Paid time off: Watch out for these traps
December 3, 2008 by Bill MeltzerPosted in: Absenteeism, Compliance, Paid time off, Special Report
Many organizations have made the switch from separate vacation and sick-time leave to single paid time off (PTO) banks. If you take the plunge, beware hidden traps.
In the last few years, there’s been a fast-rising trend for employees to claim they’re owed money for unused time when their employment ends. The scariest part: Employers haven’t been faring too well in court.
Vested benefit
While paid vacations and PTO aren’t legally required benefits, it’s a different ballgame once you offer such benefits. There are a host of laws – mostly at the state level – that address what happens with unused time.
In many cases, courts are ruling it’s a vested benefit and must be paid.
The most publicized recent case – a class action suit against Target by 270,000 California employees – cost the company $10 million to settle. But employees in several other states have also cashed in, with major cases pending in Illinois and Washington.
In the majority of cases, the dispute centers around an employer’s use-it-or-lose-it policy. Under these policies, employees typically can’t cash in unused vacation or PTO when they leave the company.
In some states, most notably California and Illinois, there are laws severely limiting employer rights.
Meanwhile, the Nebraska Supreme Court ruled that even if an employee handbook clearly says vacations are use-it-or-lose-it, employers have to pay upon termination (Roselund v. Strategic Management, Inc.).
Other states such as Florida and Texas currently favor employers, but that could change as the trend grows.
Employers have won some battles. The Minnesota Supreme Court decided vacation policies are a contract between employers and workers (Lee v. Fresnius Medical Care). In plain English, that means if you got sued in Minnesota, the wording of your policy and the clarity of your employee handbooks would be the deciding factors in the case.
PTO could present problems
Here’s the biggest problem with PTO: Even though termination pay for unused sick days and other non-vacation leave are rarely covered by state vacation-pay rules, they may be protected when the days count as all-purpose PTO.
Courts have mixed views on whether employees are entitled to reimbursement for all unused PTO or
merely the “vacation portion” of it. With the rise of PTO policies, a host of states are considering whether to amend vacation-pay laws or to leave interpretations up to the court system.
Meanwhile, some labor attorneys recommend organizations with PTO go back to separate vacation and sick banks for their own protection.
Beware buy-backs
It’s perfectly legal to offer buy-backs for unused vacation or PTO days. Just keep in mind that FLSA requires you to count this money toward total compensation when calculating overtime pay. Otherwise, you could be sued for OT violations.
You can save your company a lot of future headaches – both in terms of lost time and money – by taking a hard look at your vacation pay policies now. Experts recommend bringing the issue to the attention of senior management and huddling with your organization’s legal counsel.
Three questions to discuss:
- Where does your state stand?
- Do you need to revise your employee handbooks?
- Could PTO cost more money in the long run than it saves now?
Tags: Paid time off
December 4th, 2008 at 5:43 pm
Our business is in NM.
1. Our vacation policy states that you use your vacation days in the current year or lose it. Upon termination, however, we pay for unused days and accrued vacation. Is the first statement legal?
2. We do not use vacation time in the calculation of overtime. Is this legal?
December 4th, 2008 at 5:49 pm
This was very interesting and informative. Does the overtime pay also apply to a pay period where there is Holiday? That is, does a worker receive overtime pay when a paid holiday throws him/her over 40 hours? Where does Missouri laws fit in to this?
December 4th, 2008 at 7:06 pm
What have we done? Everybody has their hand out & the courts make us fill them. What ever happened to earning your pay?
December 5th, 2008 at 1:18 pm
We used to have combined PTO for all vacation and sick time. I found that combining them made it okay to take all days off. Once they were separated and the employees have vacation time accured and sick time alongside that for only sick time, I often have employees who do not use all of their sick time. As a small business, we need our people here as often as possible. Even a few extra days a year goes a long way in the customer service industry.
If you are thinking about changing from combined PTO to separatly allocated PTO you may want to think about increasing the vacation portion slighlty as to not create an uproar in your offices by making it possible for the employees to feel you are taking time away from them.
December 5th, 2008 at 1:19 pm
Also, Judy,very true! How did we get to this feeling of entitlement being so widespread?
December 5th, 2008 at 1:21 pm
We have a “use it or lose it” policy and upon termination we do not pay for any unused time. All time must be used prior to giving notice. In addition, we do not use PTO when calculating overtime. My understanding is overtime comes into play after an employee actually “works” over 40 hours in a week. Is my interruption of Pennsylvania’s law in error? Are we in violation? It seems the employer is always on the short end of the stick.
December 29th, 2008 at 6:51 pm
The PTO and overtime comes into play only for calculation of total pay for overtime. This is true of some bonuses as well. If you pay out a lump sum of PTO or bonus, you are required to use this compensation in re-calculating overtime (you spread the amount of the payout across the period as part of regular pay and then re-calculate the overtime rate).
As for PTO vs. vacation, my rule of thumb has always been: If it is available for an employee to use, then it is accrued and therefore, should be payable as an unused benefit at termination. This is why some companies prefer not to “front” vacation or PTO to employees upfront at the beginning of the year, but rather make employees earn the time before it is available for taking. Just make sure your handbook is very clear about what is paid out and how.
The issue with some of the Use or Lose It policies listed here is that you are basically saying that if an employee quits before the end of the year (or whatever your vacation year is) then they will get all their unused time paid out, but if an employee stays with the company and does not use it, the lose it. Sounds rather backward.
May 28th, 2009 at 8:23 am
What happens when someone goes on a business trip for a week or for training in another state? How does that count for hours?