The Limited Vs. Unlimited Vacation Policy – Which is Better?

December 29, 2020 Business Strategy, Interviews, Hiring, and Layoffs

Tracked Vs. Unlimited Vacation – The Pros and Cons

As the year comes to a close, I find myself running a department that has been operating at about 50% capacity for the past few months. Just like you, as a result of the global health crisis we’ve all ensured, every employee in my department cancelled plans for vacations and holidays earlier in the year.

Consequently, with December 31^st rapidly approaching, my staff members have been trying to squeeze in their unused days off. Although the end of the year is typically a time when a lot of people take leave, our vacation policy was partly to blame for the especially high number of absences this year.

I recently discussed the situation with a friend of mine. While I worked for a more conservative and traditional firm that opted for a standard type of vacation policy, my friend worked at a startup that recently implemented an ‘unlimited vacation’ policy. Both of us managed teams and compared our experiences.

So, what are the differences between a traditional vacation approach and an unlimited vacation policy that are becoming more popular with small businesses? What as the pros and cons? Is one better than the other? We’ll compare both approaches to vacation plans, highlighting the benefits and drawbacks of each.

Why Vacation is Important for Employee and Productivity

It goes without saying that everyone enjoys taking time off and getting a little time to relax. However, creating a vacation policy for your small business isn’t just about giving your employees a chance to head to the beach every year.

From a management perspective, the time away from work and the stress of the job helps employees rest and recover so that they can return refreshed. The job can consume employees – long hours, critical deadlines and a slow commute all wear on employees just as it wears on you. In fact, employees who go too long without a break can eventually experience total burnout.

The recharge employees feel following some time off increases both their engagement and their productivity. A fresh set of eyes returning to work can even provide a long-term project with a much needed boost of energy. So, the specific components to the vacation policy you establish should be based on giving employees enough time with their families as well as helping you maintain a productive workforce.

Other important factors to consider when creating a vacation policy include:

Giving employees sufficient control over their work-life balance
Recruiting talent to your organization
Retaining employees over time
The administrative burden you are willing to bear

Now, let’s take a closer look at some of the specific differences between the traditional paid time off and unlimited vacation policies.

Traditional Vacation Policy – The Pros and Cons

At my firm, we had your typical vacation policy, which allocated a prescribed number of days to each employee. The quantity of paid time off days was increasingly earned with years of service. While a brand new hire was given just 10 days of vacation, a tenured team member with 15 years of experience would have 25 days of personal leave to take as they pleased.

Time was tracked and the number of days of vacation taken were recorded for all employees. The traditional vacation approach, however, was also defined as ‘use it or lose it,’ meaning that if employees didn’t take their allotted days within the calendar year, the days would be lost. In other words, no days carried over to the next calendar year.

The traditional paid-time off approach has a number of benefits, but also a downside.

The Benefits and Drawbacks of a Traditional and Limited Vacation Policy

Here are some of the benefits and positive aspects of a traditional paid time off policy.

A clear set of days ensures there is consistency and fairness applied across the organization.
The amount of time people can take off is indisputable – employees are entitled to take time as they wish up to a given number of days.
A structured system with a fixed amount of time off motivates employees to plan and organize the vacation days in advance. In practice, extended periods of time off were often arranged with managers well in advance for planning purposes.
The accrual mechanism over time helps retain experienced team members.
Specifically, the ‘use it or lose it’ aspect of the policy encourages and ensures employees take their time off to recharge.

However, there are some negatives to the typical fixed vacation policy. These drawbacks include:

Tracking days can make employees feel the organization doesn’t trust their ability to plan and manage their work loads.
When employees are given a fixed amount of time off, supervisors have limited ability to influence when staffers use their paid leave, such as during peak periods.
Tracking and counting days off for each employee is an administrative burden on busy managers.
A ‘use it or lose it’ policy, while encouraging people to take a break, often results in a lot of absenteeism late in the year as employees try to use up all of their time off.

So, while there are many benefits to tracking time as part of your paid time off policy, the drawbacks should certainly be considered.

Optional Ways to Customize the Traditional Vacation Policy

The typical vacation policy described here is specific to one organization. However, there are a number of variations that you can implement into your vacation policy that may better suit the organizational culture you’re trying to create.

Here are some customizations you might want to consider:

Carry Over – As an alternative to ‘use it or lose it,’ permitting employees to carry over and bank a portion of their vacation days can reduce absenteeism near year-end when employees in a traditional vacation framework are working to ‘burn days.’ Additionally, the option to bank time – up to one week, for example – also allows employees to plan for and extended time off as with a longer vacation, a new baby, or a medical procedure.
Vacation Purchase – Allowing employees to purchase addition time off is a great optional opportunity for employees. In particular, this approach gives employees with less service time a chance to have more days of paid leave in the next calendar year.
Donating Days Off – Create a charitable program that allows employees to donate vacation days to other employees in need of additional paid leave (e.g. due to illness, family issues, parental leave, etc.). As an added bonus, consider offering a company match.
Half Days – While some organizations require time off to be consumed as a full day, giving your employees a chance to take half days lets staff member maximize and stretch the vacation time in a way that best suits them.

Unlimited Vacation Policy – Pros and Cons

Despite the name, the ‘unlimited’ aspect of an unlimited vacation policy is somewhat misleading. As with a more structured and tracked vacation policy, employees still need to seek supervisor approval or authorization. It’s not like Mary can call her boss as often as she wants to say “I don’t feel like working today… I’m taking vacation.”

Under an unlimited paid leave system, days are typically not tracked, recorded, or capped. At my friend’s firm, for instance, when he attempted to keep a log of his employee’s vacation usage to ensure these was a reasonable balance across his team, his Human Resources department said it was actually against policy to do so.

Still, there are boundaries. While high performers are generally given more leeway to take time as and when they wish, managers may be a little more cautious giving unlimited time off to underperforming staff members who are not meeting job expectations. However, this is subjective. And, even if it’s technically unlimited, is there such a thing as too much time off?

Here are some detailed benefits and drawbacks of the unlimited vacation policy used at my friend’s workplace.

Benefits and Drawbacks of an Unlimited Vacation Policy:

The “take time when you need it” policy is rooted in trust of your staff, which is a morale booster. Employees are trusted to get their work done.
Employees are empowered to make responsible decisions regarding their work/life balance.
The policy can help recruit new talent to the organization.
Not counting or tracking days off reduces an administrative burden.
If employees aren’t trying to ‘use all of their days’ within a calendar year, it can reduce disruption during peak times.

By comparison, here are some of the negatives aspects to implementing an unlimited vacation policy:

The subjectivity can get tricky – how many days is too many? How do you say no when the policy is ‘unlimited?’
The optics of some employees taking more days than others can be difficult to manage.
Without a prescribed number of days, employees may either abuse it or not take enough time off, even when they really need to recharge.

As with a standard and tracked vacation policy, there are some important decisions to make when considering an unlimited paid time off policy.

Optional Ways to Customize the Unlimited Vacation Policy

The vacation policy described here is again specific to one organization. However, there are some variations that you can implement into your vacation policy that may better suit the culture you’re trying to create.

Here are some variations to consider:

Tracking Even If Unlimited – In many organizations that adopt an unlimited vacation policy days off are not recorded or tracked as part of the policy. But tracking and recording the number of days off can help managers ensure a balance across their teams. And, if particular employees noticeably take fewer days off, a manager can encourage him or her to take a long weekend here or there to recharge.
Require a Minimum Period of Service Time – Hiring new employees into the organization is complex. As both a means of retaining talent you worked so hard to find, and ensuring their work habits are satisfactory, consider a minimum period (say, 3 years) before employees are entitled to ‘unlimited’ vacation time. Until, go with a traditional or limited time approach.

Limited or Unlimited Vacation Plans – Which is Better?

While there are certainly differences in the types of paid time off policies for your small business, both the traditional leave arrangement and the unlimited vacation policy offer unique advantages. In truth, one is not really better than the other. The most important consideration to make is that your vacation policy should complement the culture you’re trying to make.

Despite the more administrative burden and formalized structure, a traditional approach to your organization’s vacation policy helps create a clear-cut system that’s fair, finite and easy to manage. Managers and employees know the policy and can operate within its framework. It’s predictable, structured and straight forward.

By contrast, a less structured arrangement that more closely resembles an unlimited vacation policy can be an excellent recruiting tool and help you define your business culture as modern and innovative. While not as administratively intensive, however, less structure can be more difficult to manage in terms of fairness, balance, and discipline. Still, this arrangement is a morale booster for employees and gives employees the flexibility to manage their personal time while still getting the job done.

The vacation policy you choose to implement simply comes down to the culture you wish to foster and the organization you wish to create.

How to Manage Employee Vacation Time

The time your employees have away from the job is as much about their personal time as much as it is a necessary vehicle for recharging and reenergizing your workforce. While a traditional and limited vacation policy is more rigid, it is also easy to manage. An unlimited vacation policy is appealing but can become subjective. There are many ways to customize your firm’s paid leave policy – the most important decision to make is what you want your company’s vacation policy to say about your business culture.

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