Managing Employee Vacation Time

With our partner, Patriot Software, we can manually add vacation hours to your employees’ time-off balances. When employees use vacation time, the hours are automatically deducted, ensuring they cannot exceed their available balance.

Establishing a Clear Vacation Policy
Before granting vacation time to employees, it is essential to have a written and signed vacation policy that outlines:

1. How vacation time is accrued and used
2. Whether unused vacation is paid out upon separation
3. Any “use it or lose it” provisions or rollover options

Without a clearly defined policy, an employer may be obligated to pay out unused vacation time when an employee resigns or is terminated, based on past practices or implied policies.

Common Vacation Policies Among Small Businesses
Many small businesses in Ohio choose to:

1. Grant one week of vacation after a year of full-time employment.
2. Decide whether to allow unused vacation to roll over, expire, or be paid out.
3. Require employees to sign off on vacation policies to ensure transparency.

Whatever policy you establish, it must be clearly documented and consistently applied.

Tracking and Reviewing Vacation Balances
While our payroll software tracks vacation time, we encourage employers to keep their own records and compare them with our system at least twice per year (e.g., January and June) to ensure accuracy.

Clarifying Ohio Law on Vacation Payout:

Public Sector (Government & County Employees):

Ohio Revised Code § 325.19 requires that certain public employees be compensated for unused vacation if they separate from service under specific conditions.

This law does not apply to private-sector businesses.

Private Sector (Small Businesses & Employers):

No state law mandates vacation payout, however, you need written policies in place and signed off on by all employees. 

Vacation is considered a benefit, not a right, and employers can choose whether to pay it out or not, based on their written policies.

If a company’s policy states that vacation is paid upon separation, the employer must follow it.

What This Means for Small Business Employers in Ohio:

✅ If you want to pay out unused vacation upon separation, you can include it in your company policy.
✅ If you don’t want to pay it out, your policy should clearly state that unused vacation is forfeited upon termination or resignation.
✅ Having a written, signed policy protects your business and ensures clear expectations for employees.

What if There Is No Written Policy?
If an employer does not have a written policy, payout decisions typically depend on:

1. Past Practices – If an employer has historically paid out unused vacation to separating employees, they may be legally required to continue doing so to avoid inconsistent treatment.
2. Verbal Agreements or Implied Policies – If an employer has verbally promised vacation payout or if employees reasonably expect it, they could be obligated to pay.
3. Ohio Wage & Hour Law Default – Since Ohio law does not mandate vacation payout for private sector, an employer is not required to pay unless a policy, contract, or past practice establishes an obligation.
4. If an employee believes they were unfairly denied vacation pay, they may file a wage complaint with the Ohio Department of Commerce, Wage & Hour Division.

“Use It or Lose It” Vacation Policy
A “Use It or Lose It” policy requires employees to use their accrued vacation by a specific deadline (e.g., the end of the year), or they forfeit any unused time.

Example Policy:
ABC Company Vacation Policy:
“Full-time employees accrue vacation at a rate of 10 days per year. Employees must use all accrued vacation by December 31 of each calendar year. Any unused vacation time will not roll over to the next year and will be forfeited. ABC Company does not provide payment for unused vacation time upon termination.”

Key Considerations in Ohio:

• Legal Status – Ohio allows “Use It or Lose It” policies, but employers must clearly communicate them.
• Written Documentation – The policy must be included in an employee handbook or contract.
• Earned Vacation Protection – Employers cannot retroactively revoke accrued vacation without prior notice.

Alternatives to “Use It or Lose It” Policies:
Vacation Rollover – Allow employees to carry over unused vacation, possibly with limits. e.g. Half of the accrused hours carry over and expire March 31st of the following year. 

Vacation Payout Upon Separation – Some employers choose to pay out unused vacation when an employee leaves.

Vacation Policies for Employees Who Work Inconsistent Hours
If employees haven’t consistently worked 35+ hours per week, employers still have options for structuring fair vacation policies.

1. Define Full-Time vs. Part-Time Eligibility
Employers can pro-rate vacation time for employees who worked fewer hours.

Set a minimum average hours threshold (e.g., employees must have worked at least 30 hours per week over the past year to qualify).

2. Offer Vacation Based on Hours Worked
Instead of granting a set number of days, employers can tie vacation accrual to actual hours worked.

Example: Employees earn 1 hour of vacation for every 40 hours worked.

3. Adjust Eligibility Requirements
Consider using a look-back period (e.g., the past 12 months) to determine if employees qualify for vacation benefits.

4. Provide Vacation at Different Levels
Employers can offer scaled benefits based on employee work hours:

Employee Type Vacation Time, For Example:
Full-time (35+ hrs/week) 5 days vacation
Part-time (20–34 hrs/week) 2 days vacation
Less than 20 hrs/week No vacation eligibility

Recommendation
For employees with fluctuating hours, a pro-rated or hours-based accrual system ensures fairness. Whatever approach you choose, ensure your policy is clearly documented and consistently enforced.

Logically, if you use the system “for every 40 hours worked you receive 1 hour of vacation time”, you can credit the employee immediately as they earn (accrual) or manually a year into their employment with you with their earned time. 1×52 weeks is 52 vacation hours if the employee never missed a day and you didn’t close for any holidays. So realistically they’re not going to really go past 40 hours. You can decide in your policy the max vacation time to be earned if you have concerns they’ll earn too much PTO. 

Disclaimer
The information provided on this webpage is for general informational and reference purposes only. It is not intended to serve as legal, tax, or financial advice and should not be solely relied upon for making business decisions.

Laws and regulations may change, and individual circumstances can vary. Employers should consult with a qualified attorney or legal advisor to ensure compliance with applicable laws before implementing or modifying any vacation policies.

Fireside Tax, Inc. assumes no responsibility or liability for any errors, omissions, or outcomes resulting from the use of this information. By using this webpage, you acknowledge that it is your responsibility to seek appropriate professional guidance when needed.