Determining a Leave Policy that Works for You by Thomas J. Lloyd III


Determining a Leave Policy that Works for You

by Thomas J. Lloyd III

            One of the most commonly accepted facts of owning or managing a business - both small and large - is that one of the biggest costs of operation is employee compensation.  Employee compensation tends to make up the highest percentage of overhead in most industries, and it also tends to be one of the most significant areas of risk of liability for a business.  In Idaho, for example, nonpayment of wages when due, whether in whole or in part, can result in an award of treble damages in favor of the unpaid employee (or, three times the amount of unpaid compensation). What many fail to realize is that the requirement to timely pay wages when due applies to more than simply the employee’s paycheck; rather, it applies to all aspects of the employee’s compensation, whether in overtime, gratuity earnings, or even vacation time.

            Yes, if a departing employee has accrued vacation time that has not been paid, those earnings are a part of the employee’s overall compensation package and must be timely paid out to avoid having the vacation time quantified to a dollar value and then tripled in favor of the employee.  In contrast, however, sick time that is gratuitously provided by the employer does not carry the same risk of liability. This distinction has been the primary motivator for employers to decide between benefit packages that differentiate between sick and vacation time, and those that combine the two for a straight “Paid Time Off” allowance. For many businesses, then, choosing a benefits package that works both for the employees and the employer is a difficult choice, with varying degrees of risk, that should be carefully considered based upon the nature of the business. 

            In this article, we shed some light on the differences between these two types of time off, and offer some thoughts on how a business can effectively transition from one to the other.

Traditional Sick Time and Vacation Time Allotments.

            The traditional leave policy is one in which an employer hires an employee with a mutual understanding that the employee will be compensated his/her wages, will be paid for a certain number of sick days, and can earn or accrue vacation time based upon some mathematical formula set by the employer (depending on the industry, the employer may also offer certain paid holidays). For example, an employee may earn one hour of vacation time for every forty hours of work. Alternatively, the employer may set the number of vacation days to be based upon the years of service that the employee has provided to the company.

            The benefit of this type of a leave policy is that the employer can limit the amount of time off that it is paying its employees, if the employees do not get sick. Because sick days cannot typically be used for vacation time or even simply a personal day, healthy employees tend to not use the full amount of their paid time off each year. Similarly, with earned vacation time, many employees are not able to afford (in finances or in time) elaborate vacations, meaning that vacation time also often goes unused before the legally-allowed “use it or lose it” deadlines that most employers impose.

            When it comes to termination of an employee’s employment, the distinction between sick leave and vacation time becomes significant. Under this type of policy, Idaho law does not require that an employer “pay out” unused sick time at the termination of the employment relationship.  Rather, sick time is viewed more as a generous offering by the employer in order to maintain a healthy and productive work environment. However, because vacation time under this type of policy is something that an employee must work towards and “earn,” Idaho courts view unused vacation as a fringe benefit that is so intertwined with compensation that it must be paid out upon termination in the same manner as any earned wages.

            To be clear, under Idaho law, there is no requirement that an employer offer either paid sick leave or paid vacation time as a part of the compensation package. Neither is there any federal law that does so. This means that such an offering is entirely up to the employer and is highly dependent upon the nature of the business and the employer’s individual circumstances.  That said, it can be fairly stated that it is common in most industries to provide at least some form of time off. As a result, many employers find it necessary to incorporate some form of leave into their compensation packages in order to be competitive to high-quality employees in the marketplace. While the traditional model described above is the more historically common policy of providing leave, it has in recent years been replaced in many organizations and businesses with another increasingly popular policy.

Paid Time Off.

            Unlike the traditional separation between sick time and vacation time, the “Paid Time Off” model (“PTO”) allows employers to create a bank of time from which employees may draw time off for whatever purposes they need or choose. Accordingly, rather than separating and distinguishing between paid holidays, vacation time, sick leave, and any other personal days allowed by the employer, a PTO bank offers a straight number of days or hours that can be used by an employee at any time and for any purpose. 

            The benefit to the employee is obvious, as there is no longer as much risk of running out of one or more of the separate categories. For a relatively healthy employee, there is more time available for personal days and vacation time. On the other hand, for an employee dealing with a long term sickness or injury, there is a larger bank of days to use for recovery and treatment than under the traditional model, which enables an employee to take the necessary time to recover without losing much-needed income, at least not as quickly. 

            From the employer’s perspective, the primary benefit of this type of plan is that it is typically one in which the total number of days off for each employee is less. Rather than adding up the separate categories of time off (such as 10 sick days, 5 vacation days, 2 personal days, and 10 holidays), a PTO plan allows the employer to reduce the total number of days off and allow the employees to choose how, when and why the time off will be used. Thus, rather than the 27 days off in the above example, an employer may be able to reduce that number to only 20 days of the simplified PTO.

            With the employees gaining a more flexible benefit, and the employer gaining the ability to reduce the total amount of time off in a way that does not upset the employees, one may question why all businesses do not convert to such a model. The risk of the PTO model is that, like vacation days under the standard model, an employer runs a risk of becoming liable for all unused PTO days at the termination of an employee’s employment. This has been the result in a number of states, where courts have been unable to distinguish between paid time off and traditional vacation time, which is necessarily a part of the “compensation package” offered to the employees.  In Idaho, the question has yet to be resolved.  Typically, the risk of liability in this regard depends on how the benefits are described and/or limited in your employment agreements and employee handbooks, meaning that you are presently free to attempt to manage time off in a way that limits their liability.

As long as the issue remains unsettled in Idaho courts, there is a considerable amount of risk that an employer may be forced to pay out the full 20 days’ worth of PTO time, as opposed to the mere 5 days’ worth of vacation time under the standard model in our example.  Because the risk of liability can be greater under this model, employers are wise to consult legal counsel when drafting these important policies.

Transitioning Between Policies.

            For any number of reasons, be it the growth of the business, changes in local or state employment laws, or simply by virtue of a harmonious agreement between the employer and the employees, the need or opportunity may arise to alter one’s policies and transition from one of these models to the other. While the exact circumstances of each particular company will be highly significant in how the transition is best undertaken, there are a couple of general guidelines that can help smooth the process.

            First, the transition must be well thought out and evaluated for a lengthy period of time ahead of the transition. For employers, the type of benefit package that is offered to the employees can have a significant impact on the company’s bottom line. Moving from one policy to the other might have financial implications that, if not carefully planned and considered, could result in a significant cost to the company.

            Second, the transition should ideally occur at a point in the year that is either the natural ending point of the previous cycle, or the natural beginning point of the new cycle. For most companies, the best time to make such a change is at the beginning of the calendar year. This will reduce the confusion and risk of liability that could arise with this type of change. 

            Finally, the company should be fully prepared to pay out any unused vacation time at the point of transition, irrespective of whether the previous policy allowed vacation time to be carried into the next year. This would reflect a clean break from the old system, and a fresh beginning with the new policy. From both a legal and an accounting perspective, this will significantly reduce any attendant risks.

            While it cannot be said with certainty what legal implications may accompany any particular shift in company policy, given the uncertainty under Idaho law concerning PTO time, suffice it to say that much like the decision of which type of policy a company will use, the decision of how to best transition policies must be carefully planned and considered ahead of time. Seek legal and financial advice for making the decision, and keep both your legal and accounting professionals apprised of the progress during the transition. It is in some respects a behemoth endeavor, but that does not mean that it must be unnecessarily difficult or painstaking.