The answer comes back to financial accounting. The unstated point behind moving to unlimited vacation policies is what gets dropped in the process, and that is accrued vacation time, which you earn by working. The employer owes you that time once you’ve earned it.
The accounting problem for employers is that those accrued vacation days count as liabilities on their books, liabilities that have to be offset by assets. We may remember during the pandemic, when fewer people were taking vacations (presumably because there was no place to go). Companies were actually pressing employees to take time off, sometimes giving them financial incentives to do so. They did that to get those liabilities off the books.
When the company moves to unlimited vacations, it drops the accrued policy, so the liability goes away, and the company instantly becomes more valuable.
You might say, it helps the company but unlimited vacation time still sounds like it boon for employees. The reason it is not is because then employees lose their rights to vacation time. What they get instead is a promise that they can take what they need. But there is no promise that the management will not pressure employees to decide that they only need what works for the company.
Sounds reasonable enough in theory. But do companies actually carry unused statutory or contractual vacation time on their books as a liability?
Peter Cappelli is the George W. Taylor professor of management at the Wharton School of the University of Pennsylvania.
After all, we do now know that not everything said by an academic is true…..
A big corporation I once worked for went to the trouble of paying the employee for accumulated vacation days, reputedly to reduce the on-the-books liability. In the UK in this instance.
A few of our senior staff had a lot of holiday outstanding at the end of last year (I’ve only just started on this year’s allowance). Our auditors raised the issue, and wanted provision made. If someone left then unused holidays need to be paid out – the sum involved was considered material as we are a small business.
Didn’t see much point in it myself, but it was definitely on their radar.
Wouldn’t a use it or lose it clause be better? It’s arguable that you are granting the paid holiday so that your staff are well rested and more productive, therefore if they’re not taking it their productivity drops.
Thinking back I had one job where I could carry over a max of 5 days, once.
Agree with BiND. I cannot rermember the details after all this time but there was a, pretty small, maximum amount of holidays that we could carry forward and we were require to take at least two weeks as complete weeks rather than single days.
In large companies with such policies the *net* amount of accrued holidays (if someone takes a fortnight early on in the year they will have negative net accrued) is non-material so will be ignored by the auditors.
Yes – companies do carry accrued vacation days as a liability. Mine, for example, limited the number of days that can be carried forward (I can carry all of my entitlement from the prior year, but anything from the year before that has to be taken as leave or paid out). A big part of the problem was people accumulating lots of entitlement when they were earning (say) $200/day, but cashing it it at retirement, when they were earning $600/day.
I don’t think it works the way the professor thinks it does, though. Yes, there may be company pressure to not take a “normal” vacation because it suits the company – but there is also the risk that employees will resist the pressure, and take a ‘longer than expected’ vacation – and the employer seems obligated to either keep a position open for them on return. I suspect that the instability in the workforce and resultant effects on productivity will offset the improved balance sheet. Whether the net effect will be positive or negative depends on employee engagement, and the depth of due diligence a buyer or investor undertakes.
I think Peter Cappelli is full of shit.
I can’t think of a single large company I’ve come in contact with that doesn’t have a “use it or lose it” vacation policy. You can only accumulate X number of days and if you don’t use them within a specified time you lose them.
The idea that there are Fortune 500 companies out there with massive liabilities on their balance sheets for unused vacation time is absurd. Note that Cappelli presents absolutely nothing in the way of data to back his assertion. That, in and of itself, should tell you all you need to know about Cappelli’s claims.
Just another bookish commie trying to bullshit the public into believing Capitalism is cheating them.
Also note that Wharton graduated one Alissa Heinerscheid, once the VP of Marketing for a brand known as Bud Light. She got an MBA from them. Somehow I don’t think Anheuser-Busch is worried too much about their vacation accrual these days.
“The idea that there are Fortune 500 companies out there with massive liabilities on their balance sheets for unused vacation time is absurd.”
This, in spades, anywhere.
Hexchopper’s example of “senior staff accruing lots in a small business” would be about as material (distorted relative to the size of the business) as it’s possible to be.
As for Capelli’s comment “the company instantly becomes more valuable”, the corporate chaps are quaking…
Sorry – to answer your question (carrying it as a liability), Tim. In the UK, yes. Like accruing an audit fee… Small cos more likely to take the Hex type approach above (ie, is it likely to be material); larger (especially labour intensive) businesses more likely have it automatically cooked into the payroll -> finance process.
But do companies actually carry unused statutory or contractual vacation time on their books as a liability?
Of course they do, but that’s not the issue at hand. The issue at hand is whether those liabilities are material… Because if they are not material, then Cappelli’s claim that a company “instantly becomes more valuable” is a load of bullshit.
Cappelli suggests – by omission – that the liabilities are material. I suggest that you grab the balance sheet of just about any company on the Fortune 500 or the FTSE 100 and see if you can spot the accrued liability for unused vacation. If you can’t, it isn’t material and Cappelli’s argument falls apart.
One more thing. Cappelli’s background is in Human Resource Management, not Finance or Accounting. That’s right, he’s fucking HR.
When Financial Reporting Standard 102 was introduced for UK charities we were required to recalculate the prior year balance sheet to reflect the outstanding holiday we needed to accrue at that year end. We then would post a charge or credit to the current year’s P&L to reflect the movement in the value of that accrual (increase or decrease).
The initial impact (from memory was to knock 1/2 million off the retained reserves. Annual payroll was about 18-22 million. None of this was cash and just reflected the notional debt owed to staff.
We obviously had a policy of limiting the number of days you could carry forward, also our holiday year end date (HR) didn’t match our financial year end. It was a bit of a pain in the arse to initially calculate. Does it add any value to the users of the accounts, mmmmm? Companies preparing accounts under IFRS had been reporting it for years and the charity sector under FRS102 was just catching up.
I would have thought reporting this accrual or not is unlikely to impact on a business valuation.
You’d think an HR drone would have some idea of how holiday accrual operates. But maybe not if you’re a prof.
German companies do this. The taxman however will not allow past year liabilities to be carried past the end of March (we have a calendar year financial year).
This turns into various holiday carry policies, admonitions etc, depending on the size, national origin (I am now working for an American company that poached me from their major competitor, and possibly giving them second thoughts about wanting to employ more Blokes and Ladies in Europe), and giveashit rule-following level of company.
All of which are in conflict with the fact that your holiday is a right you can enforce (if needs be) for up to 3 years after it is due regardless of how the employer or taxman treats the liability.
Dennis, I remember repeatedly having this discussion with auditors of a professional society I once did financial stuff for. They wanted accrual of membership dues, I suggested, as this income stream was more or less stable and not tied to a particular time of year we accrue 50% at end of the year, adjust once a year for any change in membership numbers, and leave it at that.
That wasn’t good enough but the “proper” solution too complicated so I just refused to do anything. Sure enough it turned up with a yellow box around it in every annual report. I thought, if that is the worst they can find either we are doing a good job or they were doing a bad job.
I don’t know how many auditors even realise these things are simply “one time plays” that result in a roughly constant amount of money you hold that isn’t yours.
Banking risk takers are required to take block leave. Two consecutive weeks to see if anything blows up. Carry over is sometimes quite high as they don’t take much at other times.
We can take 3 over which isn’t that much. This seems to be a US phenomenon where people don’t take leave at all but have a contract that says they get it.
Maybe because I’ve always done contract work, but my holiday entitlement has always been “use it or get paid for it”. If I don’t take any paid holiday, I get it as pay instead. But to me it’s always been a mystery why people would expect and insist on being paid for not working.
In the U.K. it was always use it or lose it, now I’m in Canada and it’s carry over system, this is baked into the local labour laws which also insist a company must make sure an employee takes off a minimum number of days (10 if memory serves) or the company can be fined. Carry over limits are designed to keep liability down and to help meet the minimum days requirement.
The other thing to consider is for the US the typical holiday allowance is pretty low compared to Europe, locally standard vacation is 15 days believe its still 10 days in lots of places
@BniC: “In the U.K. it was always use it or lose it”
No, it depended on your contract. For several years I was paid 13 months salary every year because I didn’t take my contractual holidays. Then they changed the terms of employment so holiday was use it or lose it, with possible carry over in case emergencies prevented you taking it before year end.
In the UK in my experience private sector companies do not let holidays be taken over (apart during Covid) to the next year.
Public sector.
It is very annoying in my current job as december is busy and lots of people take loads of holidays because they have to use them up.
Having staff on the books is a liability as they need to be paid. Whether they work or are away on vacation does not normally reduce that liability as their vacation pay is enshrined in their employment contract. A contract with a higher base salary and no paid vacation would be dubious or potentially illegal. In such an arrangement should the employee choose not to take any vacation their employment cost would be higher than with the normal scheme of X days of paid vacation …… so it would be a potential liability.
All this tells us is that accountancy rules are ridiculous, and act as a barrier to productivity.
“very annoying in my current job as december is busy and lots of people take loads of holidays because they have to use them up”
When I worked in the tax office, they got round that as everyone’s leave year was based on the month of their birthday.
It should also be noted that any liability for unused holidays, is offset by additional working days received by the company during the financial year. After all if you havn’t taken paid leave during the year, the company has benefited from all those extra days worked. Sounds like a zero sum problem to me.
@BiS
I agree, if the staffer remains employed all year.
If still untaken at end of leave year, usually lost (except maybe a few days carry over).
But accrued & untaken holiday must be paid in cash if the staffer leaves, or is redundanted, for example. So contingent liability.
@Tim the Coder
But accrued & untaken holiday must be paid in cash if the staffer leaves
True but the converse is also true. If the staffer leaves after taking more holiday than entitled by the number of days worked their final pay is docked accordingly. This is particularly the case at the end of summer where some people only have a couple of days holiday left for the rest of the year.
@jgh – “But to me it’s always been a mystery why people would expect and insist on being paid for not working.”
They’re not really paid for not working. People vary in what skills they have and one area is life management – things like saving from irregular income to cover your costs. The intent behind paid holiday is that it is equivalent to a higher rate of pay for time worked, but the employer does the work of averaging it out between working time and holiday time. The same applies to sick pay. This is why a self-employed person must charge a higher hourly rate for the same work as an employee. Similarly, redundancy payments are another form of averaging (though, logically, you should also get a lump sum on voluntary resignation – like MPs do).
Of course, there’s always a difference between the theory and the practice, with legislators endlessly meddling with stuff they don’t really understand.
Accrued holiday entitlement is a liability and so has to be shown as such in accounts.
Because any untaken holiday must be paid to employee.
But, employers can with appropriate notice, require holiday to be taken. Hence every company has a use it or lose it policy which is specifically designed to neutralise that ‘must be paid’ legal obligation.
Uk employees are legally entitled to about 28 days holiday a year including bank hols. So you still have to recognise that legal liability.
If you change to a take any holiday whenever model then you still have a liability per employee of at least that 28 days per year. So a provision is needed for any untaken from that 28 for each employee.
At least as far as the uk is concerned, the OP is bollocks.
@Bi4R
I am now working for an American company that poached me from their major competitor, and possibly giving them second thoughts about wanting to employ more Blokes and Ladies in Europe
When I worked for a US company in the UK, their US staff were often horrified by UK employment legislation: “You mean I can’t just fire this guy if I want to?” Imagine their reaction when exposed to say, French or German employment rules!
Chris … And the unfortunate guy they want to sack is usually the one who has found the courage to tell them that they really need to translate “fanny pack” to “bum bag” 🙂
in my experience then in the private sector it is pretty much use it or lose it, with a small entitlement to carry forward at the margin. In the public sector every day is a holiday. And just to note that I hafve worked in both.