Description

Paid Time Off – Vacation Policy

Paid Time Off – Vacation Policy Preparation Form – We recommend that you gather the information in this form prior to accessing the online questionnaire.  Doing so will help you efficiently create your custom Paid Time Off Policy (PTO or Vacation Policy).

Summary

This Paid Time Off Policy (Vacation Policy) is for private employers. This employee policy addresses the accrual, use, and carryover of PTO, vacation, and sick days. Employers may incorporate this policy into an employee handbook or use it as a stand-alone policy document. State or local laws may impose different or additional requirements for employers to provide paid sick leave for their employees. Thus, employers should modify this policy, as needed, in order to comply with such applicable state or local laws.

Details

Federal law does not require paid time off (PTO). However, most private employers provide some form of paid time off to their employees, such as vacation and sick days. Employers generally memorialize these vacation and leave entitlements in a written policy. Additionally, some states require employers to memorialize vacation and leave entitlements in a written policy.

PTO Factors

The amount and type of PTO employers provide varies based on several factors, such as:

• How much flexibility employers want to give employees. For example, employers may choose between policies that:
  • provide time off that can be used for a variety of reasons at the employee’s discretion, such as vacation, illness, or other personal reasons, which allow employees more flexibility; or
  • permit employees to take time off only for a specified reason, such as either vacation or illness, which are less flexible, and may require confirmation that the employee is taking time off for a permissible reason, such as a doctor’s note if the employee takes a sick day. (For example, some employers have a Vacation Policy or Sick Leave Policy).
• Local or industry practice. The amount and type of PTO provided can vary by industry or geography. Employers frequently try to provide competitive employee benefits, including PTO, so they can recruit and retain a talented workforce.
• Restrictions imposed by applicable state and local law. For example:
  • in some states, accrued but unused vacation time may be considered wages that cannot be forfeited once earned, and may need to be carried over to the next benefit year and paid out on termination of employment; and
  • while no state or local paid sick leave laws require that employers pay employees for accrued but unused sick leave on termination of employment, many laws require that unused leave be carried over to the next benefit year.

Written Policies on Paid Time Off

Regardless of an employer’s approach and whether applicable law requires a written policy, best practice is to maintain and communicate a written paid time off policy that explains:

• What kind of PTO the employer provides, such as whether:
  • the employer has one PTO policy incorporating all types of paid time off; or
  • the policy is limited to a specified purpose, such as vacation or sick time.
• Which employees are eligible to accrue paid time off. For example, some employers require employees to complete a probationary period before they can accrue any PTO.
• How much PTO employees accrue, including the rate and manner of accrual. For example, employers may:
  • provide the same amount of vacation time to all employees; or
  • vary vacation accrual based on years of service, position, full-time or part-time status, or other factors.
• Whether accrued but unused PTO can be carried over from year to year.
• Whether there is any cap on how much PTO an employee can use or accrue each year.
• The procedures for requesting PTO under the policy and whether there are any restrictions on scheduling PTO.
• Whether accrued but unused paid time off is forfeited or paid out on termination of employment.

State Law Considerations

Although this policy does not address state or local laws, these laws may impose additional or different employer obligations for paid time off.

Compliance with the National Labor Relations Act

Both unionized and nonunionized employers must ensure that they comply with the National Labor Relations Act (NLRA) when developing and implementing policies.

Tax Considerations

Employers must consider tax implications when designing their PTO policies. Typical policies often direct that employees accrue PTO during the year and forfeit any unused time at year’s end. In this scenario, the vacation or sick time would be taxed currently. However, some states, such as California, prohibit “use it or lose it” PTO policies. In these states, many employers allow employees to carry over unused time from one year to the next or to cash out unused time at termination of employment. In those instances, employers must analyze the policy for possible constructive receipt issues.

Additionally, most traditional paid time off policies qualify as “bona fide vacation leave, sick leave and compensatory time off” under Treasury Regulation § 1.409A-1(a)(5). In such cases, those policies are exempt from the requirements of Section 409A of the Internal Revenue Code. Policies that permit substantial carryovers or that contain overly generous features could result in substantial penalties to the employee if not structured properly.