In this week’s episode our question of the day is vacation time or PTO – which is better and what’s the difference.
Well, as you might guess – different states have different rules around this. So for now, I’ll focus on the Golden State – California.
In California you can have sick time and vacation time – or you can lump them altogether as PTO or paid time off. Now the term PTO can be a bit confusing, because people use it two different ways. Sometime they just mean the literal definition of Paid Time Off – meaning any time the employee is taking that is paid by the company. This could include sick time, vacation time, holidays and/or personal days.
On the other hand, they might use the term PTO as the title of a specific type of time off. For instance – “we don’t’ have sick time and vacation time – we just have PTO”. In that context they are saying a PTO program has replaced the separate other types of time off that are usually available.
So, isn’t it just easier to have PTO, and deal with tracking one thing, and forget it? Sounds simple, but (of course) it’s not that simple at all.
In California you are required to provide paid sick time for your employees. That sick time has specific rules around it, the minimum amount they can get, the fact that it doesn’t get paid out when they leave the company, and other rules around how it can be used.
Vacation time on the other hand is considered wages earned. That’s a really important distinction – in fact I’ll say it again. In California vacation time is considered wages earned. And for you and me as employers, that means once it’s earned by the employee, they can’t lose it. That’s why a use it or lose it policy is illegal in California. Also, employers have to enter vacation amounts on their accounting books as a liability – honestly it’s because the powers that be want to be sure that if everyone stops working for you, that you have the money to pay out all the vacation that’s been earned.
That wages thing also informs how you manage vacation. Some, and in some cases all, of it has to roll over into the next year. And again – since it’s a liability for you, the cost of the days increases as the employee’s salary does. But on the bright side, you as the employer can determine when vacation can be taken.
“…In California vacation time is considered wages earned“
So remember all that about vacation because – wait for it – if you go to a PTO policy, California considers all that time as vacation time – meaning it all falls under the vacation rules. Yep, that’s right, even though you most probably rolled in the sick time policy totals – it’s all under the vacation guidelines now. And not only does it have to meet the vacation rules, it also has to meet the accrual rules of sick time. Now generally that part isn’t much of an issue, because most vacation policies accrue at a rate much higher than the required sick time minimum accrual of 1 hour for every 30 hours worked.
But, where I’ve seen this out of alignment is when a vacation policy says something like you start accruing on your first day, but you can’t take any time until you’ve been there for a year. Well, that’s counter to the sick time guidelines, so if you have a PTO policy, it has to at lease meet the sick time rules. BTW – the ‘you can’t take vacation until you have been here for a year’ thing has it’s own issues – but I’ll do a deep dive on that in a later episode.
So, having said all that – PTO is generally more expensive to the employer. You have to keep the time on the books, it rolls over and it gets more expensive as salaries go up.
You can probably tell I’m not a huge fan of PTO. But one thing in its favor, it’s relatively easy to track – after all – it’s only one bucket, and everything comes out of that one bucket.
So, if you do decide to covert from separate sick and vacation policies into one PTO policy – here are three top things to think about:
First, any vacation employees have on the books will stay on the books. Just because you are changing the policy doesn’t mean they can lose anything. What you can do is cap the accrual amount, and work out a schedule where they sort of ‘use it down’ over a period of time.
For example, I have a client converting to PTO, and some of their employees have 500 hours of vacation time on the books – and no, don’t ask me why they have so many hours. We’re just dealing with the situation as it is presented to us. Now, while those 500 hours will stay in place, the company can say that they are capping PTO at 200 hours. By the way, another thing to keep in mind is that the cap can’t simply be one year’s worth – the courts have seen thru that rouse.
So back to the cap – if they cap PTO at 200 hours, the people with 500 hours won’t start accruing again until they have used more than 300 hours – that will bring them below the cap.
The next thing to consider is that you really should add in the sick time to the PTO bucket. Sure, it’s possible for you to create a PTO program and do away with sick time altogether (as long as you are meeting all the accrual guidelines etc.) – but it will really annoy your employees. Why, because to them, you are starting a new program and taking some time away from them. That annoys employees. So, we don’t recommend it.
And finally – think carefully about communication. How you sell the program will define success or failure. Be clear about the numbers and what is happening. Prepare individual statements for each employee. Communicate in a variety of ways, a written announcement, maybe a video, and also consider doing a kick off meeting. Remember, different people take in information differently. You have to meet them where they are.
So, if you’re considering a PTO policy, look carefully at the numbers, maybe have a chat with your favorite HR consultant, and clearly outline the pros and cons.