Time for a Vacation Policy Makeover? 5 Flexible Options for Small Businesses

Ever heard a colleague brag about how they never have a personal day? Or had extra pressure piled on you the week before your vacation?

Thanks to nose-to-the-grindstone company cultures, vacation can be as stressful as it is relaxing — and when you’re worried about returning to a mountain of backlogged work, it’s no surprise US workers are more hesitant to take time off than ever before.

While it may be seen as noble at face value, passing on well-earned but unused vacation time can lead to higher employee burnout rates, reduced productivity and crappy company cultures.

The good news is there are plenty of opportunities for small business owners to encourage workers to actually take their Paid Time Off (PTO) and protect your bottom line in the process.

But which small business vacation policy changes make the most sense for your company?

5 types of small business vacation policies

• The standard vacation policy
• Paid Time Off (PTO) banks
• Unlimited PTO
• The rollover policy
• Use it or lose it vacation policy

The standard vacation policy (and how you can do even better)

The right vacation policy supports work life balance and is great for increasing overall employee satisfaction (not to mention a big perk for your employer brand). But what does the average vacation policy look like for a growing business like yours?

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Let’s start with the basics. According to the Bureau of Labor Statistics (BLS), average paid vacation time for employees at small businesses typically works out like this:

• Time in role: 1-5 years | Vacation days: 11 days per year
• Time in role: 5-10 years | Vacation days: 15 days per year‍
• Time in role: 10-20 years | Vacation days: 17 days per year‍
• Time in role: 20+ years | Vacation days: 20 days per year

Note: This doesn’t include additional PTO like sick days, national holidays, etc., and the average vacation time can vary between industries. Always do your research to find out what the average is in your industry before settling on your policy.

According to BLS’s Employee Benefits Survey, 79% of private industry workers had access to paid vacation days in 2022. And with 82% of employees ranking leave as a “very important” or “extremely important” benefit, it’s clear that vacation time is the key to an effective employee benefits package.

The right small business vacation policy is great for employee health and even better for business. Because when your employees receive time and space to recharge, they’re less likely to burn out and more likely to innovate.

So why not go above and beyond the norm?

Why it pays to have a small business vacation policy your employees actually use

Offering PTO is just the first step. To really make the most of it, your employees need to actually use their vacation days.

According to PTO managers Sorbet, 55% of PTO went unused in 2022 and when you compare that to only 28% of PTO left on the table in 2019, you can see that this figure has nearly doubled. So what gives?

Employees shouldn’t feel like their jobs are at risk simply because they took time off to recharge.

Here’s why it pays to have a vacation policy your small business employees actually use:

• Great vacation policies boost company culture by showing you care about your employees.
• Candidates are attracted to companies that offer fair vacation policies.
• Vacation increases productivity by giving employees time to reboot.
• Time off can help you retain employees and develop future leaders by allowing less experienced workers to step into senior roles while employees are away.
• If your company allows PTO rollovers, you can end up with unbalanced books. Getting employees to take vacation helps avoid balance sheet liabilities.
• Regular vacation days can help prevent physical and mental illnesses and reduce your healthcare costs.

Although it’s not a legal requirement to offer paid time off, it does boost your employer cred, both with new hires and existing employees. Fortunately, there are plenty of ways to make the most of a strong PTO policy.

4 employee vacation policy options for small businesses

Now that we know why paid vacation is so important, it’s time to dive into how to build an awesome vacation policy your employees will love (and use!).

Here are a few of the main types of vacation policies to test.

1. Paid Time Off (PTO) banks

PTO banks give employees ultimate control over their paid leave. 

Basically, all time off (including sick pay, any number of vacation days, and personal leave) is piled into a vacation ‘bank’ which employees can use when they need to. 

The standard set number of days off typically varies by tenure, but it usually hovers around 11 days for newer hires and 17 to 20 days off for decades-loyal veteran workers.

👍🏻 The benefits: More flexibility for employees, easier to administrate, helps to compete with other employers, lowers absenteeism, and boosts employee engagement.

👎🏻 The drawbacks: Higher volume of requests, often an uneven spread of time off over the year, and employee resistance to using PTO as sick time.

⭐️ Star policy: Isaac’s Deli, a Pennsylvanian restaurant chain, has a general PTO bank policy perfectly suited for the restaurant industry. They outline their PTO info with clear sections on eligibility and scheduling, along with a visual accrual chart. This easy-access approach to PTO means employees can understand and utilize their time off, something that’s rare in the service industry to begin with. With veteran workers earning more PTO the longer they stay, Isaac’s encourages good employees to stick around.

2. Unlimited PTO

With unlimited vacation policies, employees are free to take off as much time as they want, as long as they finish their tasks on time. 

With unlimited vacation policies, the focus is on productivity and results rather than being chained to your desk.

👍🏻 The benefits: Boosted employee engagement, reduced burnout, increased productivity, and better recruitment and retention results.

👎🏻 The drawbacks: Fear of employees abusing the system, vacation overlap, increased chance of employee ‘martyr syndrome’ where workers don’t take enough time off.

⭐️ Star policy: When it comes to a pitch-perfect unlimited PTO policy, Evernote is leading the charge. The popular note-taking platform not only offers unlimited vacay days, but also encourages employees to use their time off by giving workers who take advantage of the policy a $1,000 stipend - now that’s a fresh take on vacation pay! While we can’t all afford to line workers’ pockets with a cool grand, implementing a similar (but lower-stakes) rewards program could encourage employees to utilize their unwind time.

3. The rollover policy

With the rollover policy, employees have a set amount of annual, accrued vacation time off — but if they don’t use it, they can roll it over to the following year.

👍🏻 The benefits: Increased employee flexibility, opportunity for unofficial sabbaticals, and avoiding the end-of-year race to take time off.

👎🏻 The drawbacks: Employees could end up rolling over too much leave, or they could avoid taking regular breaks to save up vacation time.

⭐️ Star policy: Global consulting firm Accenture offers a generous rollover policy that sets them apart from other top dogs in the industry. Consulting work is grueling and travel-heavy, and Accenture offsets the grind by offering generous paid time off and exceptional carryover options. Employees earn and can roll over up to 240 hours of unused paid time off from one year to the next, allowing them to take longer (and more restful) breaks.

4. Use it or lose it vacation policy

No more cashing out on unused holidays or rolling it over to the following year — the use it or lose it policy does what it says on the tin: use your annual vacation policy before the year’s end, or lose it.

👍🏻 The benefits: Employees are more likely to take time off, companies avoid balance sheet liabilities, and no risk of employees using a ton of time off all at once.

👎🏻 The drawbacks: Employees may lose out on much-needed time off (especially if they don’t feel able to ask for it), use it or lose it isn’t a great pull for potential new hires, and there’s often an end-of-year race to take time off — meaning many employees out of office at once.

⭐️ Star policy: Bolder Industries, a Colorado-based manufacturer, offers a mandatory PTO policy. CEO Tony Wibbeler believes that far too often in blue-collar environments, workers don’t get the most out of their PTO, “I want people to come to work and feel like they have security, where they don’t have to…worry about losing their jobs if their kids are sick or someone dies.” By creating a PTO policy with a built-in expectation to actually use it, Bolder Industries has built a better work environment where factory workers feel valued and well-rested.

Note: Use it or lose it policies are banned in some states. Always do your homework and check with a legal professional before changing or updating your HR policies.

How to write a vacation policy your employees will love

So you know what a five-star vacation policy looks like. But how can you write one for your business?

Let’s start with the basics — eligibility, accrual, and administration.

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• Eligibility dictates how long employees have to work for you before they start earning time off. Are new employees eligible for PTO right off the bat? Or do they have to put in a few months of work before they jet set? 
• ‍Accrual describes how time off is accumulated. While some companies offer the same amount of time off for every employee, others allow veteran employees to accrue more PTO the longer they’re at the company to reward loyalty.‍
• ‍Administrative decisions allow you to build flexibility into your policy. 

For example, if you want your employees to use up their vacation days, you can implement a use-it-or-lose-it policy where unused time off doesn’t carry over from year to year. 

Alternatively, you can opt for a more generous rollover policy so employees can save up hours for longer vacations. No matter how you slice it, you need to decide how employees are allowed to use their time off and how they should go about requesting time off. Do you need a week’s notice? Two weeks?

Whatever vacation policy you opt for, you need to plan a few extra parameters to make sure the company doesn’t miss out when employees go on holiday or fall ill.

Here are the factors you’ll need to consider:

1. Employee sick leave

When structuring your PTO policy, consider how you’ll handle sick days. Will you have distinct vacation and sick leave policies? Or will employees draw from the same bank of time on both accounts?

While the Family and Medical Leave Act requires employers to provide protected days off in the case of personal or family illness, they don’t require that time off to be paid. 

But with 79% of workers able to access paid sick leave in 2021, neglecting to pay workers for illness-related time off isn’t the best look, and it could give your competitors a leg up.

2. Holidays

Holidays are another question mark in your vacation policy considerations. But unlike paid sick leave, this topic is usually a little more cut and dry.

Observing holidays is an economical way to offer more PTO because your business may be able to shut down for the day without worrying too much about lost sales. The big question is: which holidays will you observe?

The typical worker in the US averages about 8 paid holidays per year, most of which include some combination of federally recognized holidays like New Year’s Day, Christmas, Thanksgiving, Independence Day, and so on. 

But in order to keep things fair and inclusive, consider offering at least one or two floating holidays so employees can take off the special days that coincide with their religious beliefs or family needs.

3. State PTO laws

While there is no federal law mandating PTO, some states have specific legal requirements concerning vacation time and sick leave.

California, Connecticut, Massachusetts, Rhode Island and Vermont, for example, all require employers to provide paid vacation days. Some of these states also obligate companies to pay out unused PTO if an employee quits. However, laws differ from state to state, so be sure to do your research.

A stronger company culture from day zero

A well-planned vacation policy not only keeps employees happy, it also helps you attract the right candidates now and in the future.

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