How to Implement Vacation Policies at Your Business

How to Implement Vacation Policies at Your Business
Having a well-thought-out vacation policy is one way to attract and retain employees.
by Chidinma Nnamani Aug 12, 2022 — 4 min read
How to Implement Vacation Policies at Your Business

This article is for educational purposes and does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.

Happy employees are good for business. According to a Work Institute Retention Report, it costs an employer 33% of a worker’s annual salary to find a replacement if they leave. In a hyper-competitive labor market, this is why businesses should try to offer competitive perks that not only attract employees, but also retain them. Having a well-thought-out vacation policy is one way to do so.

What is a vacation policy?

A vacation policy, also known as a paid time-off (PTO) policy, is a set of guidelines that dictate the amount of time off employees are permitted to take, usually during the course of a calendar or fiscal year. 

The time off that an employee is permitted to take usually varies depending on the type of job and the length of employment. There is no one-size-fits-all policy, so it’s important to determine what works for your business.

Here’s how to get started creating vacation policies for your business.

Types of vacation policies

Vacation policies usually fall under three main categories:

1. The traditional vacation policy

Here, employees receive a fixed number of days for specific time-off categories such as vacation, sick leave, personal days, etc. Most traditional vacation policies are tenure-based, which means that employees earn more time the longer they work with a business. This can encourage employees to stay longer with a business.

2. Flexible vacation policy (or paid time-off policy)

This type of policy offers employees a total number of days off per year and the freedom to choose how to spend the time. This type of policy may be particularly appealing to employees who are parents and need to take a day off for parenting duties that would typically not appear in traditional vacation schedules. The drawback of this policy type is that it may be more difficult to determine how much time each employee receives and to plan for staff coverage. 

3. Unlimited vacation policy

This type of policy allows employees to take as much time off as they want as long as they complete their tasks and/or get approval. This policy type shifts the focus to deliverables and results instead of hours worked and is popular in tech and other industries where organizations compete for top talent. However, an unlimited vacation policy may not work well for hourly workers or in shift-based industries like restaurants or hospitality.

How to implement a vacation policy that works for your business.

Now that you know the types of vacation policies to consider, here are some guidelines to help you create and implement one.

1. Check state and local laws that apply to your business 

Depending on where your business is located, there may be specific state and local laws that apply and may impact your business’s paid time-off policies. Be sure to find out what they are and take them into consideration when creating your vacation policy.

2. Define the terms of your policy

Consider the areas outlined below and make decisions about the terms to include in your vacation policy. 

Decide how much time employees will receive

If you are going for a traditional or flexible policy, you’ll need to decide the total number of days off employees receive annually. Keep in mind that more time off will be attractive to employees, but you should ensure your business will have adequate staff coverage throughout the year.

Specify an approval process 

While you may opt to let employees take time off without approvals, a clearly defined approval process makes it easier to manage your staffing needs and ensure you’re adequately staffed at all times. For example, you can specify how much notice employees need to give before taking time off and who can approve their time off.

Specify deadlines for calling in sick

This is particularly important for restaurants and businesses that rely on hourly workers. While no one knows when they’ll fall sick, a fair deadline can encourage employees to be more proactive and communicative, giving you time to find a replacement. 

Decide if you’ll have different vacation policies for different employee types

If you have employees on different employment terms, such as full time and part time, you may want to create different vacation policies for each group, depending on the size of your business. Full-time employees usually receive more time off and benefits, but you can also create an attractive vacation policy for part-time staff.

Decide if time off will be accrual-based or one lump sum at the start of the year

In an accrual-based policy, employees will earn time off based on the hours they’ve worked. For example, employees can take a day off for every four weeks worked. That adds up to 12 days off in a year. If vacation time does not accrue, employees can take time off whenever convenient without needing to work a stipulated number of days to earn that time. Once they’ve used up the maximum allotted time, however, they cannot request more time off.

Decide whether unused time can be rolled over (or not)

Time off may be rolled over or you can adopt a “use it or lose it” approach. The first approach is more flexible, but you should stipulate how much time employees can roll over and how they can do it. A “use it or lose it approach” may appear more restrictive but it may encourage employees to take time off. 

Studies continue to show that taking time off benefits both businesses and employees. A research study by Project: Time Off shows that employees who work for companies that encourage vacations (68%) are much happier with their jobs than those who work where either vacation is discouraged or managers are ambivalent about taking time off (42%).

3. Document your policy

Once you’re clear about your policy terms, the next step is to document key decisions. It’s a good idea to seek professional legal advice before creating a policy, especially to confirm whether there are specific state or local laws that apply to your business. This could help you avoid costly mistakes. 

4. Enforce your policy

A vacation policy is only useful if it’s used by your employees. This means making sure that everyone in your organization is aware of your vacation policies and abides by the rules. To ensure that your policy is not abused or misused, communicate the terms clearly to your employees and encourage them to give feedback. Ultimately, the goal is to provide a great work-life balance for employees while growing your business, so a policy that’s perceived as overly restrictive or unfair may have the opposite effect.  

Manage your team and policies with the right technology

Even if you have only a few employees, manually tracking time can be a chore. Using staffing software can help efficiently manage staffing activities like shifts, time-off approvals, and more. For example, with Square Team Management, you can track your team’s hours at a glance, manage shift schedules, and approve time-off requests — all from the same dashboard. Plus, you get valuable insights into employee performance so you can make more informed decisions about how to run your business.

Chidinma Nnamani
Chidinma Nnamani writes about the food industry, digital marketing, and technology — and explores the fine spaces where they intersect. She works with B2B startups and agencies, helping them deliver clear, actionable, and insightful content for business audiences.


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