What are your considerations when deciding whether to implement a paid time off (PTO) policy? Do you know all of the pros and cons? PTO policies typically combine vacation days and sick days together into one bank of available days. In a CER webinar titled “Paid Time Off: How to Draft and Administer an Effective PTO Policy that Complies with Both California and Federal Law,” Marc L. Jacuzzi outlined some of the items to consider before implementing a PTO policy.
PTO Policies Versus Vacation Plus Sick Leave
When you implement a PTO policy, all the time off becomes the equivalent of vacation time because there is no contingency on its use (i.e. using it is not contingent upon being sick) and it cannot be forfeited. You cannot set any part of it up on a “use it or lose it” basis. This means that it might be more expensive for you in the long run if all time is actually used. So, why would you want to do that?
One of the primary reasons is that you might have better control over scheduling because employees save time for vacation purposes and use in longer blocks of time. Implementing a PTO policy is often well-received by employees as well, since it feels like an increase in vacation entitlements, even if the total days off remain the same.
Drafting Considerations for a PTO Policy
If you decide to implement a PTO policy, there are several drafting considerations:
- Who is eligible? Will it be only full-time employees? If yes, how is full-time defined? What about part-time employees? If they are not on PTO, how will their sick leave work? How is part-time defined? Are commissioned employees eligible? (They can be excluded – you may want to exclude or determine what pay rate to use for PTO.) What about inactive employees (generally defined as those employees on unpaid leaves of absence of 2 or more weeks)? Will you define this differently?
- Will there be a waiting time period before accrual begins? Since PTO is essentially a matter of contract (with the legal limitations that it vests as it is earned and cannot be forfeited) you can decide when employees begin to earn vacation, e..g., “Beginning in the 13th month of employment, employees earn .5 days of PTO for each month of employment.”
- How will PTO accrue? Will PTO accrue as time (most common) or as dollars? Jacuzzi gave some guidance: “In your policy you want to state a rate that is based on time worked, [either] by the hour, by the day, by the week, [or] by the month. If PTO accrues based on hours worked, does it include overtime hours? You need to be specific.” Be sure you are very clear – state the rate and give examples. Will the accrual rate be pro-rated under any circumstances? What circumstances? Part time employment?
- Is a limitation on accrual desirable? Use it or lose it policies are unlawful, but accrual caps are lawful. Jacuzzi is a big proponent of using accrual caps. “Without a cap . . . the PTO banks can get out of control.” Employees may even treat it as a form of a severance package by allowing it to accrue continually before leaving the company.Here is an example of a cap: “PTO accrual is capped at 150 percent of the annual PTO accrual rate. If the employee’s earned but unused PTO reaches the maximum, the employee will not accrue any additional PTO until the employee uses PTO such that the accrued balance falls below the cap. At that time, the employee will resume accruing PTO. For example, if the employee earns PTO at the rate of 10 days per year, his/her accrual is capped if s/he reaches an accrual balance of 15 days.”
- When can an employee cash out unused days? Annually? Bi-Annually? Other? Will you require mandatory scheduling instead of allowing a cash-out option? (“If you won’t schedule your PTO, we’ll do it for you!”)
- What will be the increments for use? Full days? Half days? 2 hours? Hourly? Minutes? Consider how this may apply differently to exempt and non-exempt employees. (Exempt employees are not paid based on hours worked and should not use increments of less than half days.)
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Marc L. Jacuzzi, Esq., is a shareholder in the law firm of Simpson, Garrity, Innes & Jacuzzi (www.sgilaw.com). He advises clients regarding all aspects of the employer/employee relationship including hiring and termination, wage and hour requirements, employee classification, civil rights and discrimination issues, employee investigations, commission plans, employment contracts, employee handbooks and policies, confidential information agreements, reductions in force, leaves of absence, employment audits, M&A employment issues, violence in the workplace, and international employment issues.