Instead of receiving separate allotments for sick, personal or vacation days, PTO is given as a single account to draw from. Employees can earn or accrue PTO over a period of time based upon their hours worked and given each pay period. Or it can be given in a lump sum at the beginning of the year.

There are employers that give both PTO and paid sick leave separately as an additional perk. This added enhancement provides the employee richer benefits and the discretion to be able to save PTO for vacations and other unexpected days off.

Paid Sick Leave Requirements in California
If an employer opts to give separate vacation and paid sick leave, it’s important to know that in California and some other states, there are regulations for administering paid sick leave.
The Healthy Workplace Healthy Family Act of 2014 requires that employers in California provide paid sick leave. If an employer chooses to, they are permitted to give more than the minimum paid sick leave than the law requires.

Here are the requirements as set forth in the law:

  • It applies to all full-time, part-time, temporary or seasonal workers who work in California for 30+ days within a 12-month period for the same employer.
  • It is to be given at a minimum of one hour of paid sick leave for every 30 hours worked with a minimum of 24 hours per year.
  • Employers are permitted to require new employees to wait to use paid sick leave until 90 days after employment.
  • Employers must begin accrual, if they choose that method, by the 30th day of employment of a new employee.
  • The amount of paid sick leave an employee can use may be limited by the employer to 24 hours every year.
  • If an employer gives paid sick leave by the accrual method, the accrued unused paid sick leave must be carried over to the next year. A cap on accrued hours of 48 hours is allowed.
  • If an employer gives paid sick leave at the beginning of the year in a lump sum, the paid sick leave does not have to rollover to the following year. This is up to the employer’s discretion.
  • An employer is not required to pay out unused accrued paid sick leave upon an employee’s termination of employment.

Benefits of Offering PTO
PTO is definitely a benefit to employees that is not required by law. Like vacation, there are no regulations that govern it. The only thing that is regulated is if your version of PTO includes paid sick leave and if your state regulates that. If so, it’s important to ensure that your PTO is compliant with the paid sick leave requirements of your state.

Most employers prefer PTO over vacation and paid sick leave since it eliminates some administrative oversight. It gives employees more control of their time off. The one downside to employers is that unused PTO is required to be paid out upon termination of an employee. You want to be sure that you have a reasonable cap on it since it rolls over year after year, again if your state requires that. In California, employers are required to allow rollover while allowing the employer to put a cap on an accrual maximum.

Some benefits that employers receive when giving PTO and how it affects employees:

  • Reduce levels of unplanned absenteeism
  • Reduce employee burnout
  • Increase productivity
  • Lower administrative costs
  • Increase employees’ sense of autonomy
  • Improve diversity of your workforce since employees are free to take alternative holidays off
  • Competitive advantage for attracting and retaining highly qualified talent
  • Increase morale of your workforce

How to Set Up a PTO Plan
The first thing you will want to do when setting up a PTO Plan is to determine eligibility and criteria of which employees are eligible to receive PTO. For example, employers have the latitude to select certain classifications of employees as eligible for PTO and not others. It is commonly done that full time employees are eligible for PTO but those who are part time, seasonal and temporary are not. On the other hand, you can have everyone be eligible and set up the PTO so it is given as prorated based upon hours worked. Keep in mind that any category of employees that is ineligible for PTO, must still be given paid sick leave if your business is in California or another state that requires it.

Next decide how employees will be given PTO. We recommend that it be accrued based upon the number of hours worked each pay period. This way employees know how much PTO they have since it should be listed on their pay stubs. An alternative is to front load PTO so that it is given at the beginning of the calendar year or on the employee’s work anniversary.
We recommend employers use the accrual method of PTO award. This to avoid the situation where the employer gives PTO in January and then, for example, have the employee quit in March after having taken their PTO for the entire year.

Decide how much PTO will be given. PTO can be used as an incentive to keep your employees with the company on the long term when you increase the allotment of PTO based upon seniority. An example would be 2 weeks or 10 days of PTO for full time employees for the first year and then increase it gradually over time. Perhaps by year 3, increase it to 3 weeks or 15 days.

Once you have the PTO criteria decided upon, be sure that it is documented in a policy that is included in the employee handbook.

About Unlimited PTO
There are some employers, especially those who are competing for talent with big corporations, to use unlimited PTO. Before you put an unlimited PTO policy in place, you’ll want to check with your employment law counsel.  I have seen court cases pending because there are disputes with employees with their former employers about the payout of unlimited PTO upon termination. Per the labor law in California, employers that offer vacation or PTO must pay out the unused balance upon termination. If it is unlimited, what is the unused balance? I’m sure that some legal genius will have a way to word an unlimited PTO policy that puts bounds on it to avoid this kind of dispute. I’m waiting to hear that resolution and I’ll let you know when I do.

Important Points to Consider
Don’t allow employees to have an advance on their PTO. I’ve seen employers do this accidently since they didn’t have adequate controls on their payroll. An employee took quite a bit of PTO which put them at a negative balance of more than 3 weeks and then quit their job. There is no way the employer can recover that money. It is not permitted to withhold the money for the advanced PTO from the employee’s final check since it is not permitted by law.

Make sure that all paid time off is displayed on the employee’s pay stub. It should be set up like their earnings where the amounts appear as what was accrued for that pay period, what has been used to date and the total amount accrued to date for the year. If this information is missing, it is a non-compliance and is easily disputed through the labor commissioner or labor attorney.

One other detail about any kind of paid time off whether it is PTO, paid sick leave or vacation, it is a liability on the company balance sheet. That is why it is so important to pay attention to the cap option. If there is no cap and you have an employee with a lot of unused paid time off, it can have a negative effect on the company financials. Who wants to pay out 8 weeks of PTO plus the owed salary upon a long-term employee’s termination? That can be quite the sticker shock.

In Summary
A well thought out Paid Time Off plan, with adequate controls and customized to the business and its employees’ needs will reap benefits that will have a positive impact on the bottom line and benefit employees.

You can download our DIY Checklist for Employers – PTO to get you started. If you need help with setting up your PTO plan and/or implementation, let us know. You can also schedule a FREE 60-minute consultation and sign up for our Request to sign up for Small Business HR Services monthly newsletter. We’re here to help busy employers make HR easy.