Under a PTO plan, how should we handle payouts when employees quit or get fired?

Q. Our company is considering replacing sick leave and vacation benefits with a paid time off (PTO) system. Under a PTO plan, how should we handle it when an employee resigns or is terminated?

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 an employee 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, where using leave is contingent on medical necessity), 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.

Employees and employers alike generally have a favorable view of PTO policies because they eliminate the need to designate a particular absence as a sick day or vacation day. In some instances, PTO plans make it unnecessary for employees 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.