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Every place I have worked has capped the amount of paid time off employees are allowed to roll over to a new calendar year. In many cases it's a "use it or lose it" scenario, where accrued time is lost if the employee is over the cap.

One year, the company I worked for significantly reduced the amount of rollover allowed, in order to "prevent employees from disappearing for large amounts of time while we have important projects running", but this had the exact opposite effect. My project lead literally disappeared for 5 and a half months so he would not lose any of his accrued time.

The next thought is future liabilities. Maybe they are worried about having cash to pay someone out when they leave the company or retire, but, simple accounting should be able to manage that by pre-paying into a fund each year and only pulling money out when someone uses paid time off. The idea being if they had the cash to pay it on 31 December, then they still have the cash to pay it on 01 January. It could even be an interest-bearing account to avoid inflation issues. This makes the "we may not have the cash available if you store up too much paid time off" argument rather thin.

The next thing I can think of is maybe they are truly looking for a good work/life balance and want to make sure their employees get time off. That's kind and all, but if there are employees who would rather work a lot now and take a lump sum when they retire, I think that's a valid scenario for employees who really thrive on that sort of thing.

Tax reasons possibly?

This leaves the last thing I can think of: maybe this is just the way it's always been, and no one has really thought to question it. But that seems rather simplistic.

So to get to the question, why would employers in the USA cap paid time off accrual?

Answers such as "that's the HR policy" are not super helpful, as I'm trying to get to why such a policy exists.

  • Money sitting in a bank and earning 3% interest isn't very productive money... The best interest comes from specialised savings accounts, but they are still only likely to return ~10%pa and typically will lock the money for a minimum period. If that money can be used to increase business somehow (more production, more advertising, more sales), then the company will spend it and get much better returns on their investment. – HorusKol Aug 16 at 6:25
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    When you say it had the opposite effect - sure, that one person was off for half a year once, but introducing the cap meant that that wuoldn't happen ever again – AakashM Aug 16 at 9:30
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    Regarding the opposite effect, this sounds like the result of a bad implementation and better thought out could have prevented this. Regarding the 'putting cash aside' there have been numerous problems in the UK with pension blackholes, irregularity and tax raids, so there is a real risk with this arrangement. It also ignores the non-financial side, if someone leaves for six months and comes back this could be harder to account for that someone who just leaves. – mattumotu Aug 16 at 9:35
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    Plus it encourages employees to take leave which reduces the change of burn out and enhances productivity – mattumotu Aug 16 at 9:36
  • As a reference, in Italy you do must take half of your PTO within the year and the other half within the next 18 months, required by the law. Also if you don't take your PTO your employer can be fined. – Paolo Aug 16 at 17:29
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The most common reason I heard is that

Employees become more expensive over time

So that vacation after a raise costs your company more money than before a raise. The difference might be small for one person, but if it is common behaviour to collect vacation days over the years then it sums up to a big amount.

Also you confirmed the other reason that people will take long vacations with the collected days. Now your project lead left for over 5 months, but he won't be able to do that again in future.

  • In software development, one could easily accrue 1-2 months of flex hours (150 - 300) each year. It is just 10 hours extra per week for 4 - 8 months, which easily happen with eg. weekly production releases during weekends and a few extra hours during the week. – Juha Untinen Aug 19 at 22:07
  • In Ontario education, if a teach does not take any sick leave in their entire career, they can retire a whole year earlier. That is a HUGE amount of monetary increase at the end of a career, factoring in all the raises and inflation adjustment. – Nelson Aug 21 at 3:01
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Multiple reasons you listed that makes it easy for this policy to be implemented but limited to no reason for it not to.

  • Really not having cash available. Orgs need to budget for those things and if they do not have a top limit on how much they might need to pay off, they might run into issues. And some risk management philosophies dictate that might is a big no-no
  • Some organizations want employees to really take at least some time off annually.
  • Some other organizations want to handle long-term time-off through separate policies
  • And yet some other organizations do it because that's what everyone else does.

So "that's the HR policy" is not a helpful answer but ultimately the only good one like a lot of other such things

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    cash not available can flow both ways. During a steep downturn a former employer raised their rollover cap from 120 to 480 hours to temporarily reduce the amount of use it or lose it they were paying out. Probably was a net gain the 1st year or maybe two; after that it's main effect was to increase the size of the last checks they had to issue to departing employees. – Dan Neely Aug 16 at 4:49
  • @DanNeely your comment about " reduce the amount of use it or lose it they were paying out" is different from use-it or-lose-it. If they are giving you a check for excess leave on the books then you aren't losing it. But if the employee forfeits hours then that is use-it-or-lose-it. – mhoran_psprep Aug 16 at 10:49
  • "Some organizations want employees to really take at least some time off annually." I don't think you reach this by capping off the paid-off time that can be transferred. Unless everyone spends all this time at the end of the year, which I do not think is desirable for a company. – Sabine Aug 16 at 11:27
  • Why would it be undesirable? End of the year corresponds to the holiday season in the US with Thanksgiving and Christmas so it is actually desirable to nudge people towards taking time off in a predicable manner around those times – Victor S Aug 16 at 11:30
  • @mhoran_psprep not interested in arguing semantics; but the way I described it is how it was called at the company. – Dan Neely Aug 16 at 11:57
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I have talked to the management of the small companies I have worked for regarding either use-it-or-lose-it or paying for excess leave hours. These are not an any particular order.

  • The leave account is a liability. They have to keep money around because the employee can take leave on short notice. Keeping that liability low, and the account balance low makes their financial situation clearer.
  • In some cases when an employee is on leave the company has to pay others to take their place. That means that the week that an employee is on vacation has the same labor hours, but some may have higher expenses due to overtime. In those cases paying a check for excess vacation can save the company money.
  • Work life balance. Taking the vacation they are entitled to makes them a better employee. Having a policy that will forfeit vacation hours makes employees take them.
  • Contract support. If you work on a contract your company is putting money away from the amount they bill the customer to pay for your benefits. But if you have a large leave balance when you switch contracts, that means that you might put in less billable hours on the next contract, that can cause issues with the customer.
  • Managing billable hours. I have worked on contracts where they can only bill x hours during the contract year for each employee. They calculate that every employee will take y hours for vacation and sick. if the employees never take vacation, then as the contract year is ending, they may run out of billable hours.
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    Not just clearer... banked vacation is a financial liability on the books. and makes various financial stats worse, as salary is usually one of the largest parts of a company’s budget. Tech startups that do the “unlimited vacation” thing are usually doing it to improve their shot at IPO or buyout by making their financials look better. – mxyzplk Aug 16 at 12:04
  • Yup, when my old (large) company changed to a "use it or lose it" PTO scenario, they actually said that the rollover limit was because large amounts of unused PTO makes their cash situation worse. Everyone hated it (because they stupidly kept the old accrual method as well) and they switched back to the old max limit way after two years. – pboss3010 Aug 16 at 13:36
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Two things not yet covered, the intent of the policy, and the cost. First is the reason to offer paid vacation time. It is to allow taking a break without a loss of income. Families especially use this time. The notion of accruing a cushion was never the intent of paying employees for not coming to work, it was to cover the time that they wanted off. So if an employee does not want a break, for years in a row, the employer should not have to automatically award extra cash for something not wanted, needed or used. Next, it is extra cost. For easy math, say the employee makes 52k a year, and gets 4 weeks vacation. A year when 4 weeks vacation is used, the cost to the employer is 52k, employee makes 52k. If unused and payable upon demand, then the employee was paid 52k, plus banked an additional 4k to be paid in cash. Employer budgets 52 but cost is now 56k. Employee made an extra 4k that year. Worked an extra 4 weeks to earn it, but by personal choice not employer coercion. So a cap is a reasonable middle ground.

  • Hi Qwerty. Thank you for the answer. I understand what you are saying, but I keep thinking that if an employee works extra, the company will make extra to cover it. At least where I work, productivity leads to very real income for the company. That may not be the same for all companies, but often we are asked to volunteer for overtime to meet this deadline or to accomplish that thing prior to another big thing being started, all of which generates revenue. That said, my sample size is pretty small. :-) – kmort Aug 20 at 4:50
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In most cases it comes down to how much liability a company can have if they have to pay out on that PTO if it builds up to to large of a size and is paid out in one or a few large chunks.

For example say someone decides to save 5 days from each years allotment of PTO it would add up to a large chunk quickly. After 10 years they would have 50 days any be able to take off 20 weeks not counting any company wide PTO days. If someone kept this up until retirement they could easily have a year or more of time saved up which the company would have to pay out.

Not to mention they tend to not like keeping someone on the payroll for an extend period when they are using the last of their vacation prior to quitting.

Not to mention it is much cheaper for a company to pay out the time off at today's current salary than at the end of a long career when they are making a lot more.

  • Hi Joe. Thanks for the answer. You said "Not to mention they tend to not like keeping someone on the payroll for an extend period when they are using the last of their vacation prior to quitting." Can you help me understand why they don't like this? Thanks! – kmort Aug 20 at 4:51
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    @kmort I have seen situations where someone will have a multiple years worth of vacation banked up and take them all at once as part of leaving the company which means they end up getting paid at the same time as their replacement. – Joe W Aug 20 at 12:19

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