Smaller companies may not have a choice. Without sufficient employees to keep each of the major areas staffed, you'll have to deny the majority of vacation requests. Offering alternate, and perhaps additional, vacation time can help soften the blow, but be prepared to endure disgruntled staff members for a few weeks.
Larger companies most likely have the ability to cross-train staff members to allow certain groups to take vacation time. How you decide who gets to stay and who gets to go is entirely up to you, but you should use a fair and objective system in every case to avoid even the appearance of impropriety or favoritism.
A common method is to offer employees with seniority first dibs at getting days off, followed by employees with pressing engagements, and then new employees. Once again, this might make you resemble Scrooge during the holidays, but remind employees that you must ensure proper coverage.
Of course, there are mitigating factors to take into consideration. You should respect the beliefs of employees with religious practices that demand they not work on certain days. These employees won't be working, no matter how much you need them. In fact, forcing them to come in and/or terminating their employment over their refusal could quickly result in litigation.
In addition, some employees may have made nonchangeable travel arrangements. They don't have legal protection, but it's still in the best interest of the organization to allow these workers to fulfill their plans, if at all possible.
So, what happens when you're short-staffed during an emergency? As a last resort, you can call people who are on vacation and ask them to return. Receiving this kind of call is the last thing an employee wants while he or she is on vacation--believe me, I know from first-hand experience--but sometimes you don't have a choice.
Another alternative, if the funds are available, is to hire temp staff on short notice to fix the emergency problems. This solution will work, but it's expensive and requires that you keep complete, up-to-date documentation.
While this may seem like common sense to a lot of IT professionals, an overwhelming number of managers do not properly plan for the lack of staffing around the holidays. Planning things out, working with the needs of your staff, and setting up pager chains will help remedy--but not completely fill--the remaining gaps. Strive to achieve a system of vacation time that keeps poor morale to a minimum and coverage to a maximum.
Mike Talon is an IT consultant and freelance journalist who has worked for both traditional businesses and dot-com startups.