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Is PTO the Solution to Your Ailments? Is PTO the Solution to Your Ailments?

Is PTO the Solution to Your Ailments?

Are you tired of wondering whether your employees are actually sick when they use their paid sick days? Are you weary of tracking your employees' use of both vacation and sick time?  Do you have locations in several states?  If you answer yes to any of these questions, switching to the use of Paid Time Off (PTO) instead of paid vacation, sick and/or personal time could be right for you. Before doing so, or if you have already made the switch, make sure you understand the upside and downside of PTO, the different options and the legal rules that apply. 
Pros and Cons of PTO
The most commonly cited benefit of a PTO system is flexibility. Employees can typically use PTO without providing a reason, meaning they have more flexibility to decide when to take off to watch their child's soccer game, attend a family function or stay home when they are under the weather. This added flexibility can benefit employee morale and result in a more positive working environment. Employees may feel they have more discretion to control their work-life balance.
Another benefit is that PTO, depending on how it is structured, can eliminate some of the administrative work required to track both vacation and sick days. With PTO, employers have less need to question the reason for the absence and monitor, for example, if the employee is truly sick when using sick days. 
One negative aspect of PTO is that employees typically have a larger bank of time to use, without much questioning, before the time off results in a reduction in pay. If employees are inclined to use every benefit the employer provides, PTO can result in the employee taking more days off than when a bucket of time can only be used for illnesses. When PTO policies are used, even salaried, exempt employees (employees who meet an exemption from overtime) may take more time off for an illness before a deduction can be taken from their pay. Under the Fair Labor Standards Act, an exempt employee's salary can be docked for a full day absence resulting from the employee's illness IF the employee has exhausted the benefits provided under a bona fide sick leave plan. PTO is a bona fide sick leave plan, because it can be used when an employee is sick. However, the employee will have more days available to use for an illness before his or her salary can be docked than what would be available in a vacation plus sick pay system.
Some commentators also believe PTO systems result in employees coming to work more often when they are sick because the employees want to save their PTO time for vacation. If this is the case, additional efforts may need to be taken to manage expectations when using a PTO system.
Another potential negative aspect of PTO is that employees may be entitled to a larger amount of pay at the end of their employment for unused PTO than they would be entitled to in a vacation plus sick pay system (assuming the policy does not include a forfeiture provision, which is discussed below).
PTO Options and Legal Rules
As with vacation pay policies, employers have many options when implementing PTO policies. In Indiana, as in most (if not all) states, employers are not required to provide their employees with paid vacation. Because PTO is treated like vacation, the employer is generally in control of the amount of PTO the employee earns, when and how the employee earns and uses PTO and (in most states) whether unused PTO is paid out to the employee.
Employers should consider the following questions when developing or revising their PTO policies:
  • Do you want PTO to accrue as the employee works, or do you want employees to earn PTO on a date certain? If the employee accrues PTO, the employee earns a certain amount of PTO for every period the employee works. In some systems, the accrual period is an hour; in other systems, the accrual period is a month or even a quarter. Except when the employer must meet the requirements of a paid sick leave law (discussed below), the accrual period is up to the employer. If the employee earns PTO on a date certain, once that date occurs (January 1, for example) the employee earns the full amount of PTO.  Some employers chose to use "hybrid" systems that provide for accrual, but add an event or date that needs to occur before the accrued PTO is earned. You will need to decide which system is right for your business.
  • If you have an accrual system, will you allow employees to use PTO before it has accrued? Many employers allow employees to use the full amount of PTO they are expected to accrue in a year before that full amount is earned. Complications can arise when the employee leaves before earning the full amount of the PTO the employee took.  In those situations, employers need to consider whether they will try to recover the PTO that was taken but not earned. In states like Indiana, certain written authorization requirements must be met before an employer can legally deduct from an employee's pay for an advance on vacation pay. 
  • Will you allow unused PTO to carry over to the next year? In many states, like Indiana, the employer can include provisions in the PTO policy stating the PTO is forfeited at the end of the year if it is not used. If you are considering (or using) a "no carry over" provision, consider how you will address situations when the employee could not use his or her PTO due to your business needs. Also, make sure the provision coordinates well with your policy on accrual and the ability to use PTO before it accrues. A no carry over provision plus a rule that the employee can only use PTO as it accrues can result in employees losing PTO they do not accrue until the very end of the year. If you allow employees to carry over unused PTO, consider placing a limit on the amount that can be carried over (e.g., one week, half of the amount that is unused, etc.) or on the amount of time during which PTO that was carried over can be used (e.g., the first quarter of the following year). Remember, under most states' laws, PTO time is treated like wages. The default rule is: Once it has been earned, it cannot be forfeited unless the policy states otherwise. Make sure the policy is very clear.
  • Will you pay out unused PTO upon separation? The rules differ by state, but Indiana's default rule is that once PTO has been earned and is owed to the employee, it must be paid out upon termination unless the policy or an agreement states otherwise. If you do not want to pay out unused PTO to all employees who leave their employment, make sure the policy is clear. You can include rules about when you will pay out and when you will not, but make sure they are easy to understand and administer.
  • Does the company have employees working in a state, county or city that has a law requiring you to provide paid sick time? There are various state and local governments that have implemented requirements for paid sick leave. In addition, there are federal sick pay rules applicable to certain federal contractors. At this time, Indiana has not enacted any paid sick leave requirements for private employers, nor are there any counties or cities in Indiana that have done so. The large majority of such laws and ordinances require that employers accrue paid sick leave at the rate of one hour for every thirty hours worked in that state or locality. These state and local laws usually have a maximum accrual amount and rules related to carrying over unused paid sick leave. PTO policies can typically be used to meet the state or local requirements, and there is often an option to "front load" the required paid sick time. You need to make sure you understand the rules applicable in every area where your employees work and ensure your PTO policy complies (or that you implement a different policy in those areas of the country where it does not).
  • Does unlimited PTO fit your workplace culture and business goals? Several well-known employers have migrated to unlimited PTO. While unlimited PTO has the benefit of providing employees with a significant amount of flexibility and discretion, it is not right for everyone and should not be entered into without planning in advance for the possible outcomes. That planning should include consulting with counsel about the legal effects of an unlimited PTO policy and provisions that can help prepare for unforeseen circumstances.
A well-planned and clearly stated PTO policy can help an employer provide its employees with more flexibility and better manage paid time off. As long as you have thought through the needs of your business, you can tailor the plan to meet those needs while complying with the law. 
If you have questions about implementing or updating a PTO policy, please contact Tami Earnhart or any other member of Ice Miller's Labor, Employment and Immigration Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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