Q. Our company is 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” programs generally combine vacation and sick leave policies into a single benefit program that provides a certain number of paid days off that 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 an employer implements a PTO program, however, it may face certain obligations. Because employees have an “absolute” right to take PTO (unlike traditional sick leave where using such leave is contingent on sickness), 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 prorating, vesting and nonforfeiture.
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 on the date of separation. Unlike sick leave benefits, employers may not adopt “use it or lose it” policies that forfeit 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.
Employees and employers alike generally favor PTO policies. They eliminate the need to designate a particular absence as a sick day or vacation day and, in some instances, 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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