Deciding what sort of vacation policy you want your company to have is an important step for any business owner in creating a comprehensive employee benefits package. Whether you want to create a system of rewards, or you are just trying to create a set of guidelines for time off, there are several ways that establishing a vacation policy can help contribute to your business functioning smoothly. The following guide will highlight the various options available for creating or improving a vacation policy.

How to Set a Workplace Vacation Policy: Consider Legal Requirements

Although vacation time seems like a standard occurrence in the American workforce, employers actually have no legal obligation to offer their employees any vacation time at all. However, the majority of business owners understand the health benefits of offering their employees vacation time, and they aim to set policies that fit their business's operations.

While time off for vacation is not federally enforced, employers are legally obligated to provide certain employees with up to 12 weeks of unpaid, job-protected leave each year under the Family Medical Leave Act (FMLA), a labor law which was passed in 1993. Employees that would qualify for this type of leave include persons that are caring for a sick family member, persons who must leave due to a serious health condition that prevents them from working, or persons that have to care for a new child, by birth, adoption or foster care.

Dig Deeper: Regulation: Your Own FMLA Policy

How to Set a Workplace Vacation Policy: What Are Your Priorities?

According to Steve Kane, a human resources expert based out of Hillsborough, California, with more than 25 years of experience working with enterprise companies and start-up businesses, vacation time is simply one form of paid time off (PTO), and before you choose your vacation guidelines, you must begin with deciding what you want to accomplish. "You have to put your [benefits] strategy into perspective," he says. "Are you setting a vacation policy to create a rewards structure, to minimize costs, [or] to be competitive? Those are all worthy things, but they may lead to different conclusions."

Traditional vacation policies, Kane says, have stemmed from policies established by labor union contracts, which will grant employees a certain amount of time off depending upon the length of time they have worked for the company. And, in addition to the yearly allotment of vacation time a company decides to grant employees, many businesses offer additional time off for personal days, sick days, and national or religious holidays, like New Year's Day, Independence Day, and Christmas Day.

"An employer has the option of giving employees two weeks off for the first year, three weeks off after five years, and four weeks off for 10 or 15 years," Kane says. "But, those are just some common schedules; some employees say two weeks for everyone."

Accrued time off – additional sick days, PTO or vacation time that employees accumulate based on the length of time they have worked at a company – is also more prevalent now than it used to be. Rollover vacation days – unused vacation time from one calendar year that gets added onto next year's allotment – may count as part of accrued time off, but it depends on the employer, Kane says: "Some employers say you have to use your rollover days by March 30, or some date in the next year. Or, they will say you can accrue unused vacation time only up to so many hours, or for so many hours."

One more factor to take into consideration when creating a vacation policy is to determine whether you feel that your business has key employees. If that is the case, you may want to construct separate policies to keep those employees satisfied for the good of the enterprise, Kane says. For instance, since many businesses have sales people who consistently bring money in, you may consider offering a vacation policy with a higher incentive to that group of people who are driving your business. However, if singling out groups of people within the company leaves other employees unsatisfied, you may be better off sticking to a universal policy.

Dig Deeper: Benefits: Time Off You Can Bank On

How to Set a Workplace Vacation Policy: Enforcing a Vacation Policy

While time off from work is often viewed as an earned employee benefit, a whopping 66 percent of employees were found to have neglected to use all of their vacation time in 2009, according to a study released by Philadelphia-based career management consulting firm Right Management. So, what does an employer do when an employee neglects to take their days off?

Kane says that many companies have a "use it or lose it" policy, which means that if an employee fails to use the vacation time they are entitled to in a given year, it becomes forfeited. "Theoretically, doctors will tell you it's good to take time off to regenerate, but that only way you can actually make [employees] take a vacation is just to tell them not to come into work," he says. "Most vacation systems try to make that a part of the policy, but it's enforced by the payroll department, rather than individual supervisors."

An employer must also decide whether they want to include part-time employees in a vacation policy, or limit that option to full-time workers only. "For some stores, their bread and butter are part-time employees," Kane says. "I think it's a general rule that employers whose workforce is part-time often [tell employees they] won't accrue vacation for working 20 hours a week or less."

If an employee decides to abuse his or her vacation policy, however, the consequences can be dire, and may even result in termination. Typically, a company's human resources or payroll department will keep track of employee sick days and vacation days, and it will be up to them to report abuse to their manager or employer.

Dig Deeper: Are Your Employees Scared to Take a Vacation?

How to Set a Workplace Vacation Policy: Get Employee Input

Vacation time is one aspect of the benefits package that will be difficult to alter once it has been established, so it's best to ask your employees what they hope to gain from the policy before it's set in stone. A big mistake that employers make in creating a policy, Kane says, is setting guidelines based on what they heard worked for another company, rather than focusing on the needs of their own business and employees.

One thing to remember is that if you decide to ask your employees what they want, you have to provide them with the proper education about potential plans so they can make a well-informed decision. If you are putting a new plan to a vote, Kane recommends asking how many people want option A, how many want option B, and how many don't care either way: "If you provide the middle option of, 'I'm indifferent,' then you can potentially increase the percentage of employees who are happy with the result."

Dig Deeper: Giving Employees a Say

How to Set a Workplace Vacation Policy: Scrapping Your Policy Altogether

If you are contemplating the terms of a workplace vacation policy, a critical step is to determine whether or not it benefits your business to have one at all. Some workplaces have decided to scrap their policies altogether, and allow employees to take off as much time as they want. The theory behind this option is that it de-bureaucratizes the workplace, and, rather than making employees feel like they will be compensated for productivity, they will maintain increased productivity by not having to stress out about proving their self-worth within the company. 

This concept of workplace democracy, and doing away with employer-sanctioned occupational limitations, has become one of the most important movements in the business world, says Brian Carney, London-based member of the editorial board of the Wall Street Journal, editorial page director of the Wall Street Journal Europe, and co-author of the business book, Freedom, Inc.: Free Your Employees and Let Them Lead Your Business to Higher Productivity, Profits, and Growth. "One of the things that we discovered [in doing research for this book] is that to really liberate employees, you have to get them out of the mindset of trading material goods in one form or another for performance," he says.

According to Carney, a lot of employers are hesitant to consider getting rid of a vacation policy because employees see it as something they are entitled to and something they take comfort in – a dynamic which can be destructive to a company. "You have to break that dynamic of, 'give me something, and I'll give you something," says Carney. "You don't establish a vacation policy to encourage people to bankroll [time off], you establish a vacation policy to let people see that it's healthy to take time off work."

Dig Deeper: Put Your Policies In Writing


The Corporate Executive Board can help you learn more about how some of the nation's most successful companies are setting their own policies.

For more information on the benefits of letting employees take the reigns, rather than letting their bosses decide what's best, check out the Freedom, Inc. blog.

The Human Resources Blog will offer all kinds of information pertaining to workplace management, vacation policies, and more.

If you are unclear about the legality of office policies, be sure to check out the United States Department of Labor website.