Which is Better, Vacation or Paid Time Off?
When I have discussions with companies who have an old Vacation Policy we frequently find polices that are out of compliance. So perhaps the best place to start is with what the law says regarding vacation. In Colorado employers are not required to give vacation time to their employees. Once vacation is accrued or awarded it is considered to be an “Earned Benefit.” It is just like wages and cannot be withdrawn. If you terminate an employee or they quit and they have vacation “in the bank”, you are required to pay it our just like any other wages. The old “use it or lose it” vacation policy is illegal in Colorado – you cannot take away earnings once they are earned. Vacation is in essence “banked earnings.” So if you look at your books and you see employees with weeks’ worth of vacation on the books that they are not taking – you have a huge liability sitting out there. One solution is to create a policy that puts a ceiling on vacation accruals. Say you choose 80 hours for your maximum accrual ceiling. When an employee reaches 80 hours their “bucket” is full and they will cease to accruing until they use some. They will begin to accrue again after they have made some room in their “accrual bucket” by using some of the vacation time. This sort of policy reduces the employer’s liabilities and encourages employees to use their vacation. If you instate a policy like this you must pay out the vacation overage (anything in excess of the new 80 hour ceiling). One last thought on vacation accrual specifically. I really don’t recommend that you give “lump sum” vacation – like 40 hours on January 1st. If you do the savvy employee who is intending to leave will wait until January 2nd and quit – you now own and additional weeks wages to this person.
Sick time is not considered an “Earned Benefit” in Colorado and you are not required give it to your employees or to pay it out on separation. In many cases accrued sick time “expires” each year and the employee gets a new batch at the beginning of the year. For this reason many employees try to use up their sick time close to year end which creates its own issues.
Paid Time Off or PTO is a combination of the two. If you terminate an employee and they have 40 hours of PTO accrued, you must pay all it out upon separation.
So what policy is best? There are a lot of different ways to work this out. Many think PTO is the way to go. It is by far the easiest to manage. There is only one type of accrual to manage and you do not need to worry about how employees us the time. It is all PTO and if they have it in their bank, they can use it. PTO eliminates one of the hassles of sick time accrual, which is employees taking days of by using sick time, when you know they are not sick. It feels like cheating to the employer and the employee frequently sees it as something they “own” and have every right to use – it can create conflict and distrust. With PTO – there is not an issue. Statistically, employers find that employees who get PTO save it for actual vacations and come to work when they are a little sick. Employees tend to return refreshed and more ready to work after their vacations. I think when employees “sneak or steal” a day off by using a sick day that they feel guilty about it and for that reason do not come back rested.
We have worked out a solution that uses a little of both policies. It works for us and it might be something to consider. We separate vacation and sick time. We want our employees to take their earned vacation and only use sick when it is necessary for real sickness. So we pay out sick time on the last check of the year. This lets the employee know that they will not lose it and they don’t “cheat” and try to use it up prior to year end. We are a small shop and really do need all hands on deck – especially at year end. The other advantage for us is that if an employee leaves for any reason – we do not pay out the sick time only accrued vacation. If an employee walks out or is fired for cause I don’t want to pay them more than I really owe them. I think our policy creates a win-win all the way around.
So when you craft your policy for vacation, sick and PTO give some thought to what you are trying to accomplish in the mind of your employees. Vacation is a benefit that helps you to employ better people. It helps your folks to get refreshed and come back to work in better shape and ready to work. You also need to consider the implications for your business and the liabilities you incur with accruals on the books. Employees that feel valued produce more which will help you succeed. A good vacation policy is good for your company.
President of Business Development