Paid Leave Is Just Salary Smoothing

Though I thoroughly enjoy work, I also value my free time quite highly, and for years have told myself I’d be the sort of person who would try and get more vacation days instead of more pay, necessarily. A few more idle thoughts on the topic came to me this afternoon:

Under current employment law (presumably for most of the western world), it’s possible to have a high nominal salary and little leave but to essentially “buy” more time off by taking unpaid leave. This, however, depends on your employer approving said leave; depending on your employer, this could be difficult.

What if, in your employment contract, you stipulated the right to unpaid leave? One or two weeks per year, say – the idea would be to make it as close to paid leave in treatment as possible, except without actually receiving any money. (Perhaps make it non-accruing between years would make it easier for employers to accept, too.)

The thrust of my idea is to make the concept of unpaid leave more palatable; at the moment I still get the sense that many people (both employers and employees) treat it as something to be avoided, or at least a far worse alternative than paid leave.

That whole thinking is wrong-headed though, to me. Look at it this way: if you’re earning a salary of, say, $72’000 per year with four weeks paid leave, what you are actually doing is selling 48 weeks of work to your employer for $1’500 a week, but your employer is spreading that $72’000 out over 52 weeks instead of 48. The exact same effect could be achieve if you had a nominal annual salary of $78’000 with no paid leave (so still at $1,500 per week), and took four weeks of unpaid leave.

The point: You’re not actually being paid to take a holiday; “paid leave” is just unpaid leave with salary payment smoothing.

But let’s come back to my right to unpaid leave idea: one of the reasons “paid” leave accrues is that it’s generally recognised and accepted that people can’t just work all year – they need some time off for recovery. If an employee doesn’t take leave, eventually the paid leave they accrue becomes such a liability on their employer’s books that they can be forced (or at least strongly encouraged) to take that leave. (SAP did this during the great crash/global financial crisis in 2008, as I’m sure did many other companies.) So paid leave is, in a sense, the “minimum” amount of rest you want an employee to have. (This is obviously an incomplete treatment, but never mind.)

Unpaid leave, on the other hand, is an option. You can take it, but you don’t have to. You can choose to earn money, or you can choose to receive (or, rather, not sell) your time. So, while increasing the amount of paid leave in my contract would increase the minimum level of time off I should take, giving me the right (but not obligation) to unpaid leave would let me choose whether to work or not, and – this is the important bit – make it easier to get that unpaid leave approved.

Ever the economist, I figured out what salary reduction you (should) take into account for this unpaid leave (based on my reasoning, above):

Salary reduction = (new leave – old leave) * (old salary / [one year - old leave])

If and when I get the chance to test my thinking out in contract negotiations, I’ll let you know the result.