PTO vs. Traditional: Plusses and Pitfalls

February 13, 2012 - HR Daily Advisor

Today's HR Daily Advisor Tip:

PTO vs. Traditional: Plusses and Pitfalls

PTO plans, which eliminate distinctions between types of leave, do relieve HR of an administrative burden and the dreaded role of “absence police,” but there are some drawbacks, says attorney John Hagan.

Absences, like terminations, can be voluntary or involuntary; however, unlike terminations the distinction between voluntary and involuntary absences is not typically determined by who initiates the absence, says Hagan, who is a partner in the Dallas office of Sarles & Ouimet, LLP. He made his suggestions at a recent BLR webinar.

Involuntary absences are employee absences that are governed by federal or state law; voluntary absences are governed by company policies or practices that exist only because the employer has chosen to implement such policies and not because they are required by law.

For example, says Hagan, when a company reduces a class of workers’ schedules to 3 weeks from 4 weeks perhaps for financial reasons, that 4th week is a voluntary absence even though it is being imposed on the employees who would rather earn money working that week. The 4th week is voluntary because this forced absence is not governed any specific federal law.

On the other hand, leave under the Family and Medical Leave Act is always involuntary regardless of the employee’s having requested it, because the leave is governed by federal law. However FMLA leave may run concurrently with things like vacation, and vacation is always a voluntary absence because vacation is an elective benefit not required or directly regulated by any federal law.

Examples of involuntary absences include FMLA leave, FMLA-like leave under state laws, workers’ compensation leave, and military leave. Examples of voluntary leave include non FMLA medical leave, funeral leave, vacation, holidays, temporary layoffs, weather closures, disability leaves, and all formalized paid time off programs.

Traditional leave Banks vs. PTO

Under traditional compensated paid time off systems there are different banks for different kinds of absences, for example, there is a sick leave bank for people who are ill, and there is a vacation bank for people who want to schedule an absence in advance for personal reasons that may or may not be related to illness.

Many companies open vacation leave banks for use during illness or require that vacation to be used concurrently with FMLA. For some employers unused sick leave is credited toward pension, and in some states vacation is included in the definition of wages. Other states simply require vacation to be paid out upon termination. Under the traditional system where vacation is accrued and paid out from its own leave bank, there is no question as to what portion of the total accrued leave must be paid out in these jurisdictions, or in these states. The employer simply pays out however many hours that are left in that vacation bank.

Paid Time Off (PTO) Programs

With a PTO system, there is a single leave bank. Both management decisions and administration of paid time off are simplified. Moreover, employers are not stuck in the position of asking why an employee was absent with a potential pitfall of one of the supervisors going in and making medical inquiries that are forbidden under the Americans with Disabilities Act or the Genetic Information Nondiscrimination Act.

Payment Upon Termination

However, one problem with the single leave bank system rises when we consider whether PTO must be paid upon termination, since some states require that. So the question then becomes, Is PTO vacation? The answer is probably yes. In some states you may be able to reduce your termination costs by, for example, designating a fixed portion of available PTO as vacation. That is something you must address with your HR attorney on a state by state basis, Hagan says.

For example, California presumptively considers all of the leave time provided without condition to be vacation.

Higher Costs May Be Offset

In any event, this potential for higher termination costs is one reason some organizations have avoided PTO. However, even where the potential for higher costs upon termination cannot be mitigated, the cost can still be outpaced by savings over years of employment. One point of reduced cost is simpler administration; costs may also be reduced because some studies indicate PTO systems may lead to lower overall absence.

In tomorrow’s Advisor, four questions to ask before switching to a PTO program, plus an introduction to BLR’s popular guide for small, even one-person, HR departments.