Accounting for Vacation Days, why?

After doing some slacker-eque research, I decided to post b/c I couldn’t find an answer to my company’s dillemma:

My company has now instituted a “use or lose it” policy with regards to vacation days. My CFO who confirmed it with my GC, said that vacation days represent a form of accrued wages or compensation, because in our state, paid (I guess it doesn’t matter if it is unpaid) vacation isn’t mandatory (didn’t even know there was a law about such things). Since it is a wage/compensation, they are earned/owned (pnwed – sorry couldn’t resist ;)) by the employee and represent a cost to the employer. For accouting reasons, therefore, vacation days are now capped (you can only have X amount per position/level) and if you don’t use any by a ceratin date, they are lost as new vacation days are then allowed to accrue.

Without swimming too much into GD here, but why are vacation days thought of as a cost to the employer? Maybe I’m just too enclosed in my office bubble, but why is there even a need to account for these vacation days in the first place? What are these accounting reasons? It’s not like the company goes out and hires temps to fill in while people are gone. We just all do more work. (I work for the CPO, so I know all the buying that is going on in my company.) Also, we never before allowed anyone people to trade vacation days in for money. (I don’t know if we’re doing that now with this new policy, so I’ll have to check). Needless to say, everyone is pretty upset about this. I’ve never seen moral dive so fast.

So, shed some light on this: why is vacation a form of compensation? It’s tough for me to resolve this because, I guess, I’m a salaried employee. I work until whatever it is I’m working on is done, sometimes it’s 30 hrs/week, sometimes it’s 60. I’m probably wrong on this, but I see it as a move to account for every hour (or day) of what I’m doing, and I don’t see the need for it. I guess I receive a benefit, but it’s not like I’m receiving any more actual cash. Is this a tax on my vacation?

I can’t speak for the reasons behind your company’s sudden change, but something very similar happened at a company where I worked, and it happened because of abuse of the system. Folks quitting and getting paid for literally months of vacation that they’d accrued, folks demanding as part of a firing/laying off that vacation time be paid, folks taking three, four, sometimes five weeks of accrued vacation.

So perhaps the accounting is from an end-line standpoint: to have hours upon hours of uncapped vacation time just hanging around on one person could result in significant cash layout by the company should something happen to that person.

You should check on the money angle. My company also just recently change policy, but the new rules were that 2005 vacation had to be used by a certain date or it would be paid off (not lost). We were allowed to request that the days be rolled over into this month, but they still all had to be either used or paid off by Jan. 30, 2006. I’d be surprised if they could just take them away without compensating you at all.

Why not pay them off, though? If you earned the time off, you should either get to take it or get paid for it.

I can understand barring somebody from taking 4 weeks off, it’s disruptive to business, but people should at least get paid for being at work when they could have been vacationing.

In our company, as I was talking to my contract manager (27 yrs exp), he said that people avg about 4 weeks vacation a year (he also does the department’s metrics), btw, many people in my department have 5 weeks vacation. It’s a bit disruptive only to the point of a slight annoyance, and if someone is really feeling the pinch, they let the vacationer know about it. That way, should it happen again, the people left behind will be better prepared.

Here’s the thing, and I wonder if HR people would agree to this [I’m not a friend to my HR department]: I would rather have less vacation on the books (because I only avg like 3 weeks/yr and their mostly weekends), and more upfront pay. I have a feeling that this would be a “no.” I have a meeting with them next week, I think I’ll ask them anyway.

I understood the difference was ‘earned’ time v. ‘gift’ time and that ‘earned’ time could accrue, where gift time could not.

I don’t agree with a policy that limits/ends/retracts ‘earned’ time- after all, it is ‘earned’. I could agree to a limit of how much ‘earned’ time one could use at one event, since that could disrupt the business in some situations.

My company dispensed with all the different kinds of time (‘vacation’, ‘sick’, etc)and simply provides Paid Time Off (PTO) to be used however the employee decides to use it. They do limit the number of days used in a row to 14 unless you make additional arrangements with mgmt. The time does accrue and can be donated to other employees. They also buy it back periodically.

To put it simply.

Vacation time is a form a compensation that as it is accrued must be recorded as a liability. Say you had accrued 15 days of vacation time, then decide to quit your job. Those 15 days are income you earned that we would have to pay out to you. Thus it is a payable owed to you, in addition to your regular earned salary.

<i>Why not pay them off, though? If you earned the time off, you should either get to take it or get paid for it.</i>

That would, in effect, give people a 5-10% raise if they didn’t take their vacation. The company doesn’t have any interest in doing that.

At my company the HR system tells us that vacation time is a benefit and not a type of compensation. Since we’re global, I would assume there’d be all kinds of disclaimers regarding that statement.

We also can’t roll it over or get paid for it. We “earn” it by the month, but we can take in the same calandar year as if we’d already “earned” it – even though it’s a benefit and not compensation.

Whoever asked if it was taxed: of course it’s taxed. The money you earn while on vacation is taxed normally, which is still better than not getting paid at all.

As to whether you’d rather have more or less money versus vacation time: my company offers every year the ability to purchase additional vacation time. It’s purchased at your wage at the time you make the decision, but you get paid your normal salary when you use it (in case you get a pay raise), so it’s not strictly identical to time off without pay. Also it’s taking out of salary over the course of five months, versus the hit you’d take by working without pay. I think we’re allowed to purchase the lesser of a maximum of two additional weeks or no more than would take you over five weeks of vacation – not sure on the numbers, but that’s the idea. It’s also use-it-or-lose-it.

I’m curious as to why the IRS says we have to use purchased vacation prior to company-given vacation, though.

I had a Chemistry teacher at my high school who was an old timer when my mother went to the same high school. He retired a few years after I graduated. He was under the old system. He called in sick maybe one day every few years. He never took vacation time. He had literally years of sick and vacation time saved up. More power to him, IMO.
I personally don’t see a problem with letting people save it up as much as they want, they did, after all, earn it. It’s in their regular employment contract, isn’t it? It is another form of compensation.

If people taking long vacations is a problem, then have a policy that only 2-3 week vacations are allowed without special permission.
I’m more cynical. I think the real reason for employers limiting how much time you can acrue (sic) is because they flat out don’t want to spend money they can get with not spending. Since vacation time is not something you already have in your bank account, they can have almost any damn policy they want regarding how you get to use it and you can’t do zilch about it.

Why not? Presumably you’d get 5-10% more work out of them (perhaps more if you factor in the loss of continuity that can happen in vacations)

Is this enforced by accounting rules, or by state law?

My company started a mandatory vacation week around July 4 explicitly to reduce the amount of accrued vacation on the books (which is usually quite a bit.) This directly impacts the bottom line.

When the liability occurs depends on when vacation is added. My current company accrues it by pay period. AT&T gave you your full vacation allotment Jan 1. When I took the buyout during the trivestiture, when I had to leave Jan 15, I got a check for 5 weeks of vacation along with all the other goodies.

I would suspect most companies have small print somewhere that says vacation can be taken subject to the needs of the business. Most companies don’t have policies that allow you to convert vacation into cash because vacation is considered necessary for employee productivity and health. I have heard that some companies require certain employees to take vacations, since some who are embezzling never take vacation, for fear that their plan would be exposed if someone else saw the records.

Balthisar you are correct in 49 out of 50 states. :smiley: In California there is a law that vacation cannot be lost if not used. The employer must either accrue it or pay it out. I generally do not get to use all of mine, and I get an extra paycheck at the end of January for a couple of weeks that I didn’t take.

Not IMO.
I had a teacher that did that too. He used to brag about how he was planning to retire a couple years early, at full pay, on his unused sick time. He never called in sick, because that would screw up his retirement plans. Note I didn’t say he was never sick. He just came to work and tried to teach anyway. Sneezing and wheezing and spreading his damn germs around.

My company, which is in California, gets around this as follows: you can accumulate up to 25 days of paid vacation. If your accumulated vacation exceeds 25 days (due to not using enough vacation), you stop accumulating vacation time, until you spend enough to get you below that figure.

I hate this, because due to my job I often am unable to take planned vacation time, and in fact I had to ask for a month’s extension on my deadline because job responsibilities kept me from being able to go. HR gave me all kinds of grief about it, even though the request came from my boss.

My understanding of why companies do this matches with **homeskillet ** - earned vacation represents a liability to the company, which looks bad on the books (and may have some impact on reported profits) if it gets too big. But I am not an accountant so this is inference on my part.


Beside the accounting ( which I’m pretty sure would consider it a liabilty), there might be other issues as well. My current job and my last job both had limits as to the amount of vacation time I could accrue. On my current job, I can have no more than 300 hours ( 8 weeks) on April 1. Anything over that , I will lose. My last job, anything over the limit converted into sick leave (which could only be used for actual medical conditions). In both jobs, the vacation leave is not paid in a lump sum upon leaving. You remain on payroll until it’s exhausted. When I left my last job for this one, I remained on payroll for nearly two months. That was two months I got a paycheck , had my health insurance, had my vision and dental insurance, got credit toward my pension, and continued to earn more vacation time. It’s one thing to pay a person to be out approximately 4 weeks a year in increments of a couple of hours to two weeks at a time, with an very rare 4 week vacation. It’s another to potentially keep a twenty or thirty-year employee on payroll for a couple of years while paying the benefits and being unable to replace the employee- since he’s officially “on leave”, he can’t be replaced any more than I can be replaced if I go on vacation for two weeks.

You’re making the common mistake of confusing a cost with a liability. Your salary is a cost (more formally, an expense), whether you’re working or on vacation. Your accrued vacation time is a liability because the company owes you that time (or its monetary equivalent) as a result of service previously rendered.

If you quit tomorrow, you won’t be paid any more salary. But you will be paid for your accrued vacation time–even if that isn’t a matter of law or company policy, you can get around it by taking your accrued vacation and then quitting. It’s the same as if they owed money to a vendor for goods previously delivered. Ergo, it’s a liability.

There are innumerable variations on company vacation policy, all of which can be debated in IMHO. But from an accounting standpoint, whatever the policy, if it involves accrued vacation time, it creates a liability.

The two main problems with accruing leave are:

The leave can be accrued at one rate and paid out at another. For instance the 30 year teacher who is being paid todays salary for leave accrued in the 1970s while also presumably lower on the pay scales.

If employees take huge slabs of time off, someone has to fill in for them assuming that they have resposibilities. This may not be so for a week.

Bingo! We have a winner!

In the past, I have had to create reports on the vacation liability of my organization, down to the penny for each person. This calculation had to take into account each individuals projected pay level throughout the next year. So, if someone were expected to get a 4% raise in October of the next year, this was included in the calculation of their vacation cost liability.

In theory, a worker could accrue 2 weeks vacation when they were earning $5.00 per hour, and then never take the vacation until 30 years later when they were earning $40.00 per hour.

This guy wasn’t going to retire early, I think he just got a nice fat check when he did retire. He was a child of the depression and worked until he was about 3 years younger than God. He used to both teach and be a night janitor. This could probably be evidence for the “devout Mormon health” thread, but he only got sick every couple of years, so spreading germs wasn’t an issue.