The Perfect Vacation Policy for a Small Business

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Navigating vacation policies as a small business can take time and effort. 

There are some federal guidelines in place for large businesses, but they don’t always apply to smaller ones, leaving small business owners to try and figure things out on their own. Plus, with smaller budgets and fewer employees to cover absences, the logistics of giving employees time off can pose a risk to productivity. 

In this article, I’m breaking down everything you need to know about creating a great vacation policy as a small business, including what you need to cover, what to avoid, and an example policy that I think gets it right. 

Vacation Policy Challenges for Small Businesses

For smaller companies, there are some unique challenges when it comes to vacation policies. Many revolve around managing the disruption while supporting employee mental health and happiness. 

For example, in a big corporation with 500 employees, it’s not difficult to find a team member to take over the work when someone takes two weeks off. Some large businesses even have the resources to hire temporary workers, which small businesses don’t always have. 

In smaller teams with less than 20 people, one person missing for two weeks can have a significant impact on productivity, morale, and profit. Large businesses also tend to have a lot more money to pay employees even when they’re not working, whereas paid vacation can be much harder to fit into the budget for small companies. 

Another challenge is that in smaller teams, even one person experiencing burnout or job dissatisfaction can affect the whole team. 

Added to the fact that it’s already harder for small businesses to compete with bigger ones for top talent when offering salaries and benefits, giving employees paid vacation is essential. Small business owners must provide the same benefits as bigger companies but without the same resources. 

The good news, though, is that as challenging as all this sounds, there are ways for small businesses to be strategic when creating a vacation policy so that they maximize resources while keeping employees happy.  

You Must Check State Laws

While no federal law requires you to give paid vacation, once you create a policy, you’ll need to abide by state laws, which are all different. Many states and counties have requirements around sick time, which is important to consider, too.

Arkansas, for example, has no specific rules or laws, while California states that if there is a policy for paid time off, paid vacation time needs to be treated as wages and earned as work is performed.

Or, for example, in Indiana, where paid vacation is subject to the wage payment statute and is considered a type of deferred compensation. 

Every state has different rules about vacation pay once a policy is in place, so make sure you research in your state to avoid making mistakes or accidentally doing anything illegal. 

One thing to be aware of is that even though there is no federal rules around regular paid time off, there are federal requirements for unpaid time off, such as the Family and Medical Leave Act (FMLA).

You should also consult with a local attorney before officially implementing new policies. 

Why Your Small Business Needs A Vacation Policy

As a small business, having a vacation policy might not seem essential, but it’s actually even more important than if you were a larger company. Why? Because large businesses have more resources to offer employees benefits like medical care, free trips and enrichment activities, or retirement and investment benefits. 

While you should still try and offer these as a small business, it’s much more affordable to give employees paid time off than to invest in expensive trips and benefits. By having a vacation policy, you can save money where it counts. 

For example, you could have a flexible vacation policy that doesn’t include accrual or annual rollover so that you can minimize how much you have to pay out when employees leave. 

Avoiding burnout and having employees that feel happy and valued at work is extremely important because, with smaller teams, each person is essential and harder to replace. It’s also easier for negative energy and low morale to spread in a small team, which can quickly impact productivity. 

Having a reputation as a good employer is also very important for small businesses, as this can affect how fast you grow and what kind of talent you attract. When building a vacation policy, you can ensure that you are thinking through maximizing the benefits you’re offering while still being mindful of your budget and resources. 

What Is The Average Vacation Time Across Small Businesses?

On average, in the US, private companies give employees 11 days of paid vacation after one year of service, which climbs to 15 days after five years. However, this is the average across all businesses and varies depending on your industry. 

For example, only 43% of employees in leisure and hospitality get paid vacation leave, while in manufacturing and finance, about 95% of employees get paid time off. This is more common for larger businesses than smaller ones, with 95% of employees in big companies getting paid vacation, while in smaller ones, that number is only 71%. 

But just because the average is 71%, that doesn’t mean that you should aim for less than bigger businesses. Remember that your benefits can determine the talent on your team, and attracting specialized, high-quality candidates means you need to offer good incentives.

Critical Decisions You’ll Need to Make When Creating Your Vacation Policy 

There are a lot of factors to think about when you are creating a new PTO policy, including who gets vacation time, whether you have combined or separate PTO “buckets,” how employees accrue or are given vacation time, and how employees will be able to use vacation time. 

You want a policy that benefits both the company and its employees. 

Below, I break down the primary decisions you must make when putting your policy together.

Who Is Eligible For Vacation Time? 

The first decision you’ll need to make is who gets paid vacation. Do all employees automatically get it, or is it just for full-time, salaried employees? You must consider if you allow hourly and part-time workers to earn paid vacation time.

And how long do employees need to be with a company to qualify? Do they need to complete a three-month probation period before they can use your vacation time?

One way to make your vacation policy attractive to potential employees is to make it available right after hiring instead of making them wait.

Separate or Combined Paid Time Off? 

Next, you’ll want to consider what counts as vacation time and what doesn’t. 

Some companies allow employees to use “vacation” days for all PTO reasons, like personal and sick days, while others have separate leave policies for things like family days, sick days, or mental health days. You’ll also need to decide whether the vacation days you offer are carried over into the following year (which you can cap) or if employees must “use it or lose it.”

For smaller businesses, things like federal guidance are less clear, so this is really up to you to decide. 

You’ll need to be very clear in your PTO policy whether the PTO you offer is all one type that can be used for all days off or if there are different kinds of PTO. This is important because then you’ll need policies on how to track the different types of days, how many to offer employees, and any requirements for taking them.

How Much Time Off Should You Offer & How Will Employees Get It?

These are the big questions you’ll need to answer. How many days off per year or per quarter will each employee get? And how will they get them?

Will you follow the average and give people 10 days off per year, based on an accrual method, or will you take a more progressive approach by giving employees unlimited time off?

There are four ways you can offer employees PTO:

  • Accruing PTO per pay period or per hour worked
  • Standard PTO that provides a set combination of sick, vacation, and personal days
  • PTO banks, where all PTO is one type
  • Unlimited PTO

Of those four options, all but the PTO bank can be built with multiple types of PTO days (vacation, sick, personal, etc.) or as one “bucket” with a single type of day for everything. In addition, all but the unlimited PTO policy can have a cap on the days offered/taken.

There are advantages and disadvantages to all four options. It comes down to what is best for your small business and how you want to track your vacation days.

As a smaller business, the risk of burnout and the cost or turnover is more severe than in larger businesses, so 10 days should be the minimum you provide. 

How Will Vacations Be Organized?

You need to be clear in your policy about the procedure for booking vacation time off. 

For example, how much notice do they need to give their managers? Will you require the employees to give a reason for taking days off? And what is the process for managers to approve vacation days?

Some companies have set periods that aren’t eligible for any vacations (for example, small bookkeeping firms can’t risk having anyone absent during tax time). Anything like this needs to be clearly outlined in your policy. 

Because absences can be so much more disruptive in smaller teams than bigger ones, tracking vacations using tools like Vacation are essential to keeping things running smoothly when employees take time off. 

The Perfect Small Business Vacation Policy

Although it’s hard to give a definitive answer because every business has specific needs, I recommend small businesses adopt an accrued PTO policy using a PTO bank, where all paid days off are in the same bucket. So there is no distinction between vacation, sick, and personal days.

The traditional accrued PTO policy is the most common kind of policy in the US, in which each employee accrues a specific number of PTO hours per pay period or hour worked and adds up to a specific number of days per year. For example, if you plan to offer 10 days (80 hours) of PTO per year to full-time employees who get paid every two weeks, they would need to accrue 3.08 hours per pay period.

You can choose whether to allow any or all unused PTO to carry over into the following year. Just remember that in at least 24 states, employers must pay out for all of an employee’s unused PTO when they resign.

An accrued PTO policy with a bank is great for small businesses because you won’t have to keep track of as many different types of days, nor will managers when they approve their team’s time off. You still get to control how many total days your employees get, but they will appreciate the flexibility a bank gives them. Instead of being limited to three sick days per year, employees just use their accrued PTO hours for any reason, including sick days and vacation time.

Ultimately, when choosing your policy, it’s still important to consider other examples before deciding on the one that’s right for you. As with everything in business, there is no one size fits all answer, so make sure you do your research before making a final choice. 

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