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The Quandary of Paid Time Off (PTO)

August 08, 2013

Re-examine your PTO policy and determine if it is meeting all of your HR and financial goals.

Once upon a time, employers provided their employees with a specified amount of paid time off for sickness and a specified amount of paid time off for vacation. It was expected that employees would use their vacation time annually and use their sick time when and if they needed it. Probably because some people used sick time when they were not really ill, employers began giving employees a certain amount of paid time off for personal reasons – it was not vacation and you didn’t have to be ill to use it.

When employees were unable to utilize all of their vacation time, employers frequently granted the employee the ability to accumulate the unused time and either take it during the following year or allow the time to accumulate until they separated from the company. Sick or personal time, however, was generally not subject to accumulation. For various reasons, some employers imposed a limit on the amount of vacation time that could be accumulated from year to year. Employers could not afford to have employees use their accumulated time off to take extended absences. In addition, employers did not want to have employees accumulate a potentially expensive liability due to them upon separation.

The concept of paid time off being designated in three categories – sick, personal and vacation time in many organizations eventually gave way to a single category of paid time off (or PTO) with the total number of days for all three categories added together. This has resulted in companies that once had vacation policies of 10 to 20 days, now having PTO policies that provide for 20 to 35 days of PTO per year.

In the process of this evolution, unused PTO has generally been allowed to accumulate the way vacation time was allowed to accumulate even though, in the past, sick time and personal time generally was not allowed to accumulate. We are now seeing clients with accrued PTO for employees of 35 days or more per employee. This is causing a substantial liability on the balance sheet as well as a significant cash flow issue when this time must be paid to the employee in cash.

On one hand, employers are pleased to provide their employees with an accumulated bank of time that can be used in case of a serious illness requiring an extended leave of absence that would not have been available under the old sick leave policy. On the other hand, the cost and cash flow requirements of one or two months of accumulated compensation at current day dollars an employee would receive upon termination can appear onerous. How can these two issues be resolved?

We have seen clients limit the amount of PTO that can be carried forward to 10 days or less. Some have found, however, that this just encourages unusually high employee absences near the end of the year, just before the PTO would expire. We have also seen clients purchase unused PTO at either 100% of its value or some discounted amount (such as 75% or 50%). This, of course, is a cash flow issue even at the discounted amounts.

One of the more creative solutions we have seen implemented in this regard is the ability to accumulate PTO with a limit as to how much will be paid for upon separation but with no limit as to how much can be used in case of an illness. In such a situation, current-year PTO must be used first, prior to using any accumulated PTO.

For example: An organization’s policy may be that employees can accumulate up to 40 days of PTO. However, only 15 of those days will be paid for upon separation from the company. In case of a long-term illness, after the employee has exhausted his or her current PTO amount, they may continue to be absent from work and use as much of the accumulated PTO as prescribed by the employee’s physician.

If your company has had an evolution of the paid time off policies over the past few years, you may want to re-examine the policy and determine if it is meeting all of your HR and financial goals. As always, if you would like with your paid time off policies please contact any member of our Not-for-Profit Services Team or call 888-KLR-8557.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.

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