Regina Olga Mullen

[Written for Replicon blog]

How much can unused vacation time possibly cost an employer?

The City of Jacksonville recently learned the hard way, when an executive staffer—who hadn’t taken a vacation in five years—announced his retirement and sought payment for unused vacation days. If he gets the cash-out, he will receive $521,798 in unused vacation since 2011.

There are a couple ways to avoid situations like these entirely—the new trend being unlimited vacation policies. However, studies have shown that, if done correctly, a “use it or lose it” vacation policy actually reaps the most rewards for both employee and employer, resulting in less liability for employers, more utilized vacation days for employees, and a healthier work environment for both. Do “use it or lose it” the right way with our tips below:

Avoid liability

The Jacksonville story is an extreme, isolated case. Still, the liability for employers is huge. U.S. companies have at least $224 billion in unused vacation time on their books, according to an analysis by Oxford Economics on behalf of Project: Time Off, an initiative of the U.S. Travel Association. The country’s vacation liability grew by $65.6 billion from 2014 to 2015 alone.

Employers are troubled by the idea of having to dole out potentially hefty payouts when their employees leave the company, so they’re redesigning benefits to avoid the liability.

More employers are implementing the “use it or lose it” rule, which requires the employee to forfeit any unused vacation days they’ve accrued at the end of the year. They can’t cash out or roll it over to the following year. Over 26 percent of all U.S. employers have implemented this policy, according to the Oxford Economics analysis.

Encourage time off

Some states like California, Nebraska, and Montana prohibit employers from implementing “use it or lose it.” However, there are more states that allow the policy than those with restrictions. (Look up your state’s vacation leave law here.)

The pros are obvious:

  • Employees are more likely to take advantage of all their vacation time, compared to employees who have the option to roll it over to the next year
  • Companies are free of their unused vacation liability
  • Companies don’t worry about employees rolling over unused vacation year after year, then taking an extensive leave all at once

Experts, however, argue that employees are the biggest losers of “use it or lose it” policies if companies fail to encourage time off. Employees have to feel comfortable enough to assert themselves and ask for the time off when they need it. They have to know that their managers and coworkers will support them.

“We act like everybody has choice and control—we don’t,” said Kenneth Matos, Vice President of Research at Life Meets Work, a workforce strategy consulting firm.

“Employers need to manage the culture of their organizations so that policies are used without jeopardy, retaliation or being sidelined because people think you are no longer interested in advancement,” says Matos. “Policies [should] merge seamlessly into a productive culture, rather than being add-ons that everyone knows they are not supposed to use.”

Unlimited PTO pitfalls

Unlimited vacation time has attracted a lot of media attention in the last couple of years, as forward-thinking companies like Virgin Group, Hubspot, and Netflix have adopted the policy. Only 2 percent of U.S. companies offer unlimited paid time off, according to the Society for Human Resource Management.

The problem with unlimited vacation time is the same as with “use it or lose it:” without a strong organizational culture supporting time off, employees may be hesitant to take it when they need it.  In fact, with unlimited PTO employees can end up taking less time off – a result of “choice overload.”

“Forty-two percent of Americans are not using the vacation time they’re given,” said Katie Denis, senior program director at Project: Time Off. Most of her organization’s focus groups have not responded favorably to unlimited vacation policies.

Foster the right culture

Company leaders need to develop initiatives that clearly illustrate the expectation that everybody take time off, says Matos. From there, they need to analyze the side effects, address them explicitly, and continue to assess the policies regularly every few months.

“The key is to be honest about what you’re trying to achieve,” he explains. Even simple ideas can nudge employees in the right direction.

Tech company FullContact gives each employee $7,500 to go on vacation, as long as they follow these rules:

  • They have to go on vacation
  • They must disconnect
  • They can’t work while on vacation

Just to hammer down the point, the CEO hung a photo of himself at headquarters vacationing all wrong. In the photo, he’s riding a camel near the pyramids while checking his phone. His caption: “Me completely #failing at going off the grid.”

Companies like FullContact get it. Forced vacation policies can benefit companies only if the organization—from the top down—truly believes in the value of time off. Without a supportive culture or initiatives explicitly aimed at promoting vacation time, employees will always have that nagging thought that job security trumps

“Use it or lose it” vacation: how to do it right