Develop a Vacation Policy for Your Business

What do workers want most? Beyond a pay raise, one of the best ways to keep workers happy is to give them more paid time off (PTO). Contrary to what business owners and managers might think, vacation time has actually been shown to boost productivity.

Vacation is an issue that can turn into a power struggle between management and rank-and-file employees. But it does not have to be. Your vacation policy can provide a competitive advantage in a tight labor market in which more people are ditching their current job in favor of greener pastures.

Whatever vacation policy you decide on, you should be prepared to lead by example and take a vacation. More than half of Americans do not use all of their paid vacation time, which can undermine the benefits of your policy.

The Importance of Paid Time Off

Post-pandemic, workers are reprioritizing what they want out of their careers. The Great Resignation has given way to the Great Reshuffle as workers quit their jobs in droves and look for better opportunities elsewhere.

What they are looking for, though, is not simply more money. According to a survey from FlexJobs, 68 percent of workers say they would consider a career change.[1] The top reason (56 percent) cited for changing careers is to be in a job or field with better work-life balance.[2] That is more than the 50 percent of workers who said they would change careers for a higher salary.[3]

A survey by CNBC found that the majority of Americans consider nonmonetary job benefits to be the key to happiness at work.[4] More paid time off was the second-leading change that would most improve job satisfaction, although it varied by worker age, with twenty-five-to-thirty-four-year-olds more likely than other ages to want additional paid vacation.[5]

Navigating Vacation Time

During the pandemic, and as we emerge from it, some companies have expanded their vacation time in an effort to combat worker burnout and retain talent. Americans are the most overworked workforce in the developed world.[6] We work hundreds of more hours per year than our contemporaries in other modern economies, and our productivity has increased more than 400 percent since 1950.[7]

Part of the problem is that the majority of workers do not use their vacation time. An Oxford Economics poll revealed that 55 percent of Americans are not using all of their PTO—and this is despite workers earning more days off than in years past.[8]

Workers may fear that taking time off will hurt their chances for career advancement, but this fear may be unfounded. The results of an SHRM survey revealed that employees who take most or all of their annual vacation time perform better, are more productive, have higher levels of job satisfaction, and are more engaged at work compared to employees who take less vacation.[9]

Types of Vacation Policies

According to data from the U.S. Bureau of Labor Statistics (BLS), more than one-third of private industry workers received between ten and fourteen days of PTO after their first year on the job.[10] After ten years on the job, one-third of workers received between fifteen and nineteen days of paid vacation.[11]

Accrued PTO is the most common method for earning PTO, according to a QuickBooks survey.[12] Most companies cap the number of vacation hours a worker can accrue in a given year using this model.[13] Some reward employee loyalty by increasing the number of vacation hours a worker can accrue per year over time.[14]

Another method of awarding vacation time is lump-sum PTO, or front-loaded PTO. Instead of accruing PTO in accordance with the amount of time worked, lump-sum PTO is given all at once, typically at the beginning of the year. The employee then has the entirety of the year to use their PTO.

For both accrued and lump-sum PTO, the employer may offer workers the option to roll over any unused vacation time to the next year. More than 60 percent of organizations reported to SHRM that they have a rollover policy.[15] However, 54 percent said they only allow limited rollover days.[16] Fewer than 10 percent offer unlimited rollover.[17] About 40 percent of companies have a use-it-or-lose-it PTO policy.[18]

A final PTO option is an unlimited vacation policy. Unlimited PTO can be helpful for employers as a hiring perk. It also reduces the administrative burden of tracking PTO and the cost of having to pay employees for unused vacation time. In the competition for talent, more companies are offering unlimited PTO as a way to attract younger workers and stave off burnout. But whether unlimited PTO actually benefits employees is an open question.

Studies have shown that employees with access to unlimited PTO do not always take more vacation.[19] In fact, some research suggests that employees with unlimited PTO actually take fewer vacation days than employees with limited PTO.[20]

Implementing Your Vacation Policy

Once you have decided on a PTO scheme for your workforce, you will need to work with your Human Resources department to develop a vacation policy. Here are some things to keep in mind as you prepare to formalize your vacation policy:

  • Put it in writing. From the time they are hired, workers should have a clear understanding of the number of days off to which they are entitled, how to schedule time off, whether their vacation needs to be scheduled during specific times of the year, and any responsibilities around vacation time (e.g., finding somebody to cover for them while they are away). This information can be put in an employee handbook and made available online. The vacation policy can also be reinforced at meetings.
  • Manage requests. Certain times of the year are more popular for vacations. You can expect an influx of PTO requests around holidays such as Christmas, Thanksgiving, New Year’s, Memorial Day, and Labor Day. Generally, workers use more vacation time in the summer months. You may already close your business and give everybody the day off on key holidays. But to ensure that you are not short-staffed around popular travel times, consider a request system that allows a priority vacation schedule on a rotating basis. For example, in the first year, one group of employees gets their first choice of vacation days, the next year another group gets first choice, etc. You could also have a set one- or two-week period when you temporarily close down and scrap the request system altogether.
  • Decide on an accrual policy. Unless you have an unlimited PTO policy, you will have to decide how workers will accrue vacation time. With accrued PTO, workers typically earn PTO hours for each week, pay period, or month that they work. As a loyalty incentive, you can make it a policy that longer-tenured employees accrue vacation time at a faster clip. If using a lump-sum policy, workers who have been with the company longer might receive a larger amount of lump-sum PTO at the start of the year.
  • Set a goal for your vacation policy. PTO is one of the most valuable benefits you can offer employees. To get the most value out of your policy, though, it should have a purpose. Are you trying to reward loyalty with your policy? If so, a graduated accrual system might make sense. Are you trying to reduce costs and overhead while attracting young talent? In that case, an unlimited policy could be the way to go. Also keep in mind that vacation is just one form of PTO. You could also provide a designated number of personal or mental health days that do not need to be blocked off ahead of time, or schedule team-building activities throughout the year that are technically work days but give workers a chance to unwind and bond. You are also required to offer paid leave to certain employees under the Family Medical Leave Act (FMLA), but you could extend a similar, informal policy to employees who do not automatically qualify.
  • Take a vacation. To reap the full benefits of time away from work, employees must actually take a vacation. Due to perceived peer pressure or concerns about how PTO might affect their job evaluation, many employees opt not to use all of their vacation days. If you never take a day off, workers might feel obligated to act in kind. Remedy this by taking a vacation yourself and sending the message that vacation is a part of work.

Ideally, your vacation policy should reflect your company culture. If you have legal questions about setting a vacation policy, want advice about how you can best structure PTO, or are curious about the policies of other companies in your industry, our business attorneys are here to help. Schedule an appointment today.


[1] Rachel Pelta, Career Changers Seek Better Work-Life Balance Ahead of Better Pay: FlexJobs Survey, Flexjobs, https://www.flexjobs.com/blog/post/career-changers-seek-better-balance-ahead-pay-flexjobs-survey (last visited July 19, 2022).

[2] Id.

[3] Id.

[4] David Spiegel, Beyond a Raise, This Is What the Majority of American Workers Want to Be Happier at Work, CNBC (June 3, 2019),  https://www.cnbc.com/2019/04/01/to-be-happier-at-work-this-is-what-the-majority-of-us-workers-want.html.

[5] Id.

[6] G.E. Miller, The U.S. Is the Most Overworked Developed Nation in the World, 20 Something Finance (Jan. 30, 2022), https://20somethingfinance.com/american-hours-worked-productivity-vacation/.

[7] Id.

[8] Paid Time Off Trends in the U.S., U.S. Travel Association, https://www.ustravel.org/sites/default/files/media_root/document/Paid%20Time%20Off%20Trends%20Fact%20Sheet.pdf (last visited July 20, 2022).

[9] SHRM Survey Findings: Vacation’s Impact on the Workplace, Society for Human Resource Management 15 (Nov. 12, 2013), https://www.shrm.org/ResourcesAndTools/business-solutions/Documents/SHRM-USTravel-Vacation-Benefits-Workplace-Impact.pdf.

[10] Employee Benefits Survey, U.S. Bureau of Labor Statistics, https://www.bls.gov/ncs/ebs/factsheet/paid-vacations.htm (last visited July 25, 2022).

[11] Id.

[12] Danielle Higley, What You Should Know about Accrued Time Off, QuickBooks Blog (June 9, 2020), https://quickbooks.intuit.com/r/manage-employees/accrued-time-off/.

[13] Id.

[14] Id.

[15] SHRM Survey Findings, supra note 9, at 2.

[16] Id. at 8.

[17] Id.

[18] Id.

[19] Rob Whalen, Unlimited Paid Time Off Is a Deceptive Ploy in Today’s Workplace, Workforce.com (Aug. 9, 2019), https://workforce.com/news/unlimited-paid-time-off-is-a-deceptive-ploy-in-todays-workplace.

[20] Id.

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