The Business Risks of Tying Up $224 Billion in Unused Vacation Days

By Markets Fool.com

America's private sector has a liability of $224 billion in unused vacation days, per the latest report from the U.S. Travel Association's Project: Time Off. For all the media talk about work-life balance, the problem of unused time off is enormous. Last year alone, when USTA president Roger Dow spoke to The Motley Fool about Americans' habit of skipping vacations, U.S. companies carried forward $65.6 billion in unused paid time off (PTO).

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Adam Sacks of Oxford Economics wrote the new study and he told The Motley Fool some employers now view unused time as bad for business: "The easy way to think about it is that it's bad for employees because they're essentially working for free and having terrible work-life balance. But it's bad for companies as well."

How bad? There are at least half a dozen ways in which a cache of unused PTO can cause problems for employers.

Creditworthiness takes a hit
When unused PTO accumulates over the years, the associated financial liability "can affect credit and valuation. If a company is public, is preparing to go public, or is seeking financing, the health of the balance sheets absolutely matters," Sacks said.

Cash flow becomes unpredictable
Employers who let workers pile up unused time off are introducing uncertainty into their cash flow. Eventually, those employees will leave and cash out those days, but there's no telling when -- or how many people will cash out around the same time. "It can be a real burden when employees do have to be paid" Sacks said, noting that if several people retire or leave at once, the PTO payout could force a small organization into bankruptcy.

Tracking unused time costs money
The Project: Time Off report didn't look at the costs of tracking rolled-over PTO, but it costs money to hire people and buy software to keep everything straight. Sacks said some companies cut costs by doing away with PTO policies:

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We did find that popularity of unlimited vacation time has to do with that cost savings. The cost reduction is significant enough that it's influencing companies to change their policies to either unlimited days or "use it or lose it."

Netflix is perhaps the best-known company to embrace unlimited PTO. When the company went public in 2004, it avoided costly tracking requirements by opting out of a formal vacation policy. Netflix's policy requires a high level of trust in employees -- something that many workers respond to positively. That brings us to the next risk of the nose-to-the-grindstone approach.

Unused vacation time creates a talent drain
Sacks pointed out that a "work martyr" culture creates a "lose-lose proposition" with long-term negative effects:

When companies have a culture that time off isn't used, that produces less loyal employees and brings in less talented recruits. The flip side of that is that the companies that are being forward-thinking are attracting and retaining better talent.

Software firm HubSpot recruits top talent by, among other things, requiring each worker to take at least two paid weeks off each year. The company's trust in its people is rewarded: HubSpot is among the 2015 Best Places to Work according to employee reviews on Glassdoor.

The talent that remains underperforms
Workers at companies that don't encourage time off are prone to burnout, and worn-out workers don't deliver optimal performance. "In the short run, [those companies] get a bit more out of their employees, but it's at lower levels of productivity, and they're incurring liability," Sacks said.

By contrast, deal publisher Travelzoo has found that more employee time off contributes directly to better productivity. Travelzoo offers a cash stipend for employees taking vacation time. The result has been a more enthusiastic workforce with firsthand knowledge of the deals and destinations at the core of Travelzoo's business.

Always-there employees can mask potential failure points
If a worker can't go away because he or she is the only one who can do a particular job, the employer has a risky problem that needs fixing. Full Contact CEO Bart Lorang is quoted in the report saying that attitude indicates a "single point of failure." Sacks agreed:

If you only have one person with no redundancy in terms of backup to do vital functions, that's an incredible risk. A proactive vacation policy forces companies to have redundancies to shield them from that risk. [Vacation time can be] the thin end of the wedge to move a company toward redundancy.

Culture and policy both matter
Not every company can pay employees to take their paid time off, but every company can take a look at the books and make changes to reduce liability and boost competitiveness. It's one thing to have a proactive vacation policy, Sacks said, but senior managers need to lead by example and communicate to workers that they can and should use their time off. Taking time off, it appears, is just good business.

The article The Business Risks of Tying Up $224 Billion in Unused Vacation Days originally appeared on Fool.com.

Casey Kelly Barton has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.