Best Practices for Changing Your Vacation Policy

December 1, 2023・7 mins read
Best Practices for Changing 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 offers a certain number of vacation days per year along with sick time and personal time. But perhaps you already know that. And for that reason, you’re looking to start a new vacation policy that offers a specific number of vacation hours or allows employees to accrue vacation time. 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 time that isn’t worked. No states require paid vacation either, but several states have laws that affect vacation time accrual, unused days, and changes to your vacation policies. For example, Nebraska law treats paid vacation as a type of fringe benefit and part of an employee's wages. Therefore, employers can’t change their vacation policies to take days of vacation away from an employee who has already earned it. They also can’t have “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 any unused vacation time. Other states, such as New York, 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 agreements

When you hire a new employee, you might present them with a contract or job offer letter to sign. They lay out the terms of employment and expectations on both sides. This should include compensation and benefits, and it should be specific. So before you change your vacation policy for part-time and full-time employees, review your employment contracts and/or job offer letters. What do they say about vacation days? Do you spell out terms for prorated vacation time for new employees? Do you specify how many hours of vacation the employee will earn each pay period or how they accrue vacation? Does it say what happens with unused vacation days? And most importantly, does it say anything about changing the terms of vacation time or pay? Some employment documents 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 agreement 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. Service contract laws may be applied to government contracts, and they can require contractors to offer their employees vacation or holiday pay.

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

Company culture and morale

What is it like to work for your business? The answer to that question can speak volumes about your company, its culture, and your ability to reach goals. Time and again, research has shown that companies that invest in their employees thrive. When you offer paid vacation time, you show staff members that you care about their well-being and success. They will feel more motivated to give you their best. It will improve morale and productivity, help you retain talent, encourage loyalty and boost your business’s reputation. Because time off from work contributes so much to 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. So how will they react if you announce that they'll receive fewer paid vacation days? Even if you change your paid vacation plan to reduce only the amount of vacation each employee receives in the future, it will still feel like you took something from them. And consider what immediately taking away paid time off could cost them. Someone on your staff might have planned a dream vacation. They bought non-refundable tickets or put a deposit on a vacation package. Would it be fair to force them to cancel those plans? Or what if they were counting on using a few days to take care of some stressful personal matters? The morale problem this causes can be infectious. If certain employees start complaining about the policy change, others might chime in. 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 cut somewhere else first. If that’s not possible, encourage employees to get involved in the decision-making process. Be open and honest about your reasons for reducing vacation time. Make sure they know that you didn’t make the 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. 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 you can maintain it. Your employees won’t be so happy if they realize six months later that you couldn’t actually afford more vacation time and 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.

Make your vacation policy clear

Along with offering vacation time, make sure you present a clear vacation policy for both full-time and part-time employees. Manage vacation requests in a timely manner. When you can't accommodate vacation requests, let employees know right away. Then they can plan accordingly and not wait in limbo. It’s even better when you can offer employees alternate dates that would work better for your company. In short, remember that vacation time is an important part of your pay and benefits packages. It gives your employees time off to decompress, recharge, and boost their mental health so that they’re ready to handle your next big project. However, you risk losing some of those gains if your policy is not clearly stated and fairly managed.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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