Vacation Pay

What Is Vacation Pay?

Vacation pay (also known as paid time off) is a form of compensation paid to employees when they take pre-approved time off from work. Vacation pay aims to increase employee satisfaction and engagement while decreasing turnover rates.

Offering vacation pay is not required by federal or state law. However, if an employer offers vacation pay as a benefit, their policy must comply with applicable state laws. Additionally, a collective bargaining agreement may govern vacation pay in a unionized workplace.

Why Do Companies Offer Vacation Pay?

Vacation pay gives companies a competitive edge by increasing employee satisfaction rates by:

• Keeping employees well-rested and more attentive after having time off
• Reducing last-minute time off by allowing employees to schedule days off ahead of time
• Lowering the amount of sick leave taken by encouraging physical and mental health
• Increasing company morale

In fact, job seekers often expect vacation benefits and will probably look elsewhere if vacation pay is not offered.

Most companies include vacation pay in their overall PTO policy, but some offer an additional stipend for travel. For example, at BambooHR, we offer a "paid paid" vacation to all of our employees. We do this for several reasons:

• Improve overall employee well-being
• Provide our employees with a better work/life balance
• Get better employee engagement and loyalty
• Increase our employees’ productivity
• Use it as a valuable recruiting perk

How Does Vacation Pay Work?

While vacation pay isn't mandated in the US, there are norms that most companies abide by. A typical company policy covers:

• Who qualifies for vacation pay (e.g., full-time employees, part-time employees, contractors, etc.)
• The compensation rate (vacation pay rates are typically equivalent to the employee’s hourly rate)
• Accrual of vacation days
• Cap on the total number of vacation days
• Roll-over or use-it-or-lose-it approach
• Process for requesting paid vacation days
• Payment of unused vacation days upon employee termination

Keep in Mind: Employers retain the right to turn down paid vacation day requests as long as they do so per company policy.

Is Vacation Pay the Same as Regular Pay?

Vacation pay is different from regular pay—and the FLSA does not require payment for time off. It is an optional benefit companies may choose to offer. For IRS reporting purposes, vacation pay is treated the same as wages.

Because vacation pay is optional, it doesn't need to be equal to an employee’s regular pay (as long as it follows company policy). However, most PTO programs compensate employees at their normal hourly rates.

Is PTO the Same as Vacation Pay?

Vacation pay is a type of PTO that is only used for pre-approved vacations or time away from work. Conversely, PTO can be used to cover time off for illness, injury, jury duty, doctor’s appointments, and vacations.

Some employers offer general PTO hours, which can be used for vacation or sick days. Offering a single bank of PTO leave discourages call-outs because missing time from work will leave employees with fewer vacation days.

Other businesses have separate sick and vacation banks, which is more beneficial to employees, as they will not lose the opportunity to take time off for vacation just because they suffer from an illness or injury.

Tracking time-off usage is easier if your company only offers PTO. However, if you offer both sick and vacation leave, you can gather more data about absenteeism and other employee performance metrics.