Setting Paid-Time-Off Policies

September 30, 2016

Employers may think it’s ironic that would-be workers often focus on how much time they 2016-september-setting-paid-time-off-policieswon’t be working, when they consider job offers. However, it’s clear that offering time off may help to attract and retain valued employees. For business owners, the key is to develop a policy that provides flexibility and downtime without harming the company’s productivity.

Broadly speaking, company-paid days off fall into two categories. One is holidays: Christmas, New Year’s Day, Thanksgiving, Fourth of July, etc. Many if not most companies are closed those days; sometimes the day before or after is considered a holiday as well. Generally, around 10 paid holidays a year is the norm. Except for special circumstances, you probably want all of your workers taking those days off.

Beyond holidays, the second category includes days referred to as “paid time off ” or PTO, which are chosen by employees. They include vacation and sick or personal days. Some companies put their PTO into separate buckets, one specifically for vacation time and another for sick or personal time, and include separate rules for how each type of PTO is to be used. In this case, integrating the different types of PTO (vacation and other) should be explained to employees, to avoid misunderstandings.

Example 1: Jim Mason takes two weeks’ vacation in late summer, before and after the Monday of Labor Day. His company has told Jim that he will be charged for nine vacation days, rather than 10 due to the paid company holiday on Labor Day.

What if Jim takes an unapproved personal day before or after his approved vacation? Company policy likely states formally that such absences will be accounted for somehow (against vacation days or sick days, perhaps, or subject to discipline if Jim cannot provide a valid reason for his absence).

Combination plans

Some companies are moving away from offering the separate time-off categories of vacation days and sick or personal days and using a single PTO category.

Example 2: Karen Anderson works for a company that offers 20 days of PTO each year. She can use them as she wishes, for any purpose. The advantage, to the company, is the ease of tracking a single PTO category, rather than different subcategories of PTO.

On the other hand, this arrangement may lead employees to try and use all 20 days as vacation each year. Fearing to lose a valuable vacation day, a worker might come in sick, which could lead to poor job performance and illness for coworkers. Companies initiating a PTO program might explain how the plan is intended to work and encourage employees to use their time for illness as needed.

With any type of PTO plan or other time-off plan, all details should be formally covered. If some allowable days are not used in a calendar year, can they be carried over? Is there a maximum carryover? How long are those days eligible to be used? Moreover, your company’s plan or plans should comply with the federal Family and Medical Leave Act as well as with any state or local laws that apply.

Besides carrying over PTO opportunities, companies may offer employees the right to cash in unused PTO days. Such plans can lead to the issue of “constructive receipt,” subjecting the employer and employees to paperwork hassles and additional income tax obligations. If your company has such a cash-in plan for unused PTO days, or is considering one, our office can address the possible tax issues.