Companies have the option to either provide paid leave upfront, all at the beginning of the year or allow employees to accrue their leave as time goes by, either each hour worked each pay period, or each month. Which is better? This depends on the company and the culture, but let’s consider the pros and cons either way.
By providing, a front-load of paid time off, a company has a lower administrative burden. In simple language, it is easier. There is no accounting for each period, the amount of leave is placed in the employee’s ‘bucket’ and when the bucket is empty, there is no more leave to use (unless of course there is a leave available under Federal or State law). The challenge or downside is that if you front load the leave and an employee leaves mid-year for example, they could have used all of that leave or may be owed any accrued but unused leave in their final pay – depending on the state of course (MA & RI) or company policy (CT). Some employers don’t want to pay out the leave, and others want to only pay out enough for the half-year. Consider this vacation payout as a cost of doing business and that it indicates a better, more generous company culture. It will also help with attracting and retaining employees.
Recruiting new employees and retaining existing employees is not going to get any easier. Do you want your company culture to be giving and employee-centric or do you want it to be all about dollars and cents? Employees want time, and they want flexibility. If you don’t give it to them, someone else will. The cost of turnover is between 25 and 50% of an employee’s annual salary.
If you want to accrue as time goes by, this will solve the problem of the boss being upset about paying out vacation part way through the year, but this is at a much higher administrative cost, it lowers employee morale, and it is harder to understand. In today’s world, employers should strive to be an employer of choice. You want the applicants to come to you, instead of you trying to chase them down. If an employee has to wait until their time accrues to use it, this might not fit in with their plans of an early in the year vacation. The other thing to consider is that EVERYONE will have the most time to use late in the year, so that is when EVERYONE will use it. Can your business allow more employees to be off late in the year?
One other thing to consider in front-loading sick time, for example, is that the employees with attendance issues will use all of their sick leave very early in the year and be subject to your attendance policy sooner.
Some will argue that you could allow an employee to ‘borrow’ time, to use vacation before they have technically earned it, but what if they leave? Now you want to recoup your money and deduct from their final paycheck any ‘borrowed’ leave. If an employee is hourly, you shouldn’t take their final paycheck below minimum wage, so will you be able to recoup your money anyway? The other thing to consider is that you should not be deducting anything from someone’s paycheck unless they have agreed and signed off. Do you have a specific amount, or it is open-ended? Maybe the employee signed a form saying Yes it is ok to deduct vacation taken from my last check if I leave, but are they going to remember that six months later? When they receive their final paycheck and it is lower than expected, are they going to be upset? Could an upset employee decide to call Wage and Hour and file a complaint? Can you withstand the scrutiny of a Wage and Hour investigation?
Wage and hour will not only look at the employee’s specific case but they will try to find anything and everything during their investigation. Are your exempt employees really supposed to be exempt? Are you documenting hours worked for ALL of your employees, not just your hourly ones? Do you have documentation/timesheets showing that you gave ALL of your employees their meal breaks as required by state law? Most likely you don’t, so risking a Wage and Hour audit is probably not a good idea.
In summary, if money is tight and you have to watch every nickel and dime, the accrual method might be the only or best option. If you are trying to improve your culture and attract and retain the best employees, then consider a front-load system. One of the items that a large percentage of applicants and employees want in today’s world, is “Time”. Employees want work-life balance and flexibility. It might be a small cost to pay to avoid the high cost of turnover, employee burnout, and a lower employer reputation.