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Belt Tightening

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1Jul

Is it really a vacation if your boss orders you to go? And is it possible that such an order might actually foreshadow a layoff? In a "cost-cutting move" that preceded its disappointing fourth-quarter revenue prediction, Sun Microsystems Inc., in Palo Alto, Calif., told 38,000 employees to stay home during the week of the July 4th holiday, and to take the remaining days either as vacation or without pay, says spokeswoman Diane Carlini. "They have to take the days one way or the other," she says.


Adobe Systems Inc., in San Jose, Calif., also told 2,000 employees to make Independence Day a weeklong event. "Many employees typically take part of that week off anyway," explains spokeswoman Cheryl Edwards. And spokesman Randy Lane says Palo Alto­based Hewlett-Packard Co. asked, but did not require, that all 90,000 of its employees take six vacation days.


Oxymoron or not, forced vacation is all the rage as companies grapple with slumping earnings. But what's the financial benefit of making employees take paid time off? Typically, vacation is accrued as a liability as employees earn it. "The savings come from the reduction in the earned vacation liability," says HP's Lane. Adobe's Edwards says the measure is expected to save $4 million in "labor costs." But while reducing accrued liability makes the balance sheet look better, there's no effect on expenses beyond the incidental savings of closing the office.


"The only way to get a cost savings is not to pay for paid vacations," says James F. Harrington of Price-waterhouseCoopers LLP. But both Sun and HP cap the vacation time that employees can accrue, and neither allows workers to cash out unless they leave. That, of course, raises the possibility that forced vacation is a harbinger of layoffs.


"When people get laid off, generally you don't want them to have vacation accrued," notes Albert J. Meyer of investment research firm David W. Tice & Associates, in Dallas. More optimistically, Meyer says that if employees use vacation during slack periods, companies can be at full strength and will be less likely to incur overtime when business picks up.


For some companies, that's standard practice. Each July, General Motors Corp., for example, encourages salaried employees to take off while the plants are converted for the next year's car models. --Tim Reason

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