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Nine Things You Must Consider When Instituting a Vacation Policy

Many companies — especially small ones — ignore paid time off (PTO). They're casual about vacation and emergency absence time, as well as its tracking and accrual, but as they grow, PTO can become a significant expense that must be managed. Following are some things to think about as you develop or improve your PTO plan.

1. Talent — How to Get It

Controlling and understanding PTO expense allows you to recruit better talent. You can promise and allow people more vacation than your competitors if you know that it's controllable. This tips the balance, allowing you to build a better team than your competitors. It's another way to win. However, don't let your great teams experience burnout.

2. Burnout or Slacker?

Your company's profitability can be wrecked in two ways: by overwork with its associated burnout, or by too much absenteeism. Everybody needs a vacation once in a while — 'workaholism' is unsustainable long term. You may occasionally have to encourage people to 'vacate'. On the other hand, a few employees with serious absenteeism problems can wreck the morale of your good employees. But the law is your friend.

3. The Law and the Agreement — How to Make It Work for You

The first question businesses need to answer when creating their PTO plan is what to do about employees who quit or are terminated. Many states require that the balance of vacation pay be paid when an employee leaves the firm unless the company has a policy that states otherwise. In some states the default policy is employer friendly. By default, the law in Texas says that terminated employees get nothing.

4. Texas Rocks

This is one of many reasons why Texas is one of the best places in America to start a business. The lack of personal income tax is — of course — another. Since more of an employee's total cost actually goes in his pocket here in Texas, you can get more work for less money here than in states which have a personal income tax. Some places like New York City impose a city-wide personal income tax on top of a state income tax on top of the federal income tax. Certain kinds of businesses will just never emerge in such a hostile economic climate.

The Texas Workforce Commission is clear on Texas law regarding accrued leave payouts in the event of an employee's termination. There is no law in Texas requiring employers to pay employees for unused vacation, but some courts have awarded accrued leave payouts in the presence of a company policy that entitles the employee to this benefit. Texas Accrued Leave Payout Policy states: "Payouts of accrued leave are required under the Texas Payday Law only if such a payment is promised by the employer in a written policy or agreement. The payout would be controlled by the wording of the policy or agreement. If no such policy exists, the company would not owe such a payment."

In other words, you have a lot of power. Power is seductive. But don't be seduced by the dark side of the force — show your ethics.

5. Cost/Benefit and Ethics

If you choose to disallow vacation time to resigning employees and you run a company with high turnover — a fact of life in certain industries, like retail or food service — this allows you to reallocate the PTO that those who leave might have used in favor of those that stick around. In essence, you can offer more generous PTO packages when recruiting than your more lenient competitors can offer — at no additional cost. And this is arguably more ethical. After all, employees deserve benefits commensurate with their loyalty, do they not? Given you've earned their loyalty, how should you accumulate PTO?

6. How to Accumulate

Companies have many different formulas for the accumulation of PTO based on hours worked, seniority, title, and geographic location. Different companies institute different policies to reclaim unused PTO at the end of various time periods (usually the fiscal year, the calendar year, or on the anniversary of the employee's hiring.) Plans that allow unused PTO balances to roll over year after year can build up a larger liability: for example, when the employee takes the vacation long after earning it and after several pay changes, it will be taken at a higher pay rate than it was earned.

7. PTO is Changing

Generalized PTO plans are simpler to understand and administer than plans that separate sick, vacation, and personal days. They also favor healthy employees. Employees with absenteeism problems often get a better benefit under traditional plans with dedicated sick days. Healthy workers prefer PTOs because they can take some of the days that were formerly classified as emergency absence days as vacation. And then there's the "honesty dividend". People needn't call in sick when they're really going shopping. And HR doesn't have to play policeman on employees' reasons for taking time off. On the other hand, as your company exceeds 50 employees and you fall under the Family Medical Leave Act (FMLA), you may want to split FMLA accruals from other PTO in order to ease the task of meeting federal reporting requirements. This is where automation becomes very important.

8. Automate, Automate, Automate

Many companies — especially small ones with highly skilled workers — have a casual attitude towards PTO. But as your company grows to exceed 50 workers or so, having an automated system to help manage this benefit can be beneficial in two ways.

First, it can help you curtail the intent of employees who would take more than their fair share of PTO. Letting an automated system control this for you makes your job easier emotionally — you needn't play the heavy all the time.

Second, it can allow you to have a better understanding of who is not taking time off. You probably already know who needs time off. Who's the grumpiest sourpuss in your office right now? How much of their vacation have they used?

9. Don't be Stingy

There's evidence that the European habit of taking 6 weeks of vacation every year leads to higher productivity.

My company, Journyx, is partnered with a Dutch firm for resale of our product in Europe (Their site is at What I've noticed is that the Dutch work just as hard as Texans — but they know that they're going to get that one month or more where they can really recharge. And guess what? Things don't come to a halt.

The statistics back this up. Contrary to myth, Europe has often outpaced the United States in productivity. In fact, Europe had a higher productivity growth rate in 14 of the 19 years between 1981 and 2000, according to the U.S. Federal Reserve Board.

For more proximate examples, look at how profits have doubled at the H Group, a financial services firm in Oregon, since a three-week vacation became the rule. At Jancoa, a Cincinnati janitorial services firm with 468 employees, profits have risen 15 percent since going to a three-week vacation plan. The owners of both these companies claim the switch in vacation policy is directly responsible for the improvement.

According to a recent study on U.S. vacation habits, in 2002 a typical American was granted 16 vacation days, but only took 14 days off, handing back more than $21 billion in unused vacation days to employers. In Europe, by contrast, the average is 30 days. So be generous when you hire. They probably won't use it all anyway.


Controlling PTO appropriately leads to a smoother operating workforce. It curtails the malingerers and shines a spotlight on the unsustainable workaholics. Picking the right legal structure for PTO plans is a card you have to play in Texas. An automated PTO tracking system makes your PTO management job so much easier.

About the Author

Curt Finch is the CEO of Journyx, a provider of web-based software located in Austin, Texas, that tracks time and project accounting solutions to guide customers to per-person, per-project profitability. Journyx has thousands of customers worldwide and is the first and only company to establish Per Person/Per Project Profitability (P5), a proprietary process that enables customers to gather and analyze information to discover profit opportunities. In 1997, Curt created the world's first Internet-based timesheet application — the foundation for the current Journyx product offering. Curt is an avid speaker and author, and recently published All Your Money Won't Another Minute Buy: Valuing Time as a Business Resource.

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Popular tags:

 costs  Texas  PTO  Valuing Time  payments  emergency  expenses  Per Person/Per Project Profitability  businesses  benefits

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