Using PTO for Paid Vacation Time

What Are the Main Factors that Determine Paid Time Off Policy

A small business owner has the difficult task of making decisions that can affect the success of his or her business venture. One of the harder decisions that a business owner must make relates the his or her company’s PTO policy.

It can prove a challenge to ensure that the company remains well-staffed while employees take vacation. Also, it takes careful thought to design a PTO policy that attracts good employees who care about the benefit of vacation time, all while sticking to state regulations.

A small business PTO policy determines how an employee of a company can save hours for personal days, sick days, and vacation days. Employees can use PTO days as they see fit, though most companies want their employees to build up PTO with a maximum number of days. Also, some businesses let PTO days expire if they are not used within a certain period. By contrast, some companies choose to offer unlimited PTO, and employees can take days off so long as they have completed their work.

A lot of these factors are affected by a particular state’s regulations. Currently, there are no federal laws that concern vacation policy for small businesses. A company’s primary consideration regarding paid time off policy is recruiting top talent to work for them.

In the United States, PTO usually starts at two weeks per year, in addition to paid federal holidays. The number of PTO days might increase the longer an employee stays at a company. In some industries, PTO is saved based on hour worked, and these days may carry over from one year to the next. They may also be given up if not used within a certain period of time. Some states mandate that unused PTO time be paid off at the time of an employee’s termination, while some do not have this requirement.

Are Employees Paid for Unused Vacation Time?

When an employee quits or is fired from a job, employers are required to pay the employee for any unused vacation time. This is because under California law, vacation time qualifies as earned wages. Therefore, if an employer does not reimburse an employee for unused vacation time, it is as though he or she is not paying the employee for hours worked. The employee would have the right to take the issue to court, seeking the denied wages.

Can an Employer Be Sued for Not Paying Vacation Time?

In California, employees can sue employers who do not pay out vacation time at the time of termination. An employee who leaves a company must receive compensation for any unused vacation days.

How Does Vacation Time Accumulate?

Normally, an employee’s vacation time adds up over time. For instance, if a workplace grants an employee ten days of vacation every year, after six months that employee will have five days of vacation available to use.

But not so fast! Employers might require a waiting period when an employee is first hired. This means that for a while, a new employee will not build up vacation time. Often, this period lasts 90 days, but it can last as long as a year.

Employers may also make vacation eligible only to certain groups. Of course, they must not discriminate against a particular group based on characteristics such as race or gender. They may, however, give vacation only to full-time employees, as an example.

What Are Vacation Caps?

Some states have a “use-it-or-lose-it” vacation policy. Under such a policy, built-up vacation must be used by a certain date, or else it must be given up. Usually, the date is the end of a calendar year. “Use-it-or-lose-it” policies are often viewed as illegal, because vacation time is considered earned wages. These policies are thereby withholding owed wages.

It is possible, and permissible, for employers to put a cap on vacation time. This means that once an employee reaches a certain number of days, vacation will stop building up until some of the time is used. Employers may thereby prevent employees from building up unreasonable amounts of PTO.

The California Department of Labor Standards Enforcement (DLSE), which enforces wage and hour laws in California, provides guidelines for employers and for the benefit of employees. According to the agency, a vacation cap should be no less than 1.75 times the yearly accrual rate, or must otherwise be within reason.

How Does Scheduling Vacation Work?

When it comes to scheduling, employers have a lot more leeway to design their vacation policies. Generally speaking, employers can determine how and when their employees can take PTO. For instance, an employer can require his or her employees to submit vacation requests in advance. Employers can also implement “blackout” dates, which are period during which employees cannot take time off. Holidays and tax season are often blackout dates in certain industries. Similarly, employers can control how many employees are on vacation at any one time. This way, the workplace does not become understaffed.

The employer has the freedom to regulate when vacation is scheduled as long as his or her decisions are not discriminatory (based on age, sex, religion, race, etc.)

What is a Vacation Payout?

When an employment contract is terminated, all built-up and unused vacation time must be paid back to the employee. Because vacation time is considered earned wages, it must be paid back to the employee along with the final paycheck.

Regarding an employee’s final paycheck, the following applies:

• If an employee is fired, the final paycheck is due immediately upon firing
• If an employee quits, giving 72 hours’ notice, the final paycheck is due at the time of quitting
• If an employee quits, giving less than 72 hours’ notice, the final paycheck is due within 72 hours of quitting

Paid sick leave is not affected by the same laws, and they do not have to be paid out to an employee. However, if sick days are part of a company’s PTO policy, they are treated the same as vacation days and must be paid out upon an employee’s separation from the company.

What Are Personal Days?

Some employers offer a define number of “personal days,” also known as “floating holidays” each year. Holidays that are related to a particular event typically don’t require to be paid out upon termination of employment. So, if an employer wishes to give an employee PTO over Christmas, the employee’s birthday, or wedding anniversary, the employer does not have to pay out these days. However, if the personal days may be taken at any time of the year for no specific occasion, then they are treated as vacation and must be paid out.

How Can a Business Establish a PTO Policy?

With the results of the above survey taken into consideration, a business owner’s path toward creating a PTO policy rests on the following questions:

• Have You Considered your Specific Business? A business owner should figure out the number of PTO days that is appropriate for his or her company, industry, locale, and staffing requirements.
  
  
• Will PTO Days Roll Over? A business owner should decide whether their PTO days will expire or roll over into the next years. If employees are allowed to roll over their time, they should be given easy access to their PTO bank so that they can manage their time. An owner should be wary of an expiration policy causing a lot of turnover at the end of the year.
  
  
• What Will Your Dispersal Method Be? A business owner could distribute an annual amount at the start of the year, or instead institute an accrual policy which allows employees to earn their PTO over time.
  
  
• What Can You Do with Unused PTO? A business owner should figure out what can be done with a departing employee’s unused PTO. Some states mandate that it be paid out at the conclusion of an employee’s tenure.
  
  
• How Will You Ensure Employees Know the Policy? A business owner should publish the PTO policy and make sure that all employees understand its content. The policy should answer all major question concerning PTO days.
  
  
• How Will Employees Request Days? A business owner should ensure that employees know how to request PTO. This can be done though the company’s employee portal, by contact a supervisor, or by contacting HR.
  
  
• Will the Management Team Be Involved? A business owner should make sure that his or her management team is aware of vacation requests. This way, other team members can cover absent employees’ work if needed.
  
  
• Will You Reward Tenured Employees? A business owner should consider giving additional time off to employees who have given the company years of service. For instance, employees who have worked for the company for more than three years may get five extra days of PTO every year.

Are California Workers Entitled to PTO Or Vacation Time?

According to the California Labor Code, an employer is not required to give his or her employees vacation time, PTO, holiday pay, or personal days. Often, employers offer vacation time a benefit to attract workers. But vacation time is by law not required.

Generally speaking, employers in California have the right to govern how vacation time is earned and when employees are able to take earned vacation time. For new employees, employers can impose a waiting period, meaning that the new employee has to wait for a certain set amount of time before being able to build up vacation time. This policy must be clearly stated. This is because in California, vacation days are considered a type of wages.

While an employer in California may choose to offer vacation time or PTO, if he or she does so, the vacation time must be treated like earned wages. Even if the employee does not use his or her vacation time, the vacation time does not expire. This condition also applies to part-time employees, not just full-time.

An employer is not allowed to take away earned vacation time as a form of discipline. When an employee leaves the company, the employer is required to pay out any unused earned vacation time, again, since vacation time counts as wages.

Are Paid Sick Days Required by Law?

While employers in California do not have to provide vacation time to their employees, they do have to provide paid sick leave. Under California labor laws, employees who work at least 30 days a year must receive paid sick days.

Paid sick leave is earned at a rate of no less than one hour per 30 hours worked. If a full-time employee works 40 hours a week, then in one month, he or she would have earned a little over 5 hours of sick leave.

In California, paid sick leave is required for both exempt and non-exempt employees.

Can Earned Vacation Time Be Taken Away?

Again, vacation time must be treated like earned wages. Once an employee earns vacation time, it cannot be taken away. Nor can the vacation time expire. Some employers might have a “use-it-or-lose-it” policy that places an expiration date on vacation time. However, such a policy is a violation of California labor law.

An employer is allowed to require an employee to use earned vacation time. This would be an effort to avoid a worker building up too much vacation time to be used at once. An employer might also put a cap on how many vacation days an employee can earn. Both situations are legal under California law.

An employer is not allowed, however, to take away earned vacation time to discipline an employee. While the employer could always change the company’s vacation policy to ban vacation time, any earned leave is protected once earned.

Can an Employer Place Restrictions on Vacation Time?

Employer can indeed put restrictions on taking time off for vacation. These restrictions could include the following:

• Employees must give a certain amount of notice before taking time off
• Vacation policies may differ among other managers and employees
• Vacation time must be approved prior to being taken
• An employee may only take a certain number of days off in a row
• Blackouts, or days when time off is not available to be taken

Vacation time cannot be restricted, however, based on illegal discrimination. A vacation policy cannot be determined based on race, religion, disability, sex, age, or any other protected group.

Is “Use-It-Or-Lose-It” Legal?

In California, a “use-it-or-lose-it” policy is illegal. Vacation pay is a form of wages, so it cannot expire. Even if an employee does not use vacation leave by a certain date, they are still entitled to compensation.