How does a vacation policy differ from a PTO policy?

Does your company use a PTO policy or a vacation policy? In California, it matters more than it might seem because of the way the law treats vacation days as accrued wages. So be careful if you’re switching to a PTO policy—be sure you understand how the law will treat the accrued days.

The difference between vacation time and PTO

How is vacation different from PTO in California? Understanding this difference can be the key to staying out of legal trouble when administering your PTO plan. Let’s start with vacation time:

“Vacation is a term of art in California. When it’s used, that word means a very, very specific thing. It doesn’t mean that you’re traveling in the Bahamas. It doesn’t [even] mean that you’re on vacation in the traditional sense that you’re gone . . . The only point of vacation is that it’s paid time off that can be taken without condition.” Dan Chammas explained in a recent CER webinar. Without condition means that it can be taken for any reason or no reason. Accrued vacation time is also the equivalent of accrued wages owed under California law.

Vacation also typically means paid time off that the employee can take at his or her discretion. This does not mean that employees can take vacation whenever they want, however. Employers can insist that employees give reasonable notice of vacation and that the vacation fits in with the schedule. But it does mean that once the vacation time is accrued, no further conditions must be met for it to be taken.

PTO, on the other hand, may encompass more than just vacation days. Chammas confirmed: “PTO is broader than vacation. PTO is any time an employee is being paid while away from work and not working. So, basically, it’s any paid leave.”

Another way to think of it is that vacation is PTO, but PTO may not necessarily be vacation. In fact, vacation is a subset or an example of PTO. Here are some examples of non-vacation PTO: pregnancy leave, disability leave, jury duty, holiday pay, or sick leave.

Should you have a PTO policy?

An employer structuring a comprehensive leave policy has three types of leave to consider:

• PTO without conditions. If the leave is without condition, then it must be treated as vacation time – regardless of what it is actually used for – and all laws that relate to vacation time will apply.
• PTO with conditions (such as separate allotments for jury duty, sick leave, pregnancy disability leave, etc.). If the leave is with condition, then none of the “vacation” rules apply and it does not need to be paid out upon termination.
• Unpaid leave. If all leaves not covered by law are unpaid, then vacation laws are less of an issue—but employee retention could be a significant issue.

The employer can also determine which employee classifications are entitled to vacation/PTO. For example, the employer could differentiate PTO policies for full-time employees, part-time employees, and temporary employees.

In general, employers typically structure their leave policy as either:

1. A vacation bank, plus separate banks for other conditional leaves of absence.
2. One large PTO bank that can all be used without condition.

The first option may be the smarter administrative PTO policy because only the vacation bank has to be paid out upon termination. There’s less financial risk for the company. In this case, each of the other PTO banks that can only be used in specific circumstances (sickness, jury duty, pregnancy, etc.) need not be paid out upon termination. While this is better financially if the employee is terminated, it requires extreme diligence in recordkeeping. Another downside is that employees tend to like it less and will see it as a benefit loss compared to a PTO bank that is unconditional.

The above information is excerpted from the webinar “Paid Time Off in California: Strategies for Effectively and Legally Managing Your Program.” To register for a future webinar, visit CER webinars.

Daniel B. Chammas, Esq., is a partner in the labor and employment practice group in Venable’s Los Angeles office. He has extensive experience defending employers in wage and hour class actions and other employment disputes, from actions for unpaid wages and sexual harassment claims to wrongful termination litigation and racial discrimination complaints.