WORKPLACE LAW -
Paid Time Off

Question:

We are thinking of making some changes to our employee benefits. One change we might make is to stop giving vacation and sick leave, and just combine the two so we have less record keeping and we don’t have to ask employees why they missed work. What do we need to consider before making this change, and can we reduce the total number of days we give the employees so we can reduce our costs?

Answer:

Yes, your company can combine paid sick leave and paid vacation benefits into one time off bank, which is usually called “paid time off” or PTO. The Division of Labor Standards Enforcement (DLSE), the agency that enforces California’s wage and hour laws, takes the position that the laws that govern vacation benefits apply to PTO, because PTO hours can be used by the employee for any reason. Some issues to consider before combining sick leave and vacation into one PTO benefit are vesting, capping benefits, allowing use of PTO for “kin care,” and imposing rules for using the PTO. Because California law does not require employers to provide vacation, sick leave, or PTO, it is important that your company’s written policies clearly state the rules regarding accrual and use of these benefits.

Under California law, an employer cannot have a “use it or lose it” policy for vacation or for PTO. This is because, under the law, once an employee has earned PTO hours, those hours are a vested benefit that cannot be taken away from the employee. A proportionate right to PTO vests as the employee works. This is why employees are entitled to be paid their vested vacation, or PTO, upon termination of employment. By contrast, time off that is designated as sick leave, which can only be used for illness, injury, or treatment of the employee or the employee’s child, parent, spouse, or domestic partner, is not a vested benefit, and therefore does not have to be paid to the employee upon termination. Therefore, if your company combines the vacation and sick leave into one PTO bank, the company’s liability for paying out unpaid leave benefits on termination may increase, because the company will be required to pay out all unused PTO on termination of employment.

California employers are permitted to place a “cap” on accrued vacation and PTO in order to control this liability. The DLSE requires that employees be allowed a “reasonable” period of time to take their accrued vacation/PTO after it has accrued. Therefore, many employers cap accrued vacation/PTO at two years worth of vacation/PTO at the employee’s current accrual rate, on the theory that this will provide the employee plenty of time to use their vacation/PTO. Once an employee has accrued the maximum, vacation/PTO accruals will stop until the employee uses some of the hours in his or her bank, and the number of accrued hours falls below the cap.

Another issue to consider is the use of PTO for “kin care.” California law states that if an employer provides sick leave to its employees, the employee must be permitted to use one half of the employee’s yearly accrued sick leave to attend to the illness of the employee’s child, parent, spouse, or domestic partner. When sick leave is combined with vacation into one PTO bank, one-half of the employee’s yearly accrual of PTO can be used for “kin care.”

Your company’s policy should explain any rules that govern the use of PTO. For example, an employer can require that an employee request time off in writing a specific number of days in advance. Employers can also place restrictions on the use of PTO, and have guidelines about when employees may or may not take time off. The employer’s policy should also clearly explain the cap on PTO, and that accrued but unused PTO will be paid out at the employee’s then current rate when employment is terminated.

An employer can reduce the number of days of paid time off employees will earn in the future, but it cannot require an employee to forfeit accrued vacation. For example, assume your company decides to combine vacation and sick leave into one PTO bank, giving employees two weeks total PTO per year, and capping accrual at four weeks. If one of your employees has five weeks accrued vacation in her bank, the company could not take away one week’s time because it exceeds the cap. The company would have to cash out the extra week or require the employee to take a week off. While there are advantages to combining vacation and sick leave into PTO, there are some costs and issues to consider before making this change in policy.
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