The mod vacation tool is pretty basic.
There's a mod stats page called the "dashboard" or "admin" page where mods can see how many moderator actions they've taken in the past time period - we give them several options like day, week, month, quarter, etc. On this page, mods also have the option to mark themselves absent and leave a note about why they're out and how long they're planning to be away.
Here's what it looks like - it's pretty basic. The Admin page is divided by active mods and inactive mods with staff listed at the very bottom.
A mod who wants to take vacation goes to the admin page, fills in the text box (optionally) and clicks the button to mark themselves on vacation. This moves their row on the page down to the inactive section. Multi-site mods additionally have the option to carry over the vacation to all of their sites or just the one. When they're back from vacation, they remove the vacation status and get moved back into the active section.
There are no limitations on tool usage. Mods can use it whenever they like for as long as they wish. And many mods are "inactive" but still handle flags. Some use it as a signal of reduced activity rather than complete absence.
There's not a notification for the fellow mods about it but the page this is on generally is one mods look at regularly. Additionally, mods often communicate with each other in their private chat rooms to let their fellows know when they'll be out for a period of time.
Normal users will only know that a mod is inactive if the mod says they're going on vacation publicly (chat, meta) or if they simply notice that the mod isn't around.