What Does Paid Vacation Cost the Company?

Including paid vacation in your benefits package keeps you competitive as an employer. Intended to help employees avoid burnout and remain productive, paid vacation policies can encourage worker retention by tying the amount of time off with years of service. According to an Expedia survey, U.S. employers granted an average of 12 days of vacation in 2012. They did so knowing that paid vacation adds to their labor costs.

According to a U.S. Bureau of Statistics report in March 2013, vacation leave cost private industry employers $1.04 per hour worked. Management and professional employee vacations cost them the most per hour worked -- $2.32 -- while employees in service positions cost the least -- 29 cents. Employers may want to consider the overall expense of their paid time off, or PTO, package: vacations, sick leave, holidays, personal days and bereavement days. The BLS reported PTO cost private companies $2.01 per hour worked, out of an average hourly compensation level of $29.13.

When employees take vacation leave, their work doesn't go away. Depending on the position of the vacationing worker, temporary help may be needed, overtime required or responsibilities redistributed. Time dedicated to staffing needs becomes a "hidden" labor cost, overtime increases total compensation expense and adding to the payroll incurs wage, tax and insurance liabilities.

Twenty-three percent of Expedia's 2012 Vacation Deprivation Survey respondents opt to bank their vacation time for the future. Employees are vested in their accrued leave, so they cannot forfeit it, and they get paid for it at their current wage, not what they made when they earned the time. For example, workers paid $20 an hour today who earned $10 an hour previously create a 50 percent cost increase for any unused vacation days from their lower-wage years. Companies without a policy which caps the amount of vacation time that can be accrued before it must be taken may face higher PTO costs.

Despite the cash outlay vacations represent, employers have much to gain by encouraging their people to use vacation leave. Long hours and heavy workloads without time away from the job can adversely affect productivity, quality and morale -- factors that eventually influence profitability. Recognizing the value of work-life balance as a way to avoid stress-related health issues also can help to control health benefits costs.