Leave Policy: Paid Time Off (PTO) with Cash Out and Payment on Termination Provisions

Mar 20, 2014
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Practice Note

A PTO program replaces traditionally distinct programs—vacation, sick days, personal days, salary continuation programs, etc.— with a single block of time that employees may use for any purpose. PTO plans make it easier for an employee to take time off; they also reduce the incidence of an employee's inappropriate use of sick days. For the employer, a PTO plan improves planning and reduces costs. See How to Develop and Administer Paid Leave Programs and Paid Time Off: Giving Employees More Control Over Leave.

Managing paid leave benefits requires an understanding of federal, state and local laws (including family and medical leave laws, wage and hour laws, and laws relating to military leave) that mandate or regulate payment of all or a portion of wages to employees who take leave. See Managing Paid Leave Benefits for general discussion of these legal issues and Vacation/Sick/PTO Laws for a chart summarizing legal requirements related to PTO in specific states.

The sample policy below specifies restrictions on PTO accruals, provides guidance on the use and scheduling of PTO, and allows employees to “cash out” leave balances of over 40 hours.

Purpose

[Company Name] believes that employees should have opportunities to enjoy time away from work to help balance their lives. [Company Name] recognizes that employees have diverse needs for time off from work. [Company Name] has established this paid time off (PTO) policy to meet those needs. The benefits of PTO are that it promotes a flexible approach to time off. Employees are accountable and responsible for managing their own PTO hours to allow for adequate reserves if there is a need to cover vacation, illness or disability, appointments, emergencies, or other situations that require time off from work.

Eligibility

PTO is accrued upon hire or transfer into a benefits-eligible position. Eligible employees must be scheduled to work at least 20 hours per week on a regular basis. Employees working less than 20 hours per week on a regular basis, on-call and temporary employees are not eligible to accrue PTO.

Procedures

PTO accruals are available for use in the pay period following completion of 30 days of employment. All hours thereafter are available for use in the pay period following the pay period in which they are accrued.

Accrual and Payment of PTO

Accruals are based upon paid hours up to 2,080 hours per year, excluding overtime. Employees working less than 40 hours per week and at least 20 hours per week will earn PTO hours on a prorated basis, according to the accrual rate per hour (see table below). Length of service determines the rate at which the employee will accrue PTO. PTO does not accrue on unpaid leaves of absence or PTO cash outs upon termination. Employees become eligible for the higher accrual rate on the first day of the pay period in which the employee’s anniversary date falls.

Years of Service

Accrual Rate per Hour

Annual PTO Accrual*

Maximum Accrual**

Less than one year

.06538

17 days

(136 hours)

25.5 days

(204 hours)

1-3 years

.08462

22 days

(176 hours)

33 days

(264 hours)

4-10 years

.10385

27 days

(216 hours)

40.5 days

(324 hours)

10 or more years

.12307

32 days

(256 hours)

48 days

(384 hours)

*Annual PTO Accruals are based on an employee having 2,080 paid hours per year (40 hours per week).

**No PTO hours will accrue beyond the maximum accruals listed.

Use and Scheduling of PTO

Employees are required to use available PTO when taking time off from work with the exception of a company-required absence due to low workload or absences occasioned by the company. PTO may be taken in increments of as low as one hour. However, PTO may not be used for missed time because an employee reports late to work, except during inclement weather.

Whenever possible, PTO must be scheduled in advance. PTO is subject to supervisory approval, department staffing needs and established departmental procedures. Unscheduled absences will be monitored. An employee will be counseled when the frequency of unscheduled absences adversely affects the operations of the department. The supervisor may request that the employee provide a statement from a health care provider concerning the justification for an unscheduled absence.

When PTO is used, an employee is required to request payment of PTO hours according to his or her regularly scheduled workday. For example, if an employee works a six-hour day, he or she would request six hours of PTO when taking that day off. PTO is paid at the employee’s straight time rate. PTO is not part of any overtime calculation.

Employees may not borrow against their PTO banks; therefore, no advance leave will be granted.

Payment Upon Termination

In accordance with [name of state] law, after [number of days] of employment, an employee will be paid upon resignation, separation or retirement for all PTO hours accumulated but not used. Employees whose positions are eliminated through a reduction in force or reorganization or are whose hours drop below 20 hours per week are paid PTO on the effective date of the termination.

Cash Out

After one year of service, employees are eligible to cash out their leave. Leave balances in excess of 40 hours may be cashed out. For leave cash out, eligible employees are required to indicate the cash out amount on their time sheet. The benefit will be paid in the next regular pay cycle.

This material is for informational purposes only and not for the purpose of providing legal advice. You should always contact your attorney to determine if this information, and your interpretation of it, is appropriate to your particular situation.

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