So You Want to Change Your Vacation Policy

Many small businesses offer paid time off for vacations, sick leave, and other reasons. PTO is a popular benefit. In fact, you may have a hard time attracting qualified workers if you don’t have a vacation policy that incorporates at least some PTO and sick leave in your compensation package. But perhaps you already know […]


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Many small businesses offer paid time off for vacations, sick leave, and other reasons. PTO is a popular benefit. In fact, you may have a hard time attracting qualified workers if you don’t have a vacation policy that incorporates at least some PTO and sick leave in your compensation package.

But perhaps you already know that– and perhaps for that reason, you’re looking to switch to a new vacation policy. Let’s take a look at several factors to consider before jumping into that process.

Federal and State Laws

Federal law does not require employers to pay for any time not worked. There is no state that requires paid vacation either, but there are several states with laws that affect vacation time accrual, unused vacation, and changes to your vacation policies.

For example, Nebraska law states that paid vacation is a type of fringe benefit, and that is considered part of the employees’ wages. Therefore, employers can’t change their vacation policies in a way that would take vacation time away from an employee who has already earned it. They also can’t have so-called “use it or lose it” policies, in which employees forfeit unused vacation time after a certain date. In addition, when an employee leaves your company, you are typically required to pay them for their unused vacation time.

There are a number of other states, such as New York, that don’t get quite so specific about vacation pay rules, but they do require you to comply with your own policy or employment contract.

The bottom line: Don’t switch your vacation policy without first checking on your own state’s vacation pay laws.

Employment contracts

When you offer a job to a new employee, you probably offer them a contract that both the employee and employer sign. It lays out the terms of their employment and expectations on both sides. This should include compensation and benefits, and it should be pretty specific.

So before you change your vacation policy, take a look at your employment contracts. What do they say about vacation pay? Do you spell out terms for prorated vacation time for new employees? Does the contract specify how many hours of vacation the employee will earn each pay period? And most importantly, does it say anything about changing the terms of vacation time or pay?

Some employment contracts lay out a specific vacation accrual table. Others might say something a little less definitive, such as “the employee will earn vacation time according to the table in the employee handbook, which may be updated every two years.”

The contract between employer and employee isn’t the only one to consider, however. If your company does contract work for the federal government or a state or local government, that entity might have certain vacation pay requirements. There are a few different service contract laws that may be applied to government contracts, and they can require contractors to offer their employees vacation or holiday pay.

The bottom line: Whatever your contract requires, follow it. Don’t change your vacation policy in a way that runs contrary to the contract terms.

Company Culture and Morale

What is it like to work for your business? The answer to that question can tell you a lot about your company, its culture, and your ability to reach goals.

Time and again, research has shown that companies who invest in their employees thrive. When you show your team that you care about their well-being and success, they will feel more motivated to give you their best. It will improve morale, increase retention and productivity, encourage loyalty and boost your business’s reputation.

Because time off from work is such a huge part of employee morale, switching the vacation policy can get a little tricky. So before you do it, think about how your team will take the news.

Changes That Reduce Vacation Time

Paid vacation time is a valuable fringe benefit. Many workers consider it a deal-breaker in a job offer. No paid time off, no offer acceptance.

But consider what it would be like for employees to have their vacation taken away. This is a lot different than simply not having vacation time in the first place. Even if your policy change simply reduces the amount of vacation that employees can earn in the future without taking away previously earned vacation time, it will still feel like you took something from them.

It might cost them money, too. If you have offered your employees two weeks of vacation per year, someone on your staff might have already planned a two-week vacation. They might have purchased non-refundable tickets or put a deposit on a vacation package. Would it be fair to force them to cancel those plans?

This kind of morale problem can be infectious. If a small group of employees starts complaining about the policy change, others might chime in as well. Eventually, your entire group might feel unhappy with your company.

If you’ve decided to reduce vacation time because of budget constraints, our best advice is to look for somewhere else to cut back first. If that’s not possible, try to involve your employees in the decision-making process. Be open and honest with them about your reasons for reducing vacation time, and make sure they know that you didn’t make this decision lightly. Tell them that you value their contributions, and you would like to give them more vacation time, but you can’t see another way of solving your budget woes.

Then ask for ideas. Someone on your team might know of a creative solution that you hadn’t thought of yet. At the very least they’ll know that the company exhausted all possibilities before taking this step.

The bottom line: Only reduce vacation time if it is absolutely necessary. When you do, be sure to communicate the change to your staff in person. Listen to their concerns, and ask for their ideas. And be sure that the policy change only affects future vacation time. Never take away time that an employee has already accrued.

Changes That Increase Vacation Time

This is a much different scenario– your employees will most likely be thrilled with this change! Our best advice to businesses considering this type of change is to be sure that you can maintain it. Your employees won’t be happy for long if they realize six months from now that you couldn’t actually afford more vacation time so now they have to lose some of their other benefits.

The bottom line: Don’t offer benefits that you can’t afford. Carefully evaluate your budget, and give your employees the most generous benefits package that your finances can reasonably handle. This way, you avoid having to make tough cutbacks in the future.


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