How to Develop and Administer Paid-Leave Programs

Employers generally recognize that many employees struggle to balance the needs of work with outside interests and obligations. Taking time away from work is important, not only to handle personal matters and take care of illnesses but also for physical and emotional well-being. In addition to promoting a happier and healthier workforce, paid-leave benefits may enhance employers' recruitment efforts and retention strategies.

Paid-leave programs affect employers financially, administratively and operationally; therefore, an employer should have a well-designed plan that meets both the employer's and employees' needs.

Step 1. Identify the Objective and Any Legal Requirements to Offer Paid Leave

Organizations should first think about why they are considering a paid-leave program. Is the reason to be more competitive? Is it to build a rewards program for employees? Is it to manage employees' time off? Or is it to improve the productivity, health or safety of the workforce? Whatever the reason, establishing the need for paid leave helps determine the type of leave, how much to provide, when to provide it and how it will affect the business.

Employers must identify any requirements to provide paid sick leave under state and local laws or as a federal contractor. An employer is not mandated to offer a paid-leave plan under the Fair Labor Standards Act (FLSA); however, employers may not dock the pay of exempt employees for absences due to sickness or disability unless a) employers have a bona fide plan for paid time off that can be used for these absences, and b) exempt employees are either not yet eligible or have exhausted their benefits under the plan.

Step 2. Identify What Type of Leave to Offer Employees and Who Will Be Eligible

Next, organizations should decide whether to offer separate vacation-, sick- and personal-leave benefits or a combination of the three in one comprehensive paid-time-off (PTO) plan.

• Vacation leave is the most commonly offered leave benefit. It is generally used for time away from work for rest, relaxation, travel, handling personal matters and other planned reasons. Vacation leave is typically scheduled in advance, although some employers allow employees to use vacation time for unexpected absences.

• Sick leave can be unplanned or foreseeable and is typically used for absences due to an employee's own illness or injury, or to care for an employee's sick family member. Some employers are required by state law, city ordinance or federal contract to grant paid sick leave to employees and to allow employees to use sick leave for other relatives, such as parents, spouses or registered domestic partners.

• Personal leave is generally used for any reason, planned or unplanned, and typically supplements vacation and sick leave for short-term absences.

• PTO leave is a bank of leave time that employees may use for any reason, such as personal or family illness, personal reasons, vacation, or any other reason determined by the employee. This leave can be planned or unplanned. Employees tend to like PTO plans for this reason because it allows flexibility in how their leave is used. Employers favor PTO plans because they do not have to monitor the reasons why employees are taking leave.

To remain competitive in their industries, employers may want to research other options organizations are providing to employees. This information may be obtained from resources such as benefits surveys and benchmarking reports. See SHRM Benefits Report: Leave

Organizations may provide all employees with paid-leave benefits or offer different types of leave benefits to different groups of employees, as long as the practice does not discriminate against a protected class and it complies with state and federal laws. For example, an employer may offer a different amount and type of paid leave to exempt versus nonexempt employees, regular versus temporary employees and office employees versus field workers. Employers must also determine if part-time workers will be eligible for paid-leave benefits.

Step 3. Identify How Much Leave Employees Will Be Eligible for and When They Will Earn It

Organizations next need to determine how much leave to provide and how employees may earn the leave. According to SHRM research, the average number of leave days awarded per year based on employees' length of service ranged from 13 to 26 days for PTO plans. For plans that separate out categories of leave, the averages were 8 to 22 days for vacation, 7 to 19 for sick days and 4 personal days for full-time employees. Employers can consider creating a matrix with years of service and accrual rates/days awarded based on position or hours worked.

Organizations must decide if employees will receive the paid leave front-loaded at the beginning of the calendar or anniversary year, or at the start of employment, or if employees will accrue leave based on the number of hours worked or on length of service. In states where paid leave is required to be paid out upon termination, employers are more likely to implement an accrual system to avoid having to pay out a full year's worth of leave to an employee who departs the organization early in the year.

Moreover, employers must determine if new hires will begin accruing paid leave immediately or if they must wait a period of time before earning paid leave and/or using the leave. It is common for employers to have a waiting period of one to two months before employees are eligible to take paid leave.

Employers may decide to cap leave accruals. For example, an employer may state that vacation time will stop accruing at 80 hours and will resume only after employees take time off. This approach may encourage employees to schedule vacation regularly so vacation time continues to accrue.

Leave accruals during paid or unpaid leave will also need to be addressed. A common practice is for employers to permit employees to continue accruing leave while on paid-leave status and to have accruals stop during unpaid leave. Employers should ensure that this practice is consistently applied to all employees in the same or a similar situation.

Organizations must also decide if employees will be advanced leave if they request time off in excess of the paid leave they have earned. Employers should consider state law on wage deductions for this type of wage advance in the event an employee departs the organization with a negative leave balance. Also, the FLSA prohibits employers from deducting advanced leave for partial-day absences from an exempt employee's pay. In general, it is not recommended to advance leave but instead to permit leave without pay when appropriate.

Budgetary considerations

Employers will need to determine at what rate they will pay the leave to nonexempt employees. Will the leave be valued at the rate of pay in effect at the time the leave was earned, or will the leave be paid at the current rate of pay at the time the leave is used? For example, an employee earning $15/hour accrues five days of leave in 2020 that is not used and is carried over into 2021. In 2021, the employee receives a pay raise to $17/hour. If the employee takes a five-day vacation in 2021, will the leave be paid at the $15/hour rate or the $17/hour rate? Paying the leave at the employee's current rate of pay is the easiest approach and requires less administrative tracking of pay rates. Some states, such as California, require the leave to be paid at the employee's current rate of pay, and employers should be sure to comply with such state and local requirements.

Additional costs may be incurred when a nonexempt employee takes paid leave, including using a temporary worker that costs the employer more than the regular nonexempt employee's hourly rate or paying overtime wages for other employees to cover for the absence.

Employers should review and account for all paid-leave costs when budgeting.

Step 4. Establish When and How Employees Can Take Leave

Organizations should define in their company policy in what increments paid leave can be used. Some employers charge paid leave in full-day or half-day increments only. Other employers charge paid leave in smaller increments, such as quarter-hour or full-hour increments.

Determine if any limits will be placed on the amount of vacation time taken. For example, an employer may state that an employee may not take more than two consecutive weeks of paid leave at a given time unless the leave is protected under the Family Medical and Leave Act or state leave laws.

Employers should determine if they will stipulate "blackout periods" when employees are not permitted to take paid leave. For example, in the retail industry, employers may not want to permit time off during busy holiday periods.

Will there be any requirement for certain positions to take time off? It is common in some industries, such as banking, to require employees to take vacation time as a fraud deterrent and detection method. An employee who refuses to take any time off may be hiding misconduct or poor performance that the employee fears will be discovered during his or her absence.

Organizations should decide if employees must take their available paid leave by a certain date or within a specified time frame. A use-it-or-lose-it policy stipulates that employees will forfeit unused leave at the end of the year; it will not roll over into the new year. Some state laws, however, prohibit this type of policy for paid personal, vacation and PTO leave.

Employers also need to establish a procedure regarding when employees should request leave, how they should request leave, and the process of approval or denial of the leave.

Organizations should determine if they will require a certain amount of advance notice for vacation, personal or PTO leave. For example, an employer may ask employees to request planned time off at least 30 days in advance so the manager has sufficient time to replace the employee or prepare for the absence.

Ensure that the paid-leave program works with human resource information systems (HRIS) and payroll software, and determine if the management of time-off requests, tracking and reporting will be done electronically or manually. Organizations should involve IT as necessary to implement electronic tracking.

Step 5. Identify When Paid-Leave Use Will Be Required

Employers must consider various scenarios related to paid leave and have clear answers for situations such as the following:

• Will employees be required to use paid leave for all absences (e.g., business closings, closings during prescheduled paid days off, concurrent with other leaves), or will they have the option to use it? In most circumstances, with the exception of military leave, employers may require both exempt and nonexempt employees to use paid leave before taking any unpaid leave. See Can an employer require the use of paid time off (PTO) or limit when an employee may use it? Under the Uniformed Services Employment and Reemployment Rights Act, an employer may allow, but may not require, an employee to use paid vacation during leave due to military service. See Do I have to pay an employee on military leave? Can I require the employee to use paid time off/vacation time?
• How will paid leave be permitted for an employee on short-term disability? If an employee is collecting short-term disability benefits or other supplemental pay, the policy should be explicit regarding whether and how the employer will permit the use of concurrent paid leave.

• What happens if a holiday falls during an employee's paid leave? Will the employee receive holiday pay for the day on which the holiday falls so that the day will not be deducted from the employee's leave bank? Or will the employee be charged for a day of paid leave regardless of the holiday? Will an employee be able to receive holiday pay and paid leave for the same day?

• What if an employee on vacation becomes ill or is injured during the leave? Employers need to decide whether they will permit the change from vacation to sick leave for the period of illness or disability. This may require notification to the employer at the onset of the illness or disability. The leave policy should outline these procedures.

• What if the office closes during an employee's paid leave? The employer's policy should address this eventuality. Generally, in the event of a business closure, employers require the time to be counted as vacation time if all other employees are required to use their leave time to cover the day. Some companies do not require employees to use their vacation time during a business closure if other employees are not required to do so. Other employers consider planned absences to remain as vacation days, despite the office being closed, whether or not other employees are required to use their leave time.

Step 6. Determine Payout upon Termination Practices

Organizations should identify any state law requirements regarding payout of vacation/PTO upon termination.

Some states require employers to pay out earned but unused vacation/PTO leave when an employee departs the organization. If state law does not require this, employers should outline in their company policy if they will pay out unused leave at termination and, if so, what qualifiers exist to be eligible for the payout, such as voluntary resignation only or sufficient resignation notice provided. Employers have discretion in some states to determine under what circumstances, if any, employees will be paid for unused leave at separation.

In states where paid leave is required to be paid out upon termination, employers are more likely to implement an accrual system to avoid having to pay out a full year's worth of leave to an employee departs the organization early in the year. For example, an employee hired on Feb. 1 receives two weeks of vacation at the time of hire. If that employee quits March 30 before using any paid leave, the employee may be eligible under state law to receive the two weeks' vacation pay. However, if an employer has a paid-leave plan stating that leave is accrued monthly, per pay period or on any other basis, the employer may be obligated only to pay out the leave accrued and unused at the time of an employee's departure.

Payout of leave upon termination generally applies to vacation and/or PTO and does not include paid-sick-leave hours or other hours specific to a particular event, such as paid holidays.

Step 7. Create a Policy and Communicate It to Staff

The last step is for employers to create a written policy outlining all the rules and procedures for paid leave. HR professionals are responsible for keeping employee handbooks and policy and procedure manuals up-to-date and for communicating the policy to all staff. Employees should sign an acknowledgment that they received the information and understand the policy.

Employers may use sample policies as a starting point in creating their own policy, or they may choose to outsource development of the policy to a consultant or attorney.