Accrued vacation pay is the amount that has been earned by the employee by working, but has not yet been paid to the employee. This is separate from PTO that is automatically awarded to the employee, such as paid holidays. Anyone who writes a policy must have a thorough understanding of the rules and regulations applied by federal and state wage and hour departments when it comes to wages and paid time off. This is especially important should a question come up as to whether PTO or vacation must be paid when an employee quits or is fired. PTO, vacation, and sick time are not interchangeable because the obligations for the employer vary, depending on the type of leave.
No state or federal rule requires you to offer paid time off.
Although no state or federal law requires any employer to provide paid vacation to employees, if you have a policy in place, then you have “promised” vacation, and certain rules apply. In general, vacations that are promised to employees are considered to be wages. Some states enforce this through statutes, while others enforce it according to court rulings on the issue. There are a few states that are completely silent on the issue. I call these “test trial” states. Also affected by this is what we call “capping,” or “use it or lose it” vacation/PTO policies.
On the other hand, benefits such as paid holidays and sick pay are rarely considered, by default or statute, to be “wages.” This means employers can safely enforce policies stating that unused sick time will not carry over year to year, won’t be paid if not used in the year, and will not be paid/prorated at termination.
Some states don’t have any rules… but are you one of them? Check by calling us at 866-414-6056.
PTO makes administrative life easier but…
There can be drawbacks when lumping all vacation and sick days into the PTO category, which then subjects all the paid time off (not just the vacation days) to any final paycheck rules that apply to vacation. For example: If you used to give 5 days of paid vacation and 3 days of paid sick time, but you now lump them both into the same PTO pot, the rules say that both are considered to be wages.
So, why is it helpful to distinguish “earned” and “accrued” time off?
Using “earned” and “accrued” language makes it so that, as an employee progresses throughout the work year, an equation is applied that doles out PTO/vacation/sick days based on time worked. For example: Let’s make the employee eligible for 6 days of vacation per year after being with you for one year. Let’s also give the employee 3 paid sick days. A full time employee who regularly works 36 hours per week, or a total of 1250 hours in the last year, earns or accrues those days off as the year progresses. For argument’s sake, let’s also make the benefit period run from January 1st to December 31st.
As each month passes, the employee is earning and accruing half a day off per month. This means that if they work all of January, they earn and accrue .5 days off. If they then quit or get fired, all that is in question in terms of paying out is the .5 days. At this point, all we have to do is follow our state law with regards to whether that .5 days is owed in the final paycheck. We can pretty much ignore the accrued sick days.
The other model is to use words like “grant” or “entitled.” For example: “Employees who work one year are entitled to one week of vacation.” When this employee quits on January 31st, you owe them ALL the days you granted to them. If you have used a PTO model, you may owe them 9 days.
Are you a medical practice of any type?
Are your vacation/PTO policies in compliance with state and federal rules? As an ESS member, you can request a detailed evaluation of your entire employee handbook for free! Call us at 866-414-6056, or shoot us an email at firstname.lastname@example.org. We will be happy to set up an appointment with you to relay our findings!