February 13, 2024
What is Discretionary Time Off? (DTO)
We’re in an age where new workplace terms are being thrown at us from all angles. One you might have heard ...
There are a lot of negative opinions about Use It or Lose It vacation policies. They’re banned in some locations, and in today’s professional landscape, where employee rights are front and center, many are calling for Use It or Lose It PTO to be abolished.
In this article, we’re going to explain very clearly just what a Use It or Lose It vacation policy is and what all the big deal is about. We’ll share which US states have banned it, how it’s seen around the world, and why so many people are against it, before explaining why this type of policy may actually be a positive for employees.
A Use It or Lose It vacation policy means that employees have until a certain date to use their vacation time. If not used by that date (usually a year from the time it was earned), any outstanding vacation days are lost.
As an example, let’s say someone gets 12 vacation days per year. The company’s leave policy states that they have until December 31 to use their PTO.
At the end of December, they have only used eight days, with four days outstanding. Under this policy, those four days are lost; they begin the next year with 12 days to use again.
In some places, Use It or Lose It policies are illegal. Any unused vacation time at the end of the year must carry over to the next year.
In our example above, the person who had four days remaining at the end of the year would start the following year with 16 vacation days; 12 from their regular allowance and four carried over from the previous year.
Most states in the US allow Use It or Lose It policies for vacation time. Federal law does not refer to Use It or Lose It (but there’s also no federal law requiring companies to provide vacation time in the first place).
Please remember; we are not legal professionals. If you’re looking for legal advice, please consult an employment lawyer in your area.
The following states have made Use It or Lose It vacation illegal, or have some reference to how Use It or Lose It policies can be implemented.
California is one of the most well-known cases where Use It or Lose It is not allowed. Though companies do not have to provide vacation time, if they do, it is considered a form of wages and any earned vacation time cannot be taken away.
Colorado also banned the practice of Use It or Lose It vacation policies in 2021. A court case ruled that any agreement permitting forfeiture of earned vacation pay (such as a Use It or Lose It policy) is void.
The state of Montana treats earned vacation time like wages, and rules that this cannot be taken away from employees. In the words of the Montana supreme court:
“We conclude, however, that once an employee has accrued paid vacation pursuant to the terms of his or her employment contract, an employer may not then impose conditions subsequent which would, if unmet, effectively divest an employee of that accrued vacation.”
State law now clearly prohibits policies that take away earned benefits such as vacation time.
Many sources say that Use It or Lose It is illegal in Nebraska. However, the truth is this is not clearly stated.
Nebraska does require all unused PTO to be paid out upon separation of employment. This is backed up in the case of Roseland v. Strategic Staff Mgmt., Inc, which ruled as such, in favor of the employees. Yet this case was in reference to paying out vacation time at separation, not whether it’s legal to forfeit earned vacation time at the end of the year.
Use It or Lose It is also not specifically addressed in state law.
Nevada, one of the few states that requires employers to provide paid leave for employees, prohibits Use It or Lose It in certain circumstances.
State law provides roughly 1 hour of leave for every 52 hours worked for employees in qualifying businesses. It also states that any unused accrued leave, up to a cap of 40 hours, must be carried over to the following year.
However, the law also states that if employers front-load their employees’ leave (e.g. make the leave they will accrue in a year all available from the start of the year), carryover of unused leave is not required, and thus a Use It or Lose It policy would be legal.
While many states are silent on the matter, Wyoming law allows Use It or Lose It for vacation time. The law says that a policy can state that any unused vacation time at the end of the year will be lost. But the law also requires that employers give employees full opportunity to use all their earned vacation time, and employers cannot refuse an employee’s request to use their vacation.
There are a number of other states in which employment law requires any unused vacation time to be paid out upon separation of employment – such as when an employee quits, is fired, retires, or is laid off.
Currently there are a total of 20 states that require PTO payout. This is not the same as outlawing Use It or Lose It, however.
In most of these states, vacation time can expire at a certain date, but if an employee leaves the job before their vacation time has expired, any unused time must be paid out.
If, for example, an employee has five vacation days unused which expire on the 31st of December, if they leave their job on the 20th of December, their employer would need to pay out the unused vacation time.
If they left their job on the 5th of January, however, these days would have already expired, and would not have to be paid out (though the employer would be responsible for paying out any vacation time that had accrued so far in January).
Use It or Lose It laws vary in different countries around the world.
In Australia and New Zealand, Use It or Lose It is not legal. Employees are legally entitled to carry over unused leave (though there may be limits placed on how much can be carried over, and employers could require employees to receive a cash payout for some of their unused leave).
In Europe, many countries not only allow Use It or Lose It, but the law actually states that annual leave/vacation time must be used by a specific date.
The key detail to note with these countries is that these laws usually state that it’s an employer’s responsibility to make sure that employees actually take their leave within the given period, so there is unlikely to be any unused leave at the time of expiry anyway.
Many people, and evidently some states as well, believe that Use It or Lose It policies are unfair or unethical, because they cause workers to forfeit a benefit that they have earned as compensation for work done.
It’s like if you were to lose part of your pay, just because you weren’t able to spend it in time. No one would think this is fair.
It makes matters worse that some employees will have taken advantage of all their leave entitlement if used earlier. Employees affected by the Use It or Lose It policy may feel slighted because they spent more time at work than these employees, yet their reward was to lose part of their earned benefits.
Opponents of Use It or Lose It may thus think that such a policy takes advantage of hard-working employees and fails to adequately compensate workers.
We would argue that a Use It or Lose It vacation policy, if managed correctly, is actually good for employees, and results in increased wellness and happiness in the workplace.
A Use It or Lose It policy forces employees to actually take their PTO, instead of banking it up and working for long periods without taking time off.
There are big benefits to taking time off from work, from reduced stress and improved mental health, to increased brain power and lower risk of heart disease.
But these benefits only come if the person takes the vacation time they are entitled to. And if there’s no pressure to take PTO before it expires, a lot of workers push it to the side and work far too long between vacations.
That’s the reason most European countries enforce Use It or Lose It; annual leave is not meant to be just a financial benefit, it’s meant to give people a chance to switch off from work, rest and recharge. These countries are trying to ensure that vacation time is actually used.
Most of my experience is in working (and managing staff) in New Zealand, where it’s mandatory for annual leave to roll over at the end of the year.
I saw a lot of people (myself included, at times), not using their leave, endlessly stockpiling it for use sometime in the future (just in case they ended up needing 15 weeks of leave for some reason).
We were also allowed to cash out our leave if we wanted, which many people chose to do as well, to add to their take-home pay.
The problem with this was there were a lot of overworked staff, because people weren’t taking the four weeks per year of leave they had available.
Since then I’ve mostly been involved with teams with unlimited PTO, and I see the same problems. There’s no urgency for people to take their leave, so most people end up taking far less time off than they should.
Use It or Lose It can be a win-win, if done right.
For the employee, it incentivizes them to take ample time off and maximize their wellness.
The employer benefits from this as well, as happier and healthier employees will be more productive and contribute to a more positive work environment.
Employers also avoid large vacation time payouts, like when the city of Jacksonville had to pay an outgoing employee $401,866 for over 300 hours of accrued vacation pay.
But the key is to look at it through the right lens.
The issue with Use It or Lose It comes when the business sees vacation time as an expense, to be limited.
These businesses discourage (actively or passively) employees from taking their time off, and figure it’s a good thing when vacation time is left unused and expires.
When employers don’t give employees ample opportunity to take vacation time, a Use It or Lose It vacation policy becomes unfair and unethical.
This causes bigger long-term problems than the short-term gains in productivity and saved vacation pay.
Businesses should see this as a tool to force employees to prioritize their wellness, and to build a happier and more productive workplace.
If you’re located somewhere that doesn’t allow Use It or Lose It, this won’t be applicable to you. However, you can still incentivize employees to take more time off, through a mandatory vacation policy, or just by keeping track of accrued vacation time and encouraging people to take time off when their balance gets too high.
Whatever type of vacation policy you run in your business, it’s important to have a good system to track and manage leave.
This helps you keep a handle on unused vacation days, accrued vacation time, and ensure that you can offer paid vacation without it becoming a liability.
Slack-based teams can do this with Flamingo. Flamingo is the most user-friendly vacation tracker for Slack. It lets you manage everything within Slack, and keep on top of leave types like:
Flamingo makes it easy for employees to request time off, and easy for employers or managers to track accrued vacation time.
It’s free to use indefinitely for small teams, with transparent user-based pricing for larger teams. Try it free today!
Flamingo makes managing your team’s paid time off a breeze.