Vacation policy: Complete guide for employers with templates and examples

Temporarily unplugging from work makes employees healthier, happier, and more engaged once they’re back in the office. That’s why supportive, well-designed vacation policies can help businesses attract and retain top talent. They can also help a company build a reputation as an organization that cares about its employees' well-being. 

In this guide, we explore vacation policies, their key elements, and their benefits. We also provide a few paid time off policy sample templates to help you get started.

What is a vacation policy? 

A vacation policy is a set of requirements employees must follow to request and take time off from work. Companies typically include these guidelines in their handbooks or employment contracts, which outline the conditions of using vacation time. A well-structured vacation policy explains the number of paid vacation days employees are entitled to during a pay period, how they accrue them, and the process for requesting the time off. 

By providing a clear and comprehensive vacation policy, employers ensure that employees understand their rights and responsibilities. This enables employees to align their needs and expectations with the company's requirements.

4 types of vacation policies 

Choosing the right vacation policy enhances employee satisfaction. The best fit depends on your business needs and budget. 

1. Traditional vacation policy

A traditional vacation policy is the most commonly used due to its straightforward rules. Under this policy, employees receive a predetermined number of days off, which can increase based on their position and tenure in the company. For instance, a company can offer new hires ten days of paid annual leave, increasing that number to 15 days off after five years of service.

Based on the data available on the Bureau of Labor Statistics website, the average paid vacation time, particularly for small businesses, is:

• 11 days annually for 1-5 years of service
• 15 days annually for 5-10 years of service
• 17 days annually for 10-20 years of service
• 20 days annually for over 20 years of service

Many vacation policies allow employees to accrue vacation days over time, like earning one vacation day each month. The policy may be created as “use-it-or-lose-it," meaning unused days off may expire at the end of the year. In other cases, unused days can be carried over to the next year. 

2. Paid time off (PTO)

Paid time off consolidates various types of leave—like sick leave, personal time, and vacation days—into one bank, allowing employees to use available time off at their discretion, without specifying reasons for taking it. This policy allows more flexibility to employees in managing their time off.

3. Unlimited PTO

Unlimited PTO has grown in popularity in the past couple of years. Under this model, employees can request (though not necessarily use) as many days off as desired as long as they can meet performance expectations and maintain responsibilities. However, the effectiveness of unlimited PTO depends on company culture and management expectations. With poorly administered unlimited PTO, employees may feel pressured to take less vacation time to avoid appearing uncommitted. 

4. Floating holidays 

Floating holidays allow employees to take paid time off for personal and cultural holidays beyond the company’s standard holiday schedule. This policy accommodates a diverse workforce and recognizes that not everyone celebrates the same holidays.

For example, instead of taking a standard holiday, like President’s Day, an employee may want to use a floating holiday to celebrate Diwali. Employers often provide one or two floating holidays annually, allowing employees to celebrate important events without depleting their vacation or PTO allotments.

The importance of vacation policies: 3 benefits

Vacation policies enhance communication between employees and management, ensuring everyone is on the same page regarding leave requirements. A comprehensive vacation policy, aside from streamlining administrative work, reflects the employer’s commitment to employee well-being.

Enhances employee well-being and reduces burnout 

Expedia’s Vacation Deprivation Report reveals that over half of Americans (53%) don’t plan on using all their time off this year. However, not being able to disconnect from work often leads to burnout.

Burnout can have significant physical and psychological consequences for an employee—and disrupt company operations. In some cases, it can even harm a company’s reputation—no organization wants to be perceived as the one neglecting employee well-being. 

Taking time off, even for a few days, helps employees step away from work, recharge, and engage in activities that bring them joy and energy. This is crucial for combating everyday stress and maintaining productivity and satisfaction in the workplace.

Increases retention and attracts top talent

Offering competitive and generous vacation options is a powerful strategy for attracting and retaining top talent in today’s market. Policies such as unlimited PTO and floating holidays demonstrate that a company values work life balance and encourages employees to take greater control over their daily schedules. 

When employees feel the company respects their time and prioritizes their well-being, they are more likely to remain loyal to the organization. A well-structured vacation policy helps increase retention and reduce turnover costs, contributing to a more stable workforce.

Helps maintain compliance with labor laws

Vacation policies are critical for adhering to labor laws in jurisdictions that set minimum paid time off allotments. Unlike in the US, where vacation and other leave policies are based on state-level requirements, employers in the UK are mandated to offer 28 days of paid time off annually. 

A clear vacation policy ensures employers meet legal obligations, avoid disputes, and build trust with the team. Failing to comply with vacation-related regulations can result in significant penalties and damage the company's reputation. A well-documented policy is both a legal and strategic necessity. 

How to write a vacation policy: 4 key elements

A good vacation policy simplifies the process for employees to request and schedule time off by addressing key questions: 

• When do employees become eligible to use vacation time?
• How is vacation time accrued?
• How does vacation time work?
• What happens to unused vacation time upon departure? 

1. Eligibility

When writing a vacation policy, it’s crucial to outline the eligibility requirements so everyone knows their rights and how to request time off. For instance, both full-time and part-time employees are eligible for paid vacation days, but the number of days varies between employment types and vacation policies. Typically, full-time employees get more vacation days than part-time workers.

A policy must also provide information on when employees are eligible for vacation days. Some companies may require new hires to work for at least six months or a year before they can access vacation benefits. 

2. Accrual 

Accrual refers to a process of earning vacation days over time. Factors such as employment type, seniority, and role can influence how many hours an employee can accrue over a pay period. For example, full-time employees may accrue three hours of vacation, while part-time employees earn two. Also, long-serving employees may be eligible for higher accrual rates or additional vacation days as a recognition of their tenure.

If necessary, a policy must also clarify that accrued time off is not the same as earned vacation pay. For instance, some companies may allow employees to accrue up to 40 hours of vacation pay but not cash out unused vacation pay upon termination or resignation.

3. Guidelines for scheduling and approval processes

Ensure your policy includes clear guidelines on how employees should submit requests for vacation days. Provide information on how far in advance they should submit it, the steps for doing so, like using time and attendance software or directly informing management, and whether factors like work overload or team coverage affect approvals. 

Also, set a timeframe for managers to review and approve requests, while specifying peak periods or other windows when employees may expect their requests to be rejected. Being clear about the rules for requesting and scheduling vacation prevents overlaps and frustration within a team, allowing everyone to organize their time effectively without disrupting operations.

4. Handling unused vacation during termination or resignation

A policy must also clarify the company’s stance on unused vacation days, particularly upon termination or resignation. Some companies pay out unused vacation days, while others require employees to use them before their last working day.

Whether a company pays out remaining accrued vacation often depends on its policy and applicable laws. Some jurisdictions, like Louisiana, Massachusetts, and Colorado, mandate payouts for accrued vacation time. Addressing accrued balances in the vacation policy is essential for ensuring smooth transitions, maintaining legal compliance, and avoiding disputes.

Vacation policy checklist

When crafting a vacation policy, companies must consider their business needs and employee expectations. Adopting vacation policies best practices helps employers create clear, supportive, and compliant guidelines that benefit the organization and its workforce. 

Explore the following criteria to ensure your policy checks all the right boxes. 

Define if employees can use vacation time before it is earned

Lump sum vacation accrual allows employees to receive the entire allotment of vacation time—or a portion—upfront, typically at the start of the calendar year, employment year, or other predetermined period. This method grants employees access to vacation days before they are fully earned through regular accrual. 

Even when employers choose this approach, it doesn’t always mean employees can use vacation days at their discretion. Employers must clearly outline rules for requesting and scheduling time off. For example, employees might need written authorization from their superior detailing how much time can be taken in advance, let’s say, up to three days before it is officially earned. 

Create carryover policies 

Carryover policies determine whether employees can transfer unused vacation days to the following year. Employers must consult applicable labor laws to ensure compliance and avoid disputes when drafting policies. 

In some jurisdictions, employers can’t mandate employees to use all their vacation days within a year. Instead, they may be required to allow carryovers or pay out unused vacation. Placing a cap on accrual is often permitted. For example, employees might be allowed to accrue vacation days up to a specific limit. Once they reach this cap, they can only continue accruing vacation time after using some of the already accrued days. 

Consider peak periods in your vacation policy 

Employers want to support employees’ well-being while ensuring operations run smoothly, especially in high-demand periods. That’s why it is important to identify and include peak periods, such as holidays and end-of-the-year deadlines, in a vacation policy and set restrictions or blackout dates for time off requests. 

Alternatively, employers can implement a first-come, first-serve method to manage overlaps. These approaches help employees recharge during busy periods without disrupting operational needs.

Address payout in your policy 

Companies must clearly outline their policy on unused vacation payouts. In some companies, employees can expect to be paid for accrued but unused vacation time upon termination or retirement; it all depends on applicable labor laws and company policy. In California, for example, unused vacation is considered earned wages and must be paid out. 

2 vacation policy examples and templates 

Vacation policy template examples can help you determine what to include in your own program. These templates provide adaptable structures that you can customize to meet your company's needs, ensuring your policy is both clear and compliant.  

Annual accrual policy

XY company offers employees [the number of hours] of vacation time each year. This time is specifically designed for vacations, allowing employees to rest and recharge. The policy applies to [employees qualifying for vacation days], enabling them to use their allocated vacation days throughout the year.  

Each employee’s vacation year starts on January 1 and ends on December 31. Employees receive their full vacation time at the beginning of the year. If employees use all their vacation days, they can speak with their supervisor about the possibility of additional unpaid time off. Any unused vacation time [can/can’t] be carried over to the next year. 

Employees can take vacation for up to two consecutive weeks at a time.  Requests for additional time off should be discussed with the supervisor.

Accrual overtime policy 

YZ Company offers a paid vacation plan designed to support employees in maintaining a healthy work-life balance by taking time off for vacation purposes. Employees [full-time, part-time, and other members qualifying for vacation time] start accruing vacation time on the first day on the job. The vacation year starts on the first day of employment and ends the day before their employment anniversary. 

Employees accrue [number of hours] of vacation every [pay period] based on their accrual rate. Once accrued, vacation time can be used as needed. Employees can request unpaid time off if they run out of vacation days. 

Employees [can/can’t] carry over unused vacation days to the following year. To request vacation days, employees must notify their superior at least [number of days/weeks] in advance to ensure proper planning and coverage during their absence.

Streamline your vacation policy with Rippling

A comprehensive benefits package can help you stand out in a competitive market. However, managing benefits, especially if you run a distributed team, can be overwhelming, given the differences in legal requirements and employee preferences. But, with the right partner, you can make your company’s benefits administration a breeze.

Rippling brings your entire employee benefits administration experience—plan selection, broker partners, payroll, and HRIS—into one system, ensuring seamless integration and automating your benefits of busy work. We keep track of all federal, state, and local policies, so you can rest easy knowing your workplace is always up to code (and exceeds employee expectations).

Vacation policy FAQs

How do vacation policies work for remote employees or contractors? 

Vacation policies typically apply to remote employees the same way they do to in-office workers. Remote employees are eligible for the same accrual rates as their on-site colleagues, though time zone differences and work schedules may need to be considered. Contractors, on the other hand, generally don’t qualify for vacation days unless specifically outlined in their contracts. 

Should small businesses offer unlimited vacation policies?

An unlimited vacation policy can be an effective strategy for attracting top talent. However, it presents challenges related to work expectations and ensuring consistent coverage. Small businesses with a strong culture of flexibility and trust can consider this policy, but with clear guidelines to prevent misunderstandings and misuse. 

What is the standard vacation policy in the US?

While US federal law doesn’t mandate paid vacation time, companies typically offer between 10 and 15 days of paid vacation, primarily to full-time employees. Vacation policies vary based on the company size, type of employment, and industry.

What is a “use-it-or-lose-it” policy, and is it legal?

A use-it-or-lose-it policy means employees must use their vacation time within a specific time frame or lose it. The legality of the policy varies by state and jurisdiction. While some states, like Colorado and Montana  see accrued vacation time as earned wages, others, like Nevada and New York allow use-it-or-lose-it rules. 

How is vacation time accrued?

Vacation time can be accrued over time (monthly or annually) or based on a set number of hours worked. Common methods include lump-sum accrual at the start of the year or employment, or progressive accrual based on pay periods and tenure.

This blog is based on information available to Rippling as of December 23, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.