfairness as discussed above, it can lead to increased turnover which can be very expensive.
End of year vacation rush – when employees know their vacation days are going to disappear shortly, there may be a rush from multiple staff members to use their leave – before they lose it. This can create scheduling or HR headaches trying juggle numerous leave requests, often at a busy time of the year.
The use it or lose it vacation policy may not be the best option for your business. But it’s also not ideal to allow huge amounts of leave to pile up, which result in huge, unplanned payouts when a staff wishes to cash out or leaves the business.
So what’s the best option to prevent this?
First, you should ensure you continually monitor your employees’ leave, to ensure workers regularly take vacation days.
This is important, not just for preventing large PTO accruals, but for ensuring your staff are fresh and free from burnout.
In fact, this is the number one reason you should be encouraging staff to regularly take days off – avoiding large stockpiles of leave owing is just an added benefit.
If you use a leave management software like Flamingo, you can set up reminders to help you monitor leave allowances and make sure no one is going too long without a break.
You may also want to institute an unlimited PTO policy for your business.
This is probably the most effective way to avoid large amounts of leave owing, while maintaining a system that’s fair and liked by your team members.
With this type of leave policy, there is no annual or accrued leave allowance. Staff are free to take leave when they want and for how long (within reason).
That means there are no “outstanding” leave days left at the end of the year, and no vacation days to pay out when an employee leaves the job.
Allowing your staff to take leave with no cap requires a degree of trust, and needs to be constantly monitored for abuse, but the freedom and flexibility of this policy is generally very popular with staff.
For more information, be sure to check out our in-depth guide on unlimited PTO.