This month’s expert is
Thomas N. Makris, Esq., SPHR, counsel at the Sacramento office of the law firm Pillsbury
Winthrop Shaw Pittman, LLP.
For many
accrued paid time off (PTO) and vacation time sits on the balance sheet as a liability that just won’t go away.
Here are six effective strategies for reducing the red ink:
1. Manage vacation
usage. You
can require employees to use their vacation. You can also adopt policies to
manage the process so that employees use their vacation time, get the benefit
of actually taking time off, and don’t accrue excessive vacation. Policies
should include these strategies:
• Choose a date by which
all employees are required to sign up for vacation time for the remainder of
the year—and require employees to take the vacation as scheduled or as rescheduled
for good reason.
• Allow vacation
accounts to go negative so that employees don’t have to wait until they have 10 days earned to take a
two-week vacation.
• Make vacation usage a
factor addressed in performance reviews for employees and their managers.
• Tie managers’ bonuses
to meeting goals for reducing accrued vacation totals in their departments.
• Promote using vacation
and being refreshed as a corporate value.
2. Set required dates
for use of vacation. With a minimum of 90 days’ advance notice, you can designate days
as vacation days—for example, during the holidays or another slow time of
year—and require employees to take those days as vacation. Keep these points in
mind:
• As long as you aren’t
requiring an employee to take unpaid time off, you can designate individual days
for use of PTO, even for exempt employees.
• You can also allow
employees to take unpaid time, but for an exempt employee this will only work
if the employee is off for a full workweek and doesn’t perform any work
that week.
• The labor commissioner
says that notice of a closure and required PTO use should be given “as far in
advance as possible but generally no less than one full fiscal quarter or 90
days, whichever is greater.”
3. Modify vacation
policies. You can change your existing vacation or PTO policies
prospectively. There will be transition issues, but the transition can be
accomplished, provided there’s no forfeiture of accrued vacation, and employees
have a reasonable time to use what has been accrued. Some ideas for modifying
policies include:
• Return to using sick
leave, because unlike for accrued vacation and PTO,
pay out accrued sick time when an employee terminates. An additional benefit from
this change could be to allow a much larger accrual of sick leave (e.g.,
30 days) to give longer-term employees who don’t abuse sick leave significant
income protection in the event they become seriously ill.
• Redefine eligibility
requirements. You can limit PTO accrual by limiting eligibility to exclude
seasonal, temporary, or part-time employees; implement a waiting period before
new employees enter the PTO program; or adding additional tiers to the accrual
system.
• Adopt different rules
in different states. Many companies that operate in several states design their
PTO policies to meet
strict rules. However, few other states absolutely prohibit forfeiture of
vacation time on termination. By adopting state-specific policies, you can stop
paying out vacation on termination in most states and eliminate much of the
accrual liability.
400+ pages of state-specific, easy-read reference materials at your fingertips—fully updated! Check out the Guide to Employment Law for California Employers and get up to speed on everything you need to know.
4. Create a vacation
donation program. This would allow employees who don’t want to take time off to transfer
their PTO to other employees who need the time. The IRS allows donation of
vacation to other employees without any adverse tax impact for the company or
the donating employee, but only in cases of medical emergencies or federally
declared major disasters. A leave donation policy should be in writing and
specify clear limits on how vacation is donated and can be used.
5. Adopt an ERISA plan
for vacation. Typically, vacation is paid out of your general assets and is simply
a payroll practice subject to state-law regulation. But you can instead set up
a funded vacation plan under the federal Employee Retirement Income Security
Act (ERISA). Because ERISA supersedes state law, ERISA plans aren’t subject to
state law requirements, such as vesting and accrual of benefits. To qualify
under ERISA, the plan must be fully funded through a trust so it doesn’t pay
benefits from your general assets. The trust must be a separate fund that has a
direct legal obligation to pay benefits. Your contributions to the trust must
be actuarially determined and sufficient to cover the plan’s obligations to pay
vacation. The plan must also comply with ERISA annual reporting requirements. Because
funding the trust has an immediate impact on cash flow, and because of the
intricacies of operating an ERISA plan, few employers choose this approach, but
it is an option.
6. Cash out unused PTO. Cash-outs can be
voluntary or mandatory. But, either way, it gets PTO liability off the books at
today’s compensation rates rather than allowing it to grow as individual wages
go up.
As these strategies
show, accrued PTO doesn’t have to sit on the balance sheet forever. With
creative policies and effective management, you can take control of this
potentially large liability.