PTO: More trouble than it’s worth?
January 7, 2009 by Bill MeltzerPosted in: Compliance, Paid time off, Special Report
There’s no federal or state law that says you have to offer employees paid vacations or paid time off (PTO).
But for most organizations to stay competitive, it’s a necessity. 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.
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
Nowadays, many employers save money by lumping vacation days into a single PTO bank with sick pay, personal days, bereavement and other types of paid leave.
But here’s the problem: 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 in place of separate leave, a host of states are considering whether to amend vacation-pay laws or to leave interpretations up to the court system. Meanwhile, some experts recommend organizations with PTO consider going back to separate vacation and sick banks.
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 handbooks?
- Could PTO cost more money in the long run than it saves now?
Tags: Paid time off
January 8th, 2009 at 2:41 pm
At our organization, employees accrue PTO hours until they reach a cap. Once the cap is reached, employees begin to accrue hours in a “major illness account” which may be used while employed but has no compensation at termination of employment.
January 8th, 2009 at 3:47 pm
How would “PTO’ be affected if the legisation required companies to provide “x” amount of sick time? Would comanies that provide PTO have to change back to the traitions time off systems of vacation, sick, personal, etc…?
January 8th, 2009 at 4:22 pm
My company is transitioning now from vac days to a PTO bank. I do not plan to include DIF, jury duty, or any other paid day in this PTO bank. We do not offer paid sick days or paid personal days. Basically I am just changing the name from vacation to PTO. I do have a feeling that there is more to it then this and this article is a good example of this. I wonder what else I need to be aware of……
January 8th, 2009 at 4:41 pm
Frankly, the Target settlement mentioned at the beginning of the article is unimpressive. A $10 million settlement covering 270,000 Target employees in California is peanuts! Do the math…that’s less than $40 per employee. Even if all 270,000 employees were full-time (not the case), that comes out to a whopping 8-cent hourly raise limited to 1 year. Seems to me that this was more “costly” to the employees than to the Target Corporation.
January 8th, 2009 at 4:43 pm
Correction to my earlier post. $40 per employee would equate to 2 cents per hour if all were full-time employees; a whopping 4-cent hourly raise for 1 year if all were half-time (more likely).
January 8th, 2009 at 6:04 pm
With having manufacturing facilities in both the the states listed in this communication, CA & IL, I feel the pain of administering our PTO policy. Even our corporate headquarters in Michigan is subject to penalities on having to pay out unused PTO upon termination of employment.
I have heard from other HR professionals that organizations are moving to eliminating their formal PTO benefit.
What are your organizations doing that is creative in getting around this issue?
January 8th, 2009 at 6:50 pm
I have a question,
Our company is a contract security company, we use our mobile drivers as supervisors after regular office hours, as our operation is 24 hours. We give our upper and mid level managers (Normal hours are the same as our office hours) PTO in the form of vacation time, sick time, and personal days.
We are considering giving our mobile drivers, who act as supervisors (after office hours) PTO; If we do this, do we have to offer PTO for all employees, and one more thing. At the end of the year, if the drivers want money for their PTO instead of the time off, can we, as a company limit the group of people (Mobile Drivers, Managers, both exempt or non Exempt) who we would or could buy back the PTO?
Bob Bumann
Operations Manager
January 8th, 2009 at 6:53 pm
What is the law in Missouri regarding PTO?
January 9th, 2009 at 10:13 am
I agree that monies paid for PTO buy backs must be counted toward total compensation — when calculating workers’ compensation premiums and retirement benefits but I cannot find anywhere in the FLSA regulations where this would affect overtime. Overtime is calculated after the person actually WORKS over 40 hours per week. As far as the OT rate goes, I hope that anyone with half a brain would code for a vacation buy back as either Vacation Pay or Vacation Pay Buyback and not simply add the hours to regular pay wages which is what OT is usually based on. Unless some clarification is provided in the above article, this comment seems way off base.
January 9th, 2009 at 1:17 pm
We avoided state labor laws by ERISA-fying our Paid Time Off plan. Have been successful at overcoming state challenges in New Hampshire, Illinois, Wisconsin and California.
January 9th, 2009 at 2:14 pm
This is in response to Susan’s comment. The article is correct about pay outs affecting overtime rates. If during the week in which the pay out occurs the employee works overtime, the overtime rate will be weighted by the amount of the payout. Overtime rate is based on the total wages for the entire week.
January 9th, 2009 at 5:12 pm
I agree with Susan:we have previously been audited by DOL, and have had no issue with seperating actual time worked from correctly coded sick pay reimbursement for unused paid sick time off. It never makes sense to lump everything as PTO. Additionally, if an employer pays for break/lunch, this would be excluded from overtime considerations as well. In short, and in general, a non-exempt employee must work over 40 hours in a five day week to be paid OT pay; work is the key word.
January 9th, 2009 at 6:28 pm
I agree with Susan. OT is determined based on an employee working over 40 “productive hours”. Vacation or PTO time is not concerned productive time.
January 16th, 2009 at 3:21 pm
I believe the author was indicating that the compensation received for the vacation has to be included in the calculation of the “regular rate”. However, if both hour and earnings on included in the calculation, this should not impact the rate of pay for the overtime (if any) that’s due in that payperiod.
February 17th, 2009 at 10:43 am
I did a little research on this issue. To help other people who were as confused as I was about this article, I hope this helps clarify things. This article refers to non-exempt salaried employees who sell back their unused PTO. The buy-back is treated as compensation and must be added to the regular wages which is then divided by the total hours worked to calculate the hourly rate, then the overtime rate. This rule does not apply if the person actually takes time off, only if they sell unused PTO back to the company. It’s not entirely clear but it seems this also does not apply if the company is paying for unused PTO at the time of termination because it is not quite the same thing. This rule does not affect hourly or exempt salaried employees either.
The article would have been much more informative and less confusing if it had simply mentioned this applies to non-exempt salaried employees, or if the previous posts at least had. We don’t have any non-exempt salaried employees so I didn’t think of it as I am sure others did not either.
Considering the buy-back could result in a substantial sum, I would think it would only be reasonable to have pre-approval for the buy-back and to limit the amount that can be sold back. I think that if the company only allowed buy-backs say at the end of the year and didn’t allow any overtime unless it is absolutely unavoidable, this would be the easiest way for employers to lighten the financial burden of having a buy-back program. With the holidays at that time and overtime is still calculated as hours worked, not hours paid, that could be the best time for it.