Q&A #52 – Is it better to provide combined PTO or have separate vacation and sick leave policies?
Question: My organization has separate standalone paid vacation and sick leave policies for its employees. We have been thinking about combining our leave policies into an overall paid time off (PTO) policy. Which approach is better?
Answer: In evaluating whether to provide combined PTO vs. separate vacation and sick leave policies, there is no one answer that applies to all organizations. Both approaches have pros and cons. The choice involves weighing which pros and cons best match your organization’s priorities and capabilities. In general, combined PTO policies are easier to administer, while separate vacation and sick leave policies potentially have lower financial burdens on the organization.
The main benefit of a combined PTO policy is overall simplicity. With separate vacation and sick leave policies, employees need to say (and often prove) the reason for their leave. Human resources (HR) administrators must separately track these different buckets of accrued vacation and sick leave and determine whether the employee is using leave for a legitimate reason. With a PTO plan, the reason is generally irrelevant. H.R. administrators only have to keep track of one bucket of leave, and employees do not need to show a doctor’s note to prove they are sick because PTO plans generally allow employees to use their accrued paid leave for any reason, including vacation, going to the doctor, attending parent-teacher meetings, or other personal reasons.
The main downside of combined PTO involves the higher potential liability for payout of accrued, unused leave upon termination or separation of employees. Many state employment laws require the value of all accrued, unused PTO or vacation leave to be paid out to employees upon termination or separation (while some states do not apply this requirement if the employer sets forth in a clear policy or written agreement that accrued, unused vacation leave is not payable upon termination or separation). However, this is generally not true for paid sick leave. By combing vacation and sick leave into one PTO policy, an organization may be on the hook for larger payouts when an employee departs the organization.
An additional downside of PTO is that some employees may not plan responsibly for the need to use sick leave. Employees may be tempted to use most or all of their PTO for vacation and personal reasons and end up with insufficient PTO to use during illnesses. When this occurs, employees may be further tempted to work despite being sick, which can infect other employees in the office, or they might be forced to go negative on their accumulated PTO hours.
Planning Tip – When drafting your PTO or vacation/sick leave policies, it is important to be clear about how much unused leave carries over from year to year and make sure the policy complies with the requirements of applicable state laws. Failure to be clear about this can lead to employees accumulating very large amounts of leave year after year (which potentially means very large liabilities for the employer) and reduce the incentive of employees to use their leave when needed for rest, recreation, and medical care.
Lastly, whichever approach you choose, it is very important to assess the requirements of all states in which the organization has employees (including the states in which employees work from home), since an increasing number of states have passed legislation requiring that a minimum amount of paid sick leave be provided. While PTO policies can be consistent with these requirements, harmonizing an employer’s policy with state law requirements can be surprisingly complicated and requires careful thought and drafting.
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