Rules About Vacation Time

Employers have free rein to determine how much vacation to offer, who is eligible, how vacation time accrues, when vacation may be used and so on, as long as they check state regulations. However, with paid time off, or PTO, you may pay your employees cash compensation when the time is taken. Like any other cash compensation, those wages would be taxable for the employee and deductible for you upon payment.

Let's start at the beginning: Which employees get vacation and how much? Most employers decide on how much to provide based on industry standards and employee expectations. You can offer vacations to some employees and not to others; there is no law against only granting full-time employees vacation. In fact, according to the Bureau of Labor Statistics, only 34% of part-time employees were offered vacation in 2015.

Your firm is equally free to adopt schedules for vacation accrual. You may choose one vacation day per month or a certain number of hours per pay period. Likewise, you may impose a waiting period before new employees start accruing time and allow employees to accrue vacation days when they have more tenure at the firm. For example, you might grant employees three weeks of vacation after five years of service.

Many companies encourage employees to use their vacation time regularly. However, in some states, it's illegal for employers to impose a "use it or lose it" policy. In these states, vacation time is considered a form of earned wages, which must be cashed out when the employee quits or is fired. Thus, a policy that takes vacation time away is seen as illegal wage theft.

Such states usually allow employers to place a cap on vacation accrual, stopping employees from building up more time rather than taking away some of the time that has already accrued. Some states specify what ratio is acceptable, and still others allow a "reasonable cap," which is usually around twice the annual accrual. See your state's labor regulations.

Here are some common vacation policies:

You can prohibit workers from taking vacations during busy seasons.
You can require advance notice, so you don't have too many employees out at the same time.
You can tell workers you'd like them to schedule vacations well in advance.
You may limit how much vacation employees can take all at once.
You may require that new employees not take vacation time in their first three to six months on the job.

Your employees may be entitled to be paid for unused vacation if they quit or are fired. About half of U.S. states have laws requiring employers to pay out an employee's unused vacation. Even in states that don't require the payout in every case, you may have to cash out unused vacation time under some circumstances.

You can use vacation and paid time off to attract and retain talent. Knowing how your industry views these policies — and keeping up with your state labor laws — will help your good business practices serve as a magnet for new hires.

To ensure your employees are aware these vacation policies are in place, make sure the policies are clearly outlined in your employee handbook. If you need help building or refining your employee handbook, our HR Resource Center includes an easy-to-use employee handbook builder, which will guide you through the creation process.