What is vacation pay?

Vacation pay is wages paid for time off taken for vacation. Federal law does not require it, so the rules come from the employer’s policy and state law, especially on accrual, carryover and payout when someone leaves.

In shortVacation pay is compensation for scheduled time away from work, usually earned (accrued) over time and taken with approval. The Fair Labor Standards Act does not require payment for time not worked, such as vacations, so whether vacation is offered, how much, and how it accrues is a matter of employer policy or agreement. State law fills in much of the rest: some states treat earned vacation as wages that must be paid out when employment ends, some prohibit “use it or lose it” forfeiture, and others allow the policy to decide. For overtime, vacation pay is excluded from the regular rate when it is for occasional periods of absence and roughly equal to normal earnings for that time, and vacation hours are not hours worked, so they do not count toward the 40 that trigger overtime unless a policy says otherwise. A clear policy states accrual rates, caps, carryover, how requests are approved and what happens at separation.

Policy decisions for vacation pay

Vacation policy choices
Decision Options Check
Accrual Per hour worked, per pay period or a yearly grant Policy
Cap Maximum balance, such as 1.5 times the yearly amount Some states limit forfeiture
Carryover Roll over all, some or none State law
Payout at separation Paid, not paid, or partial State law and policy
Rate paid Regular rate at the time taken Policy

See how to calculate vacation pay for hourly employees and PTO payout.

Part-time server, one yearHours worked1,300Vacation accruedabout 43 hUsed in August25 h, $3501 hour for every 30 worked, cap 60 hours
Vacation builds up with hours worked and is paid at the regular rate when used.

Worked example: accrual for a part-time server

1 hour for every 30 worked

A restaurant’s policy gives every employee 1 hour of vacation for every 30 hours worked, with a cap of 60 hours. A part-time server works 25 hours a week, about 1,300 hours a year, and accrues 1,300 / 30 = about 43 hours of vacation a year.

In August she takes a week off and uses 25 hours, paid at her regular $14 base rate: 25 x $14 = $350. That week she worked no hours, so no overtime question arises. The next week she works 40 hours; the vacation hours from the week before do not count toward that 40.

When she leaves in November with 18 hours unused, payroll checks the state’s rule. In this state, earned vacation must be paid at separation, so her final pay includes 18 x $14 = $252.

Mistakes that are specific to vacation pay

Approving vacation fairly

Vacation requests cause conflict when the rules for approving them are unclear. Write down how far in advance requests should be made, how many people can be off on the same shift, how conflicts are settled (first come first served, rotation for holidays, or seniority) and how quickly managers must respond.

Publish blackout periods early, such as the two weeks before a holiday in retail, so people plan around them. When requests and approvals are recorded in one place, managers can see coverage before approving and employees can see the status without asking.

Second example: holiday weeks by rotation

A small warehouse with 16 employees gets 11 vacation requests for the week between Christmas and New Year, but can only release 5 people.

It sets a rotation: employees are grouped into three groups, and each year a different group gets first choice for that week. The rotation is written into the policy and posted in September. The next December, the 5 approvals go to the group whose turn it is, and nobody argues over who asked first.

Show the balance on every pay stubShowing the vacation balance on each pay stub ends most disputes before they start, because the employee sees it grow and shrink every pay period.

Questions people ask

Is vacation pay required by law?

Not under federal law. The FLSA does not require payment for time not worked, such as vacations. Employer policy and state law set the rules.

Does vacation time count toward overtime?

Vacation hours are not hours worked, so they generally do not count toward the 40 hours that trigger overtime unless the employer’s policy says they do.

Do employers have to pay out unused vacation?

It depends on state law and the employer’s policy. Some states require payout of earned vacation at separation.

How is vacation pay calculated for hourly workers?

Usually hours taken times the regular hourly rate at the time the vacation is used.

Can an employer deny a vacation request?

Generally yes, based on business needs and the policy, unless a law or contract says otherwise. Apply the same rules to everyone.

Can an employer require employees to take vacation at a certain time?

Many employers can schedule vacation, such as during a plant shutdown, if the policy says so. Check state rules and give notice.

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Handle time off requests in one place

Employees request time off from their phone, managers approve or decline it, and every request keeps a dated record.

Disclaimer: Treat this guide to vacation pay as general information rather than legal, payroll or tax advice: rules vary by location and change, and every example here is fictional.