How does PTO affect terminations?

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in Compensation and Benefits,Human Resources

Q. We are considering replacing sick leave and vacation benefits with a paid time off (PTO) program. How are these plans treated upon the termination or resignation of an employee?

A. PTO or paid leave program generally combines vacation and sick leave policies into a single benefit program that provides a certain number of paid days off, which employees may use for any purpose.

As with vacation and sick leave benefits generally, Cali­­fornia employers are not required to provide PTO to their employees.

If a PTO program is implemented, however, new em­­ployer obligations may arise. Because employees have an “absolute” right to take PTO (unlike traditional sick leave, which is contingent on being ill), California’s Divi­­sion of Labor Standards Enforcement (DLSE) takes the position that PTO is subject to the same rules as conventional vacation policies with regard to proration, vesting and nonforfeiture.

Unlike sick leave benefits, under Section 227.3 of the California Labor Code, vacation benefits are vested (on a daily basis), may not be forfeited and must be paid to an employee on a pro rata basis upon termination.

On the other hand, accrued but unused sick leave benefits generally need not be paid to an employee upon separation.

The DLSE takes the position that PTO benefits are a form of deferred compensation that “vests” as an employee works. Thus, an employee must be paid for all vested PTO that has not been fully utilized upon separation from employment (whether voluntary or involuntary).

PTO pay for a terminated employee must be prorated on a daily basis and must be paid at the final rate of pay in effect as of the date of separation. Unlike sick leave benefits, employers may not adopt “use it or lose it” policies forfeiting vested PTO.

Employees may take PTO for any reason, including vacation, personal illness, medical and dental appointments, emergencies, family care and medical leave, disability leave and personal commitments.

PTO policies are generally viewed favorably by both employees and employers, because they eliminate the need to designate a particular absence as a sick day or vacation day. In some instances, they dispense with the need to furnish medical certification of an illness.

PTO programs may allow employers to provide fewer days of combined vacation and sick leave.

According to the DLSE, employers may establish the maximum amounts of PTO hours that an employee may accrue. However, a combined vacation and sick leave plan may result in employers paying more accrued leave upon an employee’s termination than would have been the case if the two benefits had remained separate.

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