Q&A: What Is Vacation Pay?
By Indeed Editorial Team
Updated January 14, 2021 | Published December 12, 2019
Updated January 14, 2021
Published December 12, 2019
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Understanding each element of your compensation package is critical to ensure you are being paid fairly and competitively. When analyzing various components of your benefits, you may have questions about how compensation outside of your base salary affects your overall compensation. In this article, we’ll discuss what vacation pay is and how it works.
What is vacation pay?
Vacation pay is the compensation you receive while taking time off work. It is important to understand the difference between vacation time and paid vacation because an employer may not always compensate you during your time off. In this case, the vacation time is part of your benefits package, but not part of your compensation package.
Why do employers offer vacation pay?
Employees benefit from having a period to rest and recharge away from the stresses of work. Offering paid time off of work has many benefits both for the employer and employee. Time off work typically encourages more trust between employees and the organization as it shows an effort to achieve a healthy work-life balance. This generally leads to higher productivity and morale, which is the best-case scenario for the company. Employers also use vacation pay and other benefits as an incentive for recruiting high-level and senior talent.
How does vacation pay work?
Employees typically acquire paid vacation time based on the amount of time they have worked. For example, if you are eligible for two weeks of paid vacation time each year and are on a bi-weekly pay schedule, you will accrue around 3.08 hours of vacation time for each pay period. Some employers apply all 10 vacation days to your time-off bank at the same time, while others will only add vacation time into your time-off bank as you earn it. Your employer should have set guidelines that identify whether you must earn accrued vacation time before you can take time off.
Is paid vacation required by law?
Employers are not required to pay their employees paid vacation time. However, most companies offer vacation pay to be competitive in recruiting, increase employee morale and minimize turnover rates. Employees in larger-sized companies may be more likely to receive paid vacation time since there are more people available to take up any additional responsibilities during another’s absence. State requirements typically relate to how the employer distributes vacation pay, not whether they must offer it.
Full-time employee vacation rights
Employers do not have to offer paid vacation time to all employees equally. Employers can choose to offer full-time employees vacation pay, but not part-time or seasonal workers. Sometimes, part-time or seasonal workers will be eligible to earn vacation pay on a prorated basis. This means they accrue their vacation time in proportion to a full-time employee based on the number of hours they work.
For example, if you work 20 hours a week, your employer may divide the number of hours you work by 40 hours and then multiply that percentage by the number of days of vacation a full-time employee would receive. In this example, if a full-time employee receives 10 vacation days per year, then you would receive 5 vacation days per year based on the prorated schedule. Additionally, some employees are not eligible for vacation pay until they have been with the company for a certain period.
You can also use paid vacation time in salary negotiations with a potential employer. For example, an employer’s budget for the position you are considering may not allow them to pay the salary you expect, but they may give you additional paid vacation days. Employers will also sometimes offer you additional paid vacation days when you have already accrued a significant amount of paid vacation time with your current employer.
How much vacation pay do different jobs receive?
Many entry-level employees receive 10 days of paid vacation time after one year of service. Employers often offer managers and other upper-level employees more vacation time than entry-level employees. The amount of paid vacation time an employer offers you each year usually increases with additional years of service with the same company. On average, employees with five years of service received 15 paid vacation days, employees with 10 years of service received 17 paid vacation days and employees with 20 years or more of service received 20 paid vacation days.
Can employers place a cap on vacation time accrual?
Employers can limit the amount of paid vacation time you can accrue. This means that once you have earned a certain number of paid vacation days, you will stop collecting time until you use some of the time you have accumulated. This allows your employer to maintain control over the amount of vacation time you earn.
For example, if you earn two weeks of paid vacation each year and your employer allows you to roll over unused time to the following year, you could accumulate four weeks of paid vacation for that following year. But if your employer places a cap on accrual at 1.5x the normal rate, once you reach three weeks of vacation you will not accrue any additional time until use some of your earned vacation time.
Can my employer decide when and how I can take my vacation time?
Your employer can control when and how you take your vacation time. Employers with peak and slow business times might restrict you from taking time off during periods when business is heaviest. They can also require you to provide a certain amount of advance notice when requesting to use vacation time. If many other employees request vacations at the same time, your organization may ask you to take time off at another date. Finally, your employer can require you to use accrued vacation time for any time you miss from work, such as for sick days or a personal matter.
What states require employers to pay for unused vacation time?
The rules employers must follow regarding unused vacation time vary by state. Some states recognize vacation pay as wages and thus require payment of unused vacation time. Some states only recognize vacation pay as wages when the employer has established policies or precedents of paying their employees for this time. States that have requirements addressing vacation pay include:
Companies may have specific guidelines about how many days you can roll over from one year to the next.
Vacation pay after termination
States also vary on whether or not an employer must pay out accrued, unused paid vacation days upon termination of employment. This is a requirement in the following states:
Many states that do not require payout of this time require the employer to establish policies or contracts governing whether they will pay out vacation time upon separation. Some employers establish these policies even when state requirements do not cover such payout.
Related: Guide to Severance Pay
Asking about paid vacation during negotiations
Once you’ve received a job offer, you can enter the negotiation phase. This is an appropriate time to ask about the employer’s paid vacation policies or negotiate for more vacation time than they are offering you. Here are a few tips to help guide you when asking about paid vacations:
Let them know you want the position
This tells the employer you are open to their offer and willing to reach a compromise regarding compensation and benefits.
Make your concerns about paid vacation known
This is a signal to the employer that they should negotiate for you to accept their offer.
Make your reasons clear
Knowing why additional vacation time is important to you can help them consider your position and whether they can accommodate you.
Be open to their response
Keep in mind that hiring managers are not always able to negotiate for more benefits. It could be that all employees with your job title must earn the same amount or that additional time will not work with their schedule. Being understanding of their answer should show your prospective supervisor that you are flexible and dedicated to working with them.
Examples of discussing vacation pay
Here are some examples of how to discuss vacation pay in the hiring process:
If you have four weeks of vacation at your current job and your job offer only includes two weeks of paid vacation, you can ask the employer to match what you already have:
“I am excited about this job opportunity and look forward to joining your team. I have some concerns about your paid vacation policy. My current job gives me four weeks of vacation per year which has been extremely important since I’ve recently started a family. Can you match my current employer by offering four weeks of paid vacation?”
If you have stated your salary expectations are higher than what the employer is offering you, you can use the reduced salary to negotiate additional vacation time:
“I appreciate your offer and I am excited about joining your team. I was hoping that the salary would be higher, but I am happy to accept it if you can add five days of paid vacation to the original offer.”
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