Employment Law Blog: The Perils of PTO (or too much alliteration)

by Davis Brown Law Firm
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Paid Time Off (PTO) is a marketing tool. We use it to obtain interest by prospective employees, to retain existing employees and sometimes we use it to get employees out of the office before we give in to that impulse to shove them off the nearest cliff. There are almost infinite ways to construct a PTO policy but some of the more common ones have pitfalls that aren’t always readily apparent.

Common perils include:

  • Excess accumulation - When PTO policies allow for significant long-term accumulation or banking of paid time off, the bank itself can bankrupt the employer. If you have a small workforce and 5 or 6 people are out at any given time on long-term vacations, sick leave or for other paid time off reasons you may find yourself in a position where no work is done but you are paying out. Many employers have historically allowed accumulation of excessive banks and have had to work during economic downturns to reduce these banks or even to eliminate banked PTO. While it is nice to reward long-term service, it is important to do it in a way that doesn’t create significant internal risks. Further, lots of banked PTO is a debt you carry on your books.
  • Not enough PTO - If no PTO is available, this generally encourages employee lying and an excessive amount of unpaid time off. Once an employee starts believing he or she can take whatever time off he/she wants, you know it’s unpaid and no big deal, then you end up with a lot of workforce disruption and problems. A reasonable and appropriately applied PTO program can help end run some of these issues.
  • Failure to apply the PTO program - You have a PTO program, you spent a lot of time reviewing it but nobody actually keeps track of Paid Time Off.  What’s an hour here or three hours there or a couple of weeks someplace else, it all goes into a big pot and works out eventually. This is all fine until somebody starts abusing the system and if you don’t keep track of PTO, it can take a long time to catch the abuser or to appropriately discipline that person. That process usually leaves a lot of crabby employees saying snotty things on Facebook.
  • PTO Payout - You have a policy where employees can cash out existing PTO at any time. Unfortunately, particularly in Iowa, allowing employees to cash out PTO can turn the PTO bank, which is a benefit, into a wage and subject to all the rules and requirements of 91A. In other words, if the PTO is a wage earned, because you can cash it out at any time, then you have to pay it upon termination even if the termination was for something egregious such as theft.
  • Mixed Banking and Payout - Those PTO policies that allow employees to take some PTO as a payout or bank some, create tax issues and implications. If the employee has the right to take Paid Time Off as a payout but chooses not to do so, this renders the PTO taxable in the year where the employee chose not to take the payout. In other words if I accumulated 200 hours of PTO in 2013 and could have taken it all as payout but chose instead to bank it, I am still taxed on that full amount in 2013. This can be a payroll and bookkeeping nightmare for the employer as well as an unanticipated tax hit for the employee.
  • Improperly drafted or administered donation policies for those employees who have need of PTO can create significant tax burdens and other liability issues. We have previously discussed this in a blog post titled, “The Price of Generosity – PTO Donation Policies”.
  • Failure to run PTO concurrently with FMLA or other leaves - If you don’t run PTO concurrently with long-term unpaid sick leaves, such as leave taken under the Family and Medical Leave Act, you run into the issue of potential leave stacking.  Another issue that occurs here is when PTO accumulates on PTO time. If the employer calculates PTO based on number of hours worked and PTO time is treated as hours worked time, this can cause a couple of different issues. We don’t consider paid time off to be hours worked for the purposes of calculating overtime, but accumulating PTO on PTO can skew this assessment. Further, employees who are poor performers or who are “gaming” the system can end up with extensive additional PTO based on that double PTO accrual. You thought the leave was over and you could finally replace the employee except oops, they have another two weeks of PTO available to him/her.

In drafting and administering any PTO policy, the employer has to take into account the size of the workforce, the needs of the workforce, as well as the employer’s ability to monitor and maintain the policy. Overly complex policies in a small workplace will normally be considered draconian or impossible to administer. Simpler policies typically are more effective and are more consistently utilized.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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