Sick, Vacation or PTO?
Time off policies can be confusing, but as a core part of most employers’ compensation packages, it’s important to get the details right. And, as awareness and advocacy for work-life balance becomes more prominent in our culture, the right time off policies can become an effective part of your employee attraction and retention strategy. So let’s talk time off!
Time off policies can be broadly separated into two groups: Sick & Vacation, and Paid Time Off or PTO. Sometimes I hear people refer to vacation and PTO interchangeably but for employers the differences are significant.
What is Sick Pay?
While there is no federal requirement, more and more states are requiring employers (and private employers are opting) to provide paid sick leave, either on a grant basis, where an employee is given X hours for the year; or an accrual basis, meaning you accrue X hours of paid sick time for every Y hours worked. It will come as no surprise to you that not only does California have a paid sick time law but the City of Los Angeles (along with other municipalities within the state) has its own requirements that supersede the state’s.
For example, all employees within the City of Angels are entitled to either a grant of 48 hours of sick time per year, OR to accrue one hour of sick time for every 30 hours worked.
Sick time is supposed to be used when employees are sick, of course, but can also be used for other purposes depending on the jurisdiction. In California, you can take paid sick leave for yourself or to care for a family member, for preventive care or diagnosis, care or treatment of an existing health condition, or for specified purposes if you are a victim of domestic violence, sexual assault or stalking.
What’s important to note is that it’s not for any old thing you want to take off for; it is subject to rules and limits, some of which are statutory and some of which are at the discretion of the employer. When you leave your job, accrued sick pay does not get paid out.
What about vacation?
Vacation time is accrued entirely at the discretion of the employer. It can be accrued from the first day of employment or after a waiting period, and it can change with the length of service to the company. The main thing to know about vacation pay is that it is technically wages, so when you leave your job, any unused vacation time (which in most places is required to be shown on your paystub) must be paid out to you.
Wait – so then what is PTO?
Paid Time Off is an alternative method to separate Sick and Vacation accruals, where the employer bundles sick and vacation time into a single benefit called Paid Time Off or PTO. Some employers prefer PTO because they think it’s simpler to track one thing than two. I’m generally against it because I encourage our team (and our clients for their teams) to take the maximum vacation benefit they can, leaving sick time for when they are actually sick. Also, when an employee leaves the company, PTO, like vacation pay, is wages, so it must be paid out to the employee.
Accounting for Accruals
Most states require that sick and vacation benefits be shown on the wage statement, or paystub. Modern payroll systems handle this easily but remember that payroll systems only display the policies that you set up. And despite marketing we’ve seen to the contrary from all the big brands, it is possible – and easy - to set up non-compliant payroll on any payroll system. Some providers offer to check your work, but they won’t do it if you don’t ask, and they definitely don’t guarantee compliance.
What about Unlimited PTO?
Unlimited PTO plans have become popular in recent years. They’re just what they sound like: the theoretical possibility of taking off as much time as you want. Of course, workload and approvals put limits on how much you actually get to take. In fact Unlimited PTO policies have been shown to result in employees taking less time off. Our friends at SHRM have a great blog post for employers considering Unlimited PTO.
A complete discussion of Unlimited PTO would be too much for this post but I will tell you this: there are serious pitfalls around Unlimited PTO policies that can lead to disaster for employers. They are simple to avoid, but it’s crucial that your policy is set up and documented properly.
So what do I need to really know?
The main way employers get into trouble with their time off benefits is when they allow employees to use sick time for non-medical or other non-allowable personal reasons. When you do that, you violate your own policy and by default you’ve converted your Sick and Vacation Policies into a PTO policy. And when that happens, you need to pay out all that unused sick time to employees when they leave.
We recommend having clear policies on how paid time off interfaces with company holidays and in what increments time off can and must be used. For example, try to have a clear rule like being out of the office for a full 1 hour or 2 hours for a doctor’s appointment requires use of sick time, but not if you’re 10 minutes late back from lunch because you got a Covid test.
Otherwise make sure you have a good system for tracking time off both so you can run payroll properly and simply know when people are going to be out. A shared calendar is always a good start.
If you need help developing or implementing time off policies in your business,
drop me a line at joe@teelexinc.com