What Are the Pros and Cons of Using a Cash Out Vacation Time Policy?

What Are the Pros and Cons of Using a Cash Out Vacation Time Policy?
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The Fair Labor Standards Act (FLSA) that governs conditions of work does not require employers to provide employees with paid vacations or paid time off. Many employers nevertheless extend paid vacation to their employees as part of employee benefits. On average, companies provide nine days of paid vacation and six days of paid holidays per employee, and about 75 percent of the workforce in the United States avail these benefits.

The governance of employee-sponsored benefits depends on the terms of the agreement between the employer and the employee. Employers generally have the right to approve or deny vacation leave requests at their discretion. Some policies may state leaves not used are lost without the employee being able to accrue vacation days, regardless of whether the employee could not avail the leave. Most companies nevertheless do allow employees to carry forward unused sick leave for a period of about three years, and after that cash out the unused vacation days. The absence of any written forfeit policy gives the employee the right to cash out unused leaves by default. Some state laws also mandate companies with policies that offer vacation time as part of benefits to buy back such leaves from employees not availing of the same.


The legal predisposition that allows employees to cash out vacation time notwithstanding, allowing employees to do so has its benefits.

Allowing employees to cash out vacation time maintains internal equity. Approval or rejection of vacation time depends on the company’s discretion, and the employer invariably considers factors such as seasonal workload, indispensability of the person, and other factors before approving or denying the leave request. Selective approvals and denials invariably attract charges of discrimination, and even if the company may justify its stance in court, the employee not offered the vacation leave may feel demoralized. Reimbursing employees not allowed to avail vacation leaves mitigates the charges of inequity greatly.

Generally, employees tend to prefer cash in lieu of taking the leave if such a facility exists, and as such, the employer would have to process fewer leave requests. This provides flexibility and more options in allocating the workforce.

Employees entitled to vacation time are ones that work for a minimum of one year. Allowing them to cash out their leaves means the company gets to utilize the hours of their most productive employees.

When the employee quits the organization and becomes entitled to cash out the accumulated vacation leave, it makes no difference for the employer whether the employee opts to avail the vacation immediately before leaving, or cash it. From the employee perspective, it is advantageous to avail these leaves, for the employee gets an additional few weeks of service to add to work experience and full insurance coverage during the leave period.


The counterargument in allowing employees to cash out banked vacation time is that it defeats the very purpose of its existence. Employers offer vacation time to allow employees take a break from the routine work schedule and come back refreshed and recharged. Such breaks boost productivity and the employer does not lose much by allowing employees limited days off. Allowing employees to work during such periods and then pay for such leaves not taken actually causes a double loss to the employer: higher cash outgo and low productivity because of continuous work. It also harms the employee as their fatigue level rises.

Another factor that discourages a cash out vacation time policy is the Fair Labor Standards Act requirement of counting such payments toward total compensation when calculating overtime pay. This raises the employees cash outgo significantly, and employers would have to make major adjustments in wage levels or benefits packages to incorporate this provision without suffering additional outgo, and still risk disparity, as not all employees would avail overtime.

Both the arguments in favor of or against allowing employees to sell back their unused vacation time to the company have their merits. The best policy depends on the circumstances and may differ from company-to-company. Short-term expediency, especially in times of economic booms might necessitate requiring the employee to work and thereby, contribute to operational profits, for the reimbursement of vacation time would only be marginal compared to profits generated by the employee, even working at low productivity. During lean seasons, when work is lax, employers may as well as allow employees to take time off and come back refreshed rather than remain burdened with higher cash outflows buying back vacation time from employees will surely bring.


  1. NYS Department of Labor. “Wages and Hours. Frequently Asked Questions.” https://www.labor.state.ny.us/workerprotection/laborstandards/faq.shtm. Retrieved June 14, 2011
  2. US Department of Labor. “Vacation Leave.” https://www.dol.gov/dol/topic/workhours/vacation_leave.htm. Retrieved June 14, 2011.
  3. Meltzer, Bill. PTO: More Trouble Than its Worth? https://www.hrbenefitsalert.com/pto-more-trouble-than-its-worth/. Retrieved June 14, 2011.

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