What Is a Use-It-or-Lose-It Employee Vacation Policy?

A “use-it-or-lose-it" employee vacation policy generally requires an employee to forfeit any unused vacation time after a certain date, such as the end of the year.

However, some state laws, union agreements, and employment contracts may affect whether a company or employee is eligible for such a policy.

What Is a Use-It-or-Lose-It Employee Vacation Policy?

In a use-it-or-lose-it employee vacation policy, employers do not pay employees for any unused vacation leave at the end of the year. Instead, the employee forfeits their remaining vacation time, unpaid.

These kinds of policies are illegal in some states. But if there is no state law regarding use-it-or-lose-it vacation time and no company policy against it, the company is free to refuse to pay out for unused vacation time when employment ends.

How Does a Use-It-or-Lose-It Vacation Policy Work?

No federal or state laws mandate vacation time, either paid or unpaid. However, many companies provide it to increase company morale and employee wellness, while also remaining competitive with other hiring companies. Once a company provides vacation time to employees, it then becomes subject to the applicable laws in the employer's state.

Employers in most states have the right to set a date by which employees must take their accrued vacation. Employers can stipulate that employees who don't take vacations by this date will forfeit the accumulated time off.

However, in several states, including Massachusetts and Illinois, statutes indicate that employees must be afforded a reasonable opportunity to take accrued vacation time prior to the deadline.

In California, vacation pay is considered to be another form of wages and as such cannot be taken away from an employee under any use-it-or-lose-it scenarios.

For example, say an employee in California works for a company for just over a year, and they have accrued 10 days of vacation time. If they are terminated from employment, that accrued vacation time is considered the same as wages, and the employee would receive that vacation time paid out in dollars.

On the other hand, if that employee moves to another state—Wyoming, for example—and works for a year, earning 10 more unused vacation days before being terminated from employment, due to state law their Wyoming employer is not required to pay them anything if they have a use-it-or-lose-it vacation policy.

You can check with your state's labor department to find out what specific rules apply.

Requirements for a Use-It-or-Lose-It Employee Vacation Policy

Employers should advise employees about the vacation policies their organization has in place. Use-it-or-lose-it policies need to be clearly communicated to all workers in employment manuals. Whenever possible, staff should be given a reasonable opportunity to use their time off even when not required to by state law. Companies must also follow the plans they have established regarding paid time off.

Options for Taking Vacation Time

Employees can benefit from making every effort to plan vacations well in advance to reduce the likelihood that they won't be able to use up all of their time. This may involve finding other employees to cover your work if you need to take time off on short notice or as a deadline approaches for using up your vacation.

If an employer requires you to work during a planned vacation period due to unforeseen work demands, try to negotiate with your supervisor for a carryover of your time or some accommodation and ask them to put the agreement in writing.

When Employment Ends

In some states, employees who terminate employment or get fired by an employer are legally entitled to payment for any vacation time which has been accrued prior to any use-it-or-lose-it cutoff dates. Even if such laws aren’t in place in your location, employers may be required to compensate terminated employees for unused vacation if indicated by company policy.