Does combining sick leave and vacation mean I have to pay out both?

Question: 

My state requires me to provide sick leave, which does not have to be paid out when an employee leaves, but I do have to pay out vacation hours at separation. My employee handbook has separate sick and vacation policies. However, the payroll system employees use to track and request time off combines everything into one bank called PTO, and no one at the payroll company told us this would be a problem.

Frankly, I like the combined approach because it gives employees the flexibility to use all their time however they want. I was recently told this means I must pay out all the employee’s available time off if someone quits, even though sick leave and vacation are written as separate policies. Is this true? I wanted to post this in the Basecamp group to see if anyone knows the answer.

Quick Answer: 

Yes. If time off is combined into one bank of time, all of the time is subject to the rules most favorable to the employee. The same principle applies to the conflict between your written policies and how the time is administered in your payroll system. That means all of it is available for cash out when the employee leaves.

The Legal Side: 

Your handbook says employees receive separate sick leave and vacation benefits, but the way you administer their time off gives them one bank to use however they want. That is where the problem starts.

This goes beyond what employees see on a screen. You are allowing them to use hours designated as sick leave for vacations and other personal time. That changes how the benefit is treated for payout purposes. So you need to find a way to confirm exactly what you owe based on the applicable rules and how you have actually administered the benefit. That is not always easy, especially when your handbook says one thing and your payroll practices say another.

And no, changing the name of the entire bank to “sick leave” does not make the problem disappear. How employees earn and use those hours matters. A sick leave policy also comes with requirements governing when employees are entitled to use the time and how you must administer it.

Your payroll provider should have helped you recognize the mismatch. It is critical that your timekeeping and payroll set ups accurately follow your written policies. When they don’t, those mistakes can’t result in the employees being penalized in any way. Unfortunately, “the software let me do it” is not much of a defense when an employee is owed money.

Before changing the setup, you need to resolve the differences between your written policies, your payroll settings, and how employees have actually used the benefit. That includes deciding how to handle hours employees have already earned. Moving existing hours into a different category does not automatically eliminate the obligation to pay them out.

The Human Side: 

Giving employees flexibility is a good goal. You just need to understand the obligations that come with the benefit you are offering.

We recommend keeping sick leave and vacation separate when mandatory sick leave requirements apply. If you prefer a combined bank, the policy and system need to satisfy both sets of requirements. A setting that is easy to turn on is not necessarily easy to administer correctly.

Be straightforward with employees when explaining any change. If they previously could use all their hours for a vacation, and now some of those hours will be restricted to qualifying sick leave, their benefit is changing. Telling them that nothing is being taken away because the total hours remain the same may not land well.

Work out how to handle existing balances first. Then explain what will change, when the change takes effect, and how employees will request time off.

At CEDR, helping employers connect their handbook policies, timekeeping practices, and legal obligations is part of the support we provide. backstageHR gives you the tools to administer those policies. Getting the policy and setup right is what makes those tools useful.

Backstage HR gives you the tools to administer those policies. Getting the policy and setup right is what makes those tools useful.

The Takeaway: 

A well-written handbook only protects you when your actual practices support it. Do not let a payroll setting quietly change the benefit you are providing and the obligations that come with it.

FAQs

Do all employers have to pay out unused vacation or PTO?

No. The obligation depends on the applicable law and the benefit the employer has established. That is why another employer’s experience in a Facebook group does not settle what you owe. Their rules, written policy, and actual practices could be different from yours.

What if the system shows one total but tracks sick leave and vacation separately behind the scenes?

There should not be any inconsistencies between how your time off benefits are written, tracked, used, administered, or displayed. If there are, questions will arise about what rules should apply. The situation will need to be assessed carefully to make any decisions.

What should I gather before getting help with this?

Bring your written policies, current balances, accrual settings, and examples of how time-off requests have been processed. Include any instructions employees received about using their hours. The person helping you needs to understand both what you promised and what you have been doing.

Explore the other two leave questions

• Do I have to approve new parental leave dates?

  You planned around two days off a week. Now the employee needs more time up front. What happens next?
  Read this answer

• Can I require PTO during a reduced FMLA schedule?

  You want to keep an employee’s paycheck whole and avoid another absence later. Where do the rules draw the line?
  Read this answer

Need help working through a leave issue?

You need an answer that accounts for your policies, your practices, and the rules that apply to your business.

Start a conversation with CEDR.