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Policy on Exempt Employees Selling Back Vacation Time

written by: N Nayab•edited by: Jean Scheid•updated: 12/22/2010

Federal law does not require employers to offer paid vacation to employees but employers do offer such benefits to their employees. Once the employers make such an offer, a different set of laws apply. Read on for factors that influence the policy on exempt employees selling back vacation time.

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    Policy on Exempt Employees Selling Back Vacation Time Exempt employees are those not covered under the Fair Labor Standard Act (FLSA), and mostly include employees receiving salary of at least $23,600 per year and perform exempt job duties.

    The FLSA does not mandate employers to provide employees with paid vacations or paid time off. Many employers, however, offer both exempt and non exempt employees paid vacation as part of their employee benefit programs, in a bid to attract and retain talent, and maintain their employee’s productivity levels. About 75 percent of the US workforce avail of paid vacations through such company initiated benefit schemes.

    The extent of such company sponsored exempt employees vacation time depends on many factors such as the seniority of the employee and the size of the company. On the average, large American companies offer up to 15 days of paid vacation and 10 days of paid holidays for full-time employees with 10 years of tenure. The average paid vacation time provided by all companies is 9 days of paid vacation with 6 days of paid holidays per employee.

    Most schemes require the employee to provide advance notice and coordinate with the employer to ensure adequate staffing before proceeding on vacation leave, and most companies do not allow employees to take vacations during the peak business seasons.

    Image Credit: Kiel

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    Sell Back Policy

    Many companies allow the employees to sell back a part or their entire vacation leave, in a bid to improve attendance. The policy on exempt employees selling back vacation time back to the company, or in other words, not availing the vacation and taking cash in lieu of vacation depends on:

    • The terms of the agreement between the employer and the employee
    • What the vacation policy itself says about such buy-backs.

    The Minnesota Supreme Court in the Lee v. Fresnius Medical Care decided that vacation policies are a contract between employers and workers. Employers are free to either allow or disallow employees to sell back their unused vacation time.

    The vacation leave policy of many companies allows employees to carry forward their unused vacation time for up to three years, and then allow the employees to cash the vacation days still not used, either in full or in part. US Pharmacopia, for instance, allows carry forward for up to one year, and sell-back of a week’s vacation (37.5 hour), with anything extra not availed forfeited.

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    Legal Considerations

    One factor that may discourage many companies from offering a buy-back policy of vacation leaves is The Fair Labor Standards Act requirement that employers count such payments toward total compensation when calculating overtime pay. This stipulation, however, need not impact exempt employees vacation time buy-back.

    The employer can change policies midway. In the Glenville Gage Company, Inc. v. Industrial Board of Appeals of the State of New York, Department of Labor, 70 AD2d 283 (3d Dept 1979) affd, 52 NY2d 777 (1980), the court decreed that an employer can make changes to an agreement detailing vacation benefits and nullify the employees accrued benefits under certain conditions, provided the employer notify the employees in writing of the conditions that nullify the benefit.

    The law also stipulates that absence of any written forfeit policy mandates the employer to pay the employee for the accrued vacation not availed. This means that unless the company’s leave policy or the employment contract between the employer and employee mentions that vacation leaves lapses and is forfeited and if not availed during the stipulated time, the employee is entitled to sell back the vacation leave to the company, if they do not avail of the vacation.

    Some state laws also do not allow employers to install a “use-it-or-lose-it" policy and mandate employers to reimburse the employee for vacation time not availed, if the company policy offers vacation time.

    In a class action suit against Target by 270,000 California employees, the court ruled that vacation benefits offered by the company are vested benefits and must be paid, forcing the company to shell out $10 million.

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    Reimbursement on Termination

    Federal law may require employers to compensate terminated employees for accrued vacation time not utilized before the termination. The Nebraska Supreme Court in the Roselund v. Strategic Management, Inc. ruled that employers have to pay unused benefits to the employees upon termination, even if the company policy indicates that the benefit is a “use it or lose it" policy.

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    1. NYS Department of Labor. “Wages and Hours. Frequently Asked Questions." Retrieved 11 December 2010.
    2. US Department of Labor. “Vacation Leave." Retrieved 11 December 2010.
    3. Meltzer, Bill. PTO: More Trouble Than its Worth? Retrieved 19 December 2010.
    4. US Pharmacopeia. “Annual Leave (Vacation.)" Retrieved 19 December 2010.