With summer vacation season around the corner, we wanted to remind you of the rules governing employee vacations.

The first rule: You don’t have to give your employees paid vacation under California law.

However, most companies do provide vacation benefits, so it’s a good idea if you want to stay competitive.

Which gives rise to our second rule: If you decide to give employees paid time off, there are laws you must follow.

As the employer offering paid vacation time, you do have some areas of discretion:

  1. You can set the amount of vacation employees will earn each year.
  2. You can set a cap on the amount of vacation time that can be accrued. Once an employee reaches that limit, all accruals stop until the employee uses some vacation.
  3. You determine when vacations may be taken, and for how long. It is critical that vacation policies be clear about how much vacation is offered, the rate of accrual, and whether accrual begins immediately or after some period of time (often six months).
  4. Different rules apply to sick leave. A sick leave policy can be “use it or lose it.,” Plus, you don’t have to pay the employee for unused sick leave upon termination.

Your employee also has some protections under California law.

Vacation pay is treated as a form of wages that are earned on a daily basis. So any vacation accrued can’t be taken away. That means an employee who is terminated or leaves without having used all accrued vacation time must be paid for that time as wages.

Legal requirements aside, it’s probably a good idea to give employees vacation time.

Beyond its advantages as a recruitment tool, paid vacation gives your employees an opportunity to refresh and replenish their energy, and to be more productive.

As early as the 1920s, Henry Ford shifted from a six-day work week to a five-day work week after discovering that his employee’s productivity diminished after 40 hours of work.

The simple truth: Employees who work too many hours get burned out. By contrast, employees who come back from vacation show renewed energy, increased engagement – and more productivity. And studies have shown that employees who take vacations are healthier than those who don’t.

With that in mind, a small but growing number of companies – including Netflix, Best Buy and Evernote – are offering employees unlimited vacation time. According to the Society for Human Resource Management, or SHRM, 1 percent of companies nationwide offered unlimited vacation in 2013.

There are payoffs for the company, as well: It saves time and money spent tracking time off. What’s more, if an employee leaves, a company doesn’t have to pay for unused vacation days.

Whatever kind of vacation plan you offer – a standard two weeks of vacation; combined vacation, sick days and personal days in a paid time off policy (PTO); or an unlimited vacation option – be mindful that employees who use their vacation time will remain more engaged and enthusiastic, thus making your company more profitable.