January 7, 2019

A Paid Time Off (PTO) program allows an employer to grant employees a certain number of days each year as “paid days off” that the employees can use for any purpose.  Some employers find it easier to combine the employees’ vacation, sick and personal leave, and call it PTO.  However, there are several things an employer should consider before using or switching to a PTO program.

One problem with combining vacation and sick leave and calling it PTO is that employers might end up paying for more accrued and unused days upon employee terminations. California law requires accrued, unused vacation to be paid to the employee upon termination [Labor Code § 227.3], whereas there is no requirement to pay the employee for accrued, unused sick leave.  When vacation and sick leave are combined, however, employees must be paid for all accrued, unused PTO.  In other words, PTO is earned on a day-by-day basis, and once vested, paid time off days cannot be forfeited.  Consequently, an employer will end up paying for those earned, but unused sick days.

Additionally, it is not acceptable to require employees to use sick leave in the year in which it is earned.  An employer must allow accrued, unused, paid sick leave to be carried over to the next year (but a cap on carryover hours of no less than 48 hours or six days is permitted).  It is also not acceptable to require employees to use vacation in the year in which it is earned.  Employers can, however, set a reasonable cap on vacation benefits that prevents an employee from earning vacation over a certain amount of hours.  If you combine sick leave and vacation into PTO, it may become difficult to keep track of carryover hours. You cannot require that the PTO be used in the year in which it is earned.  (No “use it or lose it” policies are allowed.)  However, employers may give their employees an option to cash out unused vacation or PTO time at the end of the year or at another appropriate period of time.

Another complication in switching to a PTO program is that California law requires employers to allow employees to use their annual accrual of sick leave for time off due to the illness of a family member or domestic partner and for an employee who is a victim of domestic violence, sexual assault, or stalking.  Further, employers may not take disciplinary or adverse action against employees who take time off for these purposes.  If sick leave and vacation are combined into PTO, this rule would apply to all accrued PTO time.

In short, if you combine sick leave and vacation into PTO, all laws which are favorable to employees related to sick leave or vacation must be applied to the PTO.  For employees, therefore, it is the best of both worlds.  If you decide to change to a PTO program, the transition should include all accrued vacation for each employee.  Accrued sick leave generally does not need to be transferred because it is not viewed as wages earned.  However, an employer must allow accrued, unused paid sick leave to be carried over to the next year (but a cap on carryover hours of no less than 48 hours or six days is permitted).

Need more information?
ESKRIDGE LAW may be contacted by phone (310/303-3951), by fax (310/303-3952) or by email (geskridge@eskridgelaw.net.)  Please visit our website at eskridge.hv-dev.com.

This article is based on the law as of the date posted at the top of the article.  This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.