Question: Our current vacation policy states that employees can accrue up to 1.5x their annual vacation benefit. Once this limit is reached, the accrual will discontinue until the balance is reduced below the 1.5x annual benefit. We would like to change this policy so that an employee can carry over a maximum of 1 week each calendar year. I am looking for examples of how to implement this and how to word the new policy.
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Answer: There are a number of different ways to set up a vacation policy. Your current policy is one that is often adopted by companies that have employees in states that do not permit a “use-it-or-lose-it” policy. For instance, in California, once an employee has accrued vacation time it is owed to the employee. An employer in California is not permitted to have a policy that limits carry over to one week or that provides that an employee forfeits any accrued but unused time at the end of the year.
In a “use-it-or-lose-it” state, employees must be paid for any accrued but unused time upon termination. Interestingly, tech companies and other companies that have adopted unlimited vacation policies don’t have to worry about the California rule as there is no accrual of vacation in the case of unlimited time.
In other states, employers can have a “use-it-or-lose-it” policy so long as they have a written policy that expressly states that employees may only carry over a certain amount of time and that any excess time accrued but not used will be lost.
As far as changing the policy, there are a number of ways to do this. Generally, employers make this type of change at the beginning of the vacation year. If all employees accrue vacation on a calendar year basis, the change can be made effective January 1. Beginning January 1, any new accrual method is put in place and the new carry over policy will apply to vacation accrued that calendar year.
The key issue is how to handle vacation time that was accrued under the old policy. Employees that have a week or less, could be permitted to carry the time over under the new policy. Any time in excess of 1 week can be handled in a couple of ways. You could pay employees out for the excess time, or allow them to carry the time over to be used within the next year or a certain period of time. An analysis of the time employees currently have accrued but unused should help you quantify the cost to the company.
How you handle this will depend on the financial impact on the company, state law, and what your current policy says about carry over time and payment for accrued but unused time upon termination of employment. It would be a good idea to work with local employment counsel who can draft the policy, set a strategy for current accrued time, and help draft a communication to employees about the transition.