The complications involved in setting up a paid-time-off program as well as whether unused sick pay must be paid at the conclusion of employment are discussed this month.
In the employment area, as with so many other facets of legal practice, questions often invite more questions. Thus, for example, earlier columns addressing some of the legal implications of vacation and related policies have resulted in a host of new questions related to paid time off. My hope is that, with this column, we can clarify some of the most frequently raised concerns on this subject.
Question: I read that in California, companies have to pay earned but unused vacation days upon the conclusion of employment ... but what about earned but unused sick days?
Answer: You are correct with respect to unused vacation days. Under California law, unless a collective bargaining agreement provides otherwise, all earned but unused paid vacations provided for by employer policy or a contract of employment that are not yet taken on termination must be paid to an employee as wages at his or her final rate. See Cal. Labor Code §§ 200, 227.3 (Deering 2007); Evans vs. Unemployment Ins. Appeals Bd., 703 P.2d 122 (Cal. 1985); Boothby v. Atlas Mech., 8 Cal. Rptr. 2d 600, 602-603 (Cal. Ct. App. 1992).
This is because vacation pay is considered deferred wages for services rendered that an employee earned as they worked. Suastez v. Plastic Dress-Up Co., 183 Cal. Rptr. 846, 84 (Cal. 1982); Boothby vs. Atlas Mechanical, Inc., 8 Cal. Rptr. 2d 600 (Cal. Ct. Ap.. 1992).
Sick pay, on the other hand, is not considered wages because the obligation to pay for sick leave does not exist until the employee, or in some cases a family member, actually has an illness or injury.
Because of this distinction, a California employer is not required to pay earned but unused sick days upon termination of employment.
Question: We are looking into the possibility of changing our accrued vacation plan to a granted PTO plan. What are some of the potential issues associated with this change? Can we "bank" accrued vacation/sick time or must it all be paid out?
Answer: PTO, also referred to as "Personal Time Off" or "Paid Time Off," refers to a bank of days that an employee can draw from to take paid time off from work, without having to specify a reason (i.e., it can be used for vacation, sick leave or personal business).
Employers considering adopting a PTO plan should beware that these plans do not relieve employers of the administrative burden of tracking certain types of time off, such as time off that is job-protected under the Family and Medical Leave Act or state leave laws. While often considered a boost to employee morale, PTO days also can more readily invite employee abuse and can require employers to provide more paid time off and hold jobs longer than might be the case with a traditional differentiated paid time off policy.
Your question highlights one of the other key concerns in adopting a PTO plan, which is whether the paid leave will be treated as earned "wages" such that an employee would be entitled to be paid for earned but unused (or "banked") PTO days at termination. State law varies on this issue.
For example, even though it is within an employee's discretion to use PTO for vacation, sick or personal days, all PTO days are treated as vacation time in the state of California. Church vs. Jamison, 50 Cal. Rptr. 3d 166 (Cal. Ct. App. 2006). Consequently, employees have the right to be paid for earned but unused PTO in California (in contrast to separately designated sick days, as discussed in response to the previous question).
In other states, however, courts will generally look to the terms of an employee's contract or other written policy of the employer to determine whether an employee is entitled to be paid for accrued PTO upon termination. In Texas, for example, unless there is a provision in the employment contract that gives a separated employee the right to payment for accrued PTO, "[there is] no basis in law or in fact for recovery of [such] vacation rights." Browne vs. Sabre, Inc., 173 S.W.3d 581, 587 (Tex. App. 2005).
Similarly, in New York, there is no obligation to pay terminated employees for earned but unused PTO unless the employer's policy or employment agreement provides for such payment upon termination. N.Y. Lab. Law §198-c (2006); Glenville Gage Co., Inc. vs. Indus. Bd. of Appeals New York, 70 A.D.2d 283, 286 (N.Y. App. Div. 1979).
As with so many other employment policies, because an employer's obligations under a PTO plan vary according to state law, it is recommended that you consult a local practitioner for further guidance