Though there is no federal law that mandates that you provide vacation time to your employees, it’s certainly a best practice. Humans are not robots, and a well-thought-out policy can enable your employees to recharge and refresh their mindset. When offering a vacation policy, you’ll want to take note of the below.
Vacation is mostly discretionary.* You can choose to apply the same policy to all employees, or you can offer different policies to groups of employees, as long as the reasoning behind your groups is job-related and consistently applied. For example, you may offer 10 days of vacation per year to part-time employees, and offer 20 days of vacation per year to full-time employees. Consider the scope of your business and what will work best for your employees.
Even though vacation is not a federal requirement, some states require that companies that do choose to offer vacation must pay out the accrued, unused balance as a part of final wages. To learn more about a state’s payout requirements, you can check Justworks’ Compliance Starter Guide for each state or refer to this chart† for additional information. Regardless of where your employees are located, it is best practice to include what happens to your employees’ vacation balances upon termination in your vacation policy.
Carryover and Accrual Caps
In general, an employer may use a “carryover cap” to limit how much accrued vacation carries over from one year to the next. This is sometimes referred to as a ‘use-it-or-lose-it’ policy. Some employers may allow no time to rollover, while others may limit the number of days that roll over into the next year. Your written policy should clearly outline how vacation days carry over at year end.
Employers should note, however, that some states mandate that employers allow vacation to rollover year-to-year. In these states, employers can use an “accrual cap” to place a reasonable limit on the balance an employee may hold at any given time, but any vacation time already earned cannot be forfeited.
For more information on carryover and accrual caps, as well as how to set them up in Justworks, see here.
*Nevada, Maine and Bernalillo County, New Mexico have or will soon have laws that require most employers to allow employees paid time off “for any reason”. This may be a new trend to watch.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.