Do You "Buy-Back" Vacatoin?

[font size="1" color="#FF0000"]LAST EDITED ON 04-19-06 AT 11:38AM (CST)[/font][br][br]We are considering offering a vacation buy-back. The dilemma we're facing is trying to decide how much to buy the vacation back for (50%?,90%?,75%?). For those of you who do a vacation buy-back, what on-the-dollar percentage to you give to employees? Also, have you run into any issues I should consider before implementing something like this? As always, thanks (in advance) for your help!

P.S. Oops! Spell-Checked everything but the title ;).


  • 25 Comments sorted by Votes Date Added
  • Our owner company does a buy-back every December. They buy it at 50%. It must be in 40 hour increments and they have to have a minimum number of hours available after the purchase. I have not heard of any problems, but they are so big I am sure there are some.

    We keep reviewing the issue for our organization, but since our PTO plan is a little different, we struggle with the affect on the bottom line. (We currently pay out 45% of unused PTO at termination, but we put more into it to start with.)

    Good luck!

  • Our company has a policy that if on Dec 31, the employee has more than 200 hours on the books (we use PTO method of leave), they payout 100% of hours over.

    We also have policy that if you take minimum of 40 hrs PTO, you can cashout maximum of 40 hrs.

    Terminated employees here more than 1 year are paid out balance.
  • Ours is a bit different. Ee's are allowed to cash out vacation after five years of employment when used in conjunction with actual vacation.

    Its also dependent on the organization's financial state at the time which means its no guarantee.

    Use five vacation days = 5 days you can cash.

    The idea is to allow employees to access extra money for taking a vacation. In a non-profit, every dollar helps.

  • We allow a buy back in December to employees who for business reasons was not able to take vacation during the year and exceed 240 hours of vacation time(our cap). They can buy back up to the amount earned for the current year, which based on tenure is a max of 144 hours. We pay this at 100%. Most employees would rather take their vacation time so this option is not exercised by many. On termination all unused vacation is paid 100%.
  • We are the same as BettyBoop with one exception: We do not have a cap on the number of hours (144)we would buy back. As stated before, most people would rather use the vacation as opposed to simply receiving the cash for it.
  • We used to buy back, but the effect on cash flow was pretty substantial. So instead, we allowed folks to rollover sny un-used PTO time into a "disability bank" to be used if the employee ever has an extended illness (more than 3 days). Since we do not have a company-paid short-term disability plan, we felt this was a way employees could build up a reserve of paid time in the event of a serious illness, surgery, etc. We cap the amount they can bank at 180 days. The employees liked the buy back, but they felt the disability bank concept was a fair compromise.
  • We took a different approach. After 5 years if you have not used all of your PTO on your anniversary date of employment we allow you to carry over 80 hours to the next year. Than if you have any left you are allowed to roll it over into your 401K plan. We worked this out with the Administrator of the plan and it has been approved by the IRS.

    5-9 years 5 days can be rolled over
    10-14 years 10 days can be rolled over
    15-19 years 15 days can be rolled over
    20+ years 20 days can be rolled over

    No tax worries and the employees do not lose their time. We require them to carry 80 hours over first because our STD plan has a two week waiting period.

    Most people take their time off, but we are very generous to our most loyal employees and they sometimes cannot use all their time.

  • KDSPA: OURS IS AWARDED ON THEIR ANNIVARSARY DATE. Now the only thing we attempt to regulate is the unknown cost by month used. Because it was awarded as a benefit the time belongs to the employee. I am surprised at the number of companies that indicate they reduce the value of the awarded number of hours and get away with it.

    That reads like a clear path to UNIONization or EEOC for stealing from the employee what is already theirs. By reducing the value by any precent is in my opinion, absolutely wrong.

    We let our employees sell one weeks leave each year and we pay excess hours out each year at their anniversay date, if they have not cashed it in or used it. Once awarded the employee can count on that dollar being there and at his or her current rate of pay.

    May your employees have a Blessed day as they get ripped off!


  • After reading all of the above methods of handling this situation, I am glad that we still have the ole "use it or lose it" policy of vacation each year.
    Good luck
  • We also have a "use-it-or-lose-it" policy. The issue we're having (and the reason we're considering a buy-back) is that we recently changed from a system where vacation is accumulated on hours worked to a system where vacation is awarded as a lump sum at the beginning of the year. We also have a cap (8 weeks of vacation for employees who have been here 10 or more years; the cap is smaller for employees with less longevity).

    We began this new policy at the beginning of the second quarter and gave a prorated amount for this calendar year. For most employees this was great news. However, some employees were very close to the "use-it-or-lose-it" cap. Example: Joe has 280 hours vacation & the cap is 300 hours. His prorated amount for this year would have been 100 hours, however, he was so close to the cap, he could only accumulate 20 hours. The employees who are in this situation are very displeased and maintain that if this were still an hourly plan, they would use a vacation day here or there to stay below the cap. We want to find a reasonable way for these employees to still receive some benefit from the hours they would have accumulated if they hadn't been so close to the cap. Our plan is - for the rest of this calendar year - to let the employees have access to all the hours (in Joe's case, 380 hours) and to offer some kind of buy-back (as a bonus, or to be deferred to their 401k).

  • Pork,
    Since when is granting a paid vacation a vested right of the employee? Although some states claim it to be, not all do, and in those states, I would think treating vacation as if it is some sort of God-given right is ludicrous. To view it simplistically, vacation is a GRANTED benefit, to be used by the employee for rest and relaxation (that is usually deserved), to be taken when the employee needs or wants the time off to recharge the batteries and come back to work refreshed. The point there being "come back to work" In other words, vacation is a benefit granted to the employee while they are employed, and not something they should view as additional compensation when they terminate employment, or choose not to use the time. Companies are not obligated to grant any vacation, and when they do, they have the right to dictate how it is to be used and how excess is to be handled, both at the end of the year and the end of the employees employment. I don't see that as "ripping off" employees at all, as you claim. Its called setting parameters on the use of a company-provided and paid for benefit. If a union wins an election based on that issue, the company deserves the union...
  • I am sorry Pork but I do have to disagree with you. I spent several years seeing employees lose PTO time. They were not happy campers and it did not help us retain good workers.

    My motto is "Happy employees are good employees" I like to keep my employees happy.

    We did in the past let employees cash in 40 hours of their vacation. This was very expensive for the company as it all happened at the end of the year and was a big hit to the cash flow.

    We change to anniversary date for accruing PTO time. Then the employees were still losing time. Our new CFO brought up again letting the employees cash in some PTO. Our CEO said no.

    I worked with our 401K administrator and came up with the 401K rollover proposal. I got both of them together and we worked it out and it was approved by both of them. Our employees are happy with the program.

    What it does for the employee
    #1. They do not lose their PTO
    #2. They have an easy way to contribute more to their 401K plan and retirement
    #3. They do not feel cheated by the company.

    What it does for the company
    #1. It is cheaper than paying out vacation as there are no taxes on it as it is run through our Cafeteria plan.
    #2. It shows that the company cares for it's employees.
    #3. It is a good retention tool.
    #4. Our employees are happy about it.

    We do have limits. You have to be at our company 5 years to roll over PTO to your 401K.

    You have to carry over 80 hours to the next year.

    You can only put a prescribed abount of your left over PTO into the 401K.

    This forces the employee to take some time off and it saves the company some money over pay outs. It was a good compromise.

    If we paid it out 43% went out in taxes. This way the whole amount goes into their 401K. We do not have to pay FUTA, SUTA or match FICA or Medicare on it and it does not count for Worker's Compensation.


    If anyone should care for a copy of our schedule (policy) I would be more than happy to share.

  • I guess it was about the time when I was last directly involved with The Office of Federal Wage and Hour Division. I was taught by the auditors that they review our procedures based on the office guidelines that Vacation Time, once "awarded" it was the employees to use or loose based on the companies policy. That was in 1986/87 time frame and I have read several legal happenings that continue to support that process.

    Things might have changed since PTO became one of our opportunities to be successful at taking care of the business, but I have not read anything which told me that this situation has changed. The employees that I have been associated have also been happy about the award of vacation time and either being allowed to take leave or sell the time back. They also like the fact that we are strong enough to buy it back before they forget about it and could loose it.

    Yes, our employees are happy knowing the vacation time is there and it is not an issue that they would choose to stand up and seek representation in order to be heard and anything changed.


  • Ours is very simple. We reimburse up to 40 hours of paid time off, vacation, purchased vacation, floating holiday, and for nonexempt ee's we include personal time. Anything over the 40 hours is lost.
  • We still have the use it or loose it policy (except for CA who can take over a limited, pre set number of hours. I called state and they said this was ok.)
    In my prior life we had a PTO Bank and we did as one of the previous posters stated. There is no such thing as "carry over" since PTO is a circular thing. However, if their Jan 1 time got to be over a certain amount, they were limited to how much could be "carried over" so not to do a hardship on supv. This extra time was deposited in the extended time off bank. This seemed to work very well.
    I personally am of the philosophy that employees need and should take time off (I am one of the worst offenders, loosing time each year.) I get really mad at employees that feel that this is something that they are "entitled to" and it isn't looked at as a benefit from the company. (Enough.) I know too many employees that look at this like a savings account and just "want the money". Also, if cash out, very hard to control the economic effect. If you ever start it, you will have an impossible time taking it away.
    Did want to mention that there is always the exception where company asks employee not to take certain time off and they should be allowed to carry this over.
    E Wart
  • Wart,
    Couldn't agree with you more. For some reason, employees and employers have taken the view that vacation/PTO serves a dual role - either time off with pay or cash compensation. I really wish the HR community would quit feeding this philosophy. Vacation is a benefit that is to be used for time away from work, and most companies WANT their employees to take some time off to rest, be with the family, whatever. There is evidence that this increases overall job satisfacation and productivity. So why do employers offer incentives NOT to take time off by paying it out??? We keep perpetuating this warped philosophy that says "if I don't use the benfits you offer, pay me money" Pretty soon we'll see employer policies that pay employees for not utilizing the 401k plan. The point is, employers pay for benefits for a number of reasons related to recruiting, retention, employee morale, etc. If the employees do not take advantage of them, so be it - but don't give employees the impression that they posses a right to those benefits, or cash in lieu of using them. Start touting the fact that those benfits are there "in the event you need" health care, disability coverage, retirment savings, time off from work, etc. Stop acting like the money that pays for these costly benefits belongs to the employees.
  • Some employers feel that it does belong to the employees. In our handbook it says employees will earn (note the word earn) time this year to be used in the next. If the time is earned by the employee it does belong to the employee.

    I do not believe in pay outs for the same reason I think employees should take some time off. Sometimes that does not happen. I do not think my employees that are unable to take time off should be penalized for working extra hard, nor do I want to reward them by paying out the time.

    This is why we allow them to put it back for retirement in their 401K.

    In the perfect world time could be taken off when the employee wanted and when it was earned. That world does not exist.

    If our employees do not use their time they still stand to lose time because only a portion is allowed to be rolled over and only a portion is allowed to be accrued. I fixed the schedule so they must take at least a week off or it is lost.

  • Just a word of caution to those that have the "buy-back or sell-back" practice in place. The IRS contends that such a policy gives way to issues of "constructive receipt" and that such a policy may require the employer to tax the vacation benefit AT TIME OF ACCRUAL. If the employee has any choices involving when they may buy back the vacation, you would be wise to become more familiar w/this nasty concept. Employers permitting buy-back at less than 100% value are already close to compliance as the IRS views this as an acceptable penalty/surcharge. The use-it-or-lose-it method still stands the test of time........
  • Shirley,
    I agree with most of your points, with the exception of the part about "...employees 'earn' time...and if the time is earned, it belongs to the employee..." I'm sorry, but I coudldn't disagree more. Vacation is not "earned" it is GRANTED by the employee. Therefore, the employee should have no percieved vested right to the vacation or corresponding decision to pay it out. Do you treat all your other benefits as earned by the employee rather than provided by the company? If you proivde employees with short-term disbility coverage, do you pay them if they don't utilize the benefit? Vacation time is not in any way mandated by law. It is offered solely at the discretion of the company. So why treat it as if the employees "own it"? That's why I always refer to vacation time as "granted" and "avaialable" , but never "accrued" or "earned". I don't have a problem with giving employees creative options like yours for rolling portins of time into a 401k, I just feel that we need to get away from the concept that vacation is synonomous with compensation or that employees have any rights whatsoever to expect the company to provide something in return for unused time.
  • vphr
    Our company has a different philosophy than you. The manual, the policy and the practice was started before I took over HR 3 years ago.

    I did work with our 401K administrator and of course Management to come up with the PTO rollover plan.

    It works well for us, but what works for one may not work for someone else. The PTO time is accrued as an expense to the employer and in the liabilities listed. Our company , our CEO and owner treats all of us employees as if we are one big family. "earned" is the right word for our company.

    We do not pay STD or other insurance if they do not use it because we pay 100% of all insurance coverage for our employees. STD, LTD, Medical,EAP, Dental, and we put in 500 for each employee for Vision and Wellness in an HRA plan.

    We also pay 70% of the family insurance coverage.

    Again for the company of AIM International, Inc.

    our motto is :



    PS. out of 60 employees
    23 have been here over 10 years
    28 of the rest have been here over 5 years
    9 have been here less than 5 years

    Talk about good retention...want to keep the employees...don't mess with the Bennies
  • vphr:
    At the risk of looking to split hairs, I think the expression of earned or accrued or granted is prolly semantics. Once the employer has decided to offer this type of benefit, most states have said this is wages and whether we choose to qualify HOW it becomes available, it belongs to the employee once the expense is booked. The employer can clearly decide HOW it is used (& in that sense may grant the use)but to take the position that vacation has no vested right to the employee is problematic for most employers. Alabama is among a very short list of states that does not treat vacation as wages, so while I understand your position with "granting" how it's paid out, I think it's a situation more unique for AL than others.
  • A lot of good views expressed here. I do see vacation as something 'earned' by the employee. The leave is accrued based upon how many hours you put in, and also how long you have been here. However, sick leave is something else. As I am sure you know, a PTO policy combines the two, and may also include other leaves like holiday pay.

    Our PTO plan only has vacation and sick pay combined. Holidays and other leave are handled separately. (We are generous with holiday pay as employees only have to be here 1 day to earn it.)

    In the past, we did not pay out sick leave when employees left. Thus the compromise of only paying out a percentage of PTO. I am positive that if I were to go back and recalculate everything, employees who only get a percentage upon termination are ahead (compared to getting 100% of vacation and 0% of sick). Indeed, our 2 employees who are constantly in danger of maxing out (and thus always scrambling to take time off) have a max of 10 days between them for sick leave for the past 6 years. The only reason it is up to 10 days is that one of them required some hospitalization recently.

    If we were in a state that required us to pay out sick leave upon termination, I could see the argument that it all belongs to the employee anyway. However, I believe that sick leave is there solely as a benefit for those who become ill, and not as a way to earn extra income (come in sick and save it up). Paying out a percentage of PTO upon termination is fair. The amount of the percentage debatable, but not the fact that you have it.

  • Nae,
    What is the difference between offering employees paid time for purposes of sickness and offering paid time for purposes of rest and relaxation?? I don't follow the logic that says pay out unused vacation but not unused sick time. People can "bank" vacation easier than sick time, and do so to receive addtioanl compensation.Both are benefits that the company offers its employees, and the company is not required to offer any benefits. I completely understand certain State laws treat vacation as an accrued and compensable benefit. But where it is not madated, I still feel that employees should be granted generous vacation benefits and time off provisions to keep them happy, motivated and content. That doesn't, however, translate into treating time off as a form of cash compensation if it is not utilized. I can see I am in the extreme minority on this issue, so I will now shut the hell up.
  • I think of sick leave as a benefit for those who fall under an unexpected hardship. It is there, but only if you need it (like how health insurance started-as hospitalization insurance).

    Vacation is more of a planned leave, and most companies allocate more for long time employees and for management. It is a retention tool and a negotiating point in some places. These facts make it seem more as an 'earned' benefit to me, whereas sick leave is the least the company feels they have to offer.

    It is very common for people now to say vacation is for rest and relaxation and ultimately for the good of the company, but it was a completely different thing a few decades ago. I guess I am old enough to remember the difference then, so it still translates differently to me now. I think many of our lawmakers are old enough to remember too. Thus they often legislate the leaves differently.

  • We don't do buy back but we offer our employees options to cash out some of their vacation. We call it PTO for Paid Time Off which can be used for holidays, sickness or vacation. PTO accrues based on the number of hours worked, not including overtime, and the length of service. We allow PTO to be rolled over from year to year (ending December) up to a max of 48 days or 384 hours. If they get to the max they can cash out a specified number of hours or take those hours and put them into an extended sick leave account where we add 8 hours for every 16 hours they put in. We also allow a once a year cash out in addition to the max cash out. We have a lot of folks cash out 2 or 3 weeks in the fall to pay for their Christmas purchases. So it sort of functions as a savings plan without the employee having to put money in.

    Either cash out is dollar for dollar. It is a benefit they have earned by their service. To offer them less than that is, in my opinion, cheating your employees of an earned benefit and I believe they will perceive it that way.
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