Setting sound vacation policies requires understanding NC law

Employers and employees alike often misunderstand North Carolina’s legal requirements concerning vacation benefits. Those misunderstandings often can become emotional and heated. An employee may believe her employer is cheating her out of a benefit. The employer may believe the employee is claiming a benefit she has not earned.

Many times such disputes result in complaints to the North Carolina Department of Labor. The best way to avoid such disputes—and maintain workplace tranquility—is to publish a clear vacation benefits policy based on a solid understanding of North Carolina law.

North Carolina law does not dictate the terms of an employer’s vacation benefits policy. In fact, it does not even require employers to provide vacation time. However, employers who provide vacation benefits, as most employers do, must comply with the North Carolina Wage and Hour Act.

Vacation notice requirements

The act requires an employer that provides vacation benefits to have a written policy. An employer may satisfy the act’s notice requirement by posting or by making available its written policies and practices. Although not required, the employer would be wise to have employees sign a statement that they have received a copy of their employer’s vacation policy.

According to the North Carolina Administrative Code, the written vacation policy should address the following:

  • How and when vacation is earned, so that the employees know the amount of vacation to which they are entitled
  • Whether vacation time may be carried forward from one year to another, and if so in what amount
  • When vacation time must be taken
  • When and if vacation pay may be paid in lieu of time off
  • Under what conditions vacation pay will be forfeited upon discontinuation of employment for any reason.

Vacation accrual

Employers must choose a method for determining how much vacation time employees may earn. The act does not require any particular method, but the accrual method employers choose will affect the amount of vacation time employees earn and payments that will be due to employees upon termination. Here are some common accrual methods.

Annual accrual: An employer policy stating that an employee gets two weeks of vacation each year at her anniversary date is an example of an annual accrual method. For purposes of the act, the employee “earns” her vacation time on her anniversary date. If the employee is terminated the day after this anniversary date, she probably is entitled to two weeks’ vacation pay, absent a valid forfeiture clause.

Monthly accrual: To avoid that day-after-anniversary-date-blues scenario, some employers accrue vacation on a monthly basis. Under this plan, the employer’s policy for an employee receiving two weeks’ vacation a year might read like our example (see box below).

Since accrual occurs slowly over the year, the employer runs little risk of paying a substantial “unearned,” accrued vacation benefit upon an employee’s termination. However, this accrual method often requires an additional policy permitting the use of vacation time prior to full accrual, since employees may desire to take vacation early in the year. Such policies may have payback provisions if the employee leaves before accruing sufficient vacation time to cover the advanced vacation time.

Paying out or giving back

An employer must pay an employee at termination for the total amount of vacation he or she has accrued, unless the employer’s policy states differently. The North Carolina Wage and Hour Act permits an employer to require an employee to forfeit all unused accrued vacation, but only if the employer’s vacation benefits policy explicitly says so.

The act gives employers great latitude in the terms of forfeiture. Forfeiture can occur in all terminations or just in certain types. The act requires only that the employer’s policy be clear, consistently enforced and that it be communicated to the employees.

Employers should take care in crafting their vacation benefit policies. Employees greatly value their vacation time and don’t take kindly to losing any of it. A clear, fair and properly published policy will avoid misunderstandings and help maintain a happy and productive workplace.

Monthly accrual policy language

The vacation year is the calendar year and vacation benefits are accrued (earned) on a monthly basis at the end of each month. For employees who are entitled to two weeks of vacation per year, vacation is accrued one day per month up to a maximum of ten (10) days.