PTO Programs: Two Commonly Asked Questions About Employee Terminations and Accrual of Unused Hours
In my last Insight, I explained why many businesses are turning to well-managed paid time off (PTO) programs as a way to reduce administrative headaches. Generally, PTO days are used for absences such as vacation, personal illness, family member illness, personal/family matters and religious holidays.
Once employers have decided to develop or convert to a PTO program, the following two commonly asked questions may pop up:
1. When preparing for the time when the employer-employee relationship is terminated, what PTO policies or procedures should be in place?
Specifically, how should employers compensate a terminated employee for any remaining PTO left on the books? Most states have laws regarding payment of vacation on termination of employment and these same laws apply to payment of accrued PTO. Some states require employers to pay employees for all accrued unused vacation time; others do not. Some states allow the employer's policy to dictate whether terminating employees are entitled to be paid vacation. Generally, if the policy does not say that employees will not be paid for unused vacation time, the employer will be required to pay the time accrued. Be aware of the law in the state(s) where your employee(s) works.
Employers should also be aware that most states have laws specifying exactly when a final paycheck must be issued to employees who either resign or are discharged and these same laws apply to the payment of accrued vacation.
In Illinois, for example, employers are required to provide the payout immediately, if at all possible, or no later than the next payday following termination. In California, the final paycheck must generally be paid immediately (or within 72 hours if the employee quits without notice).
2. When the PTO calendar year has ended, what should be done about leftover PTO time?
First of all, it is far easier for everyone if employees earn and track PTO on a prorated calendar-year basis, rather than by employees’ anniversary dates. Otherwise, confusion and more administrative headaches can follow.
Many employers find it to their advantage to allow employees to carry over accrued PTO. There is a sound business reason for this: At the end of any calendar year, many employees can find themselves with unused PTO left on the books. This scenario is not uncommon and happens because of work or personal reasons. Employees may get caught up in projects and deadlines and, as a result, don’t feel comfortable taking time off, etc. Or as a precaution, they may be saving up PTO hours in the event of an unplanned illness.
If these employees are not allowed to carry over at least some of their unused PTO, a business may find itself with a vast majority of employees out of the office or away from the shop at the same time. Additionally, some state laws prohibit employees from forfeiting any accrued vacation, even if the employee fails to use it. Employers in such states may have policies that call for a "cap" on vacation accrual any time a maximum number is reached. Vacation stops accruing until time is used. This keeps employers from having huge balances of vacation owed.
Other employers limit how many hours of accrued time can be carried over from year-to-year. In states that prohibit loss of accrued time, employers must be proactive to ensure employees use all accrued time that cannot be carried over.
Some companies allow employees to elect to roll over unused PTO hours forward into the next calendar year. Companies may also allow employees to receive payment for unused PTO hours according to a predetermined formula found in the employee handbook. These type of policies may raise tax issues so it is important to discuss any such policy with your tax advisor.
Properly Managed PTO Programs Work Well
As mentioned, a properly managed PTO program can serve a business well. In fact, according to the Society for Human Resource Management (SHRM), a large majority of employers surveyed in 2007 said that their PTO program either met their expectations (78.4 percent) or exceeded them (14.6 percent).