PTO Cash-Out Policies

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Rather than offer separate vacation days and sick time, many U.S. companies offer employers PTO -- paid time off. Employees can use PTO for any purpose -- sick leave, vacation days or just because. Some companies also allow workers to redeem unused PTO for cash at year's end.

Paid Time Off

The Nolo website says no law requires an employer to provide workers with paid vacation time. A business also has the freedom to decide how much vacation and sick leave it grants, or whether it uses PTO instead.

G&A Partners says going the PTO route offers several benefits, such as simplified record keeping. Companies offering PTO do not need to keep track of sick leave and vacation time separately as it all comes from the same time-off pool.

Unused PTO

For employees who don't use all their PTO for the year, employers can adopt a "use it or lose it" policy, meaning any unused PTO for that year goes away. CNBC reported in 2013 that this has pros and cons:

  • Pro: Employees have an incentive to take time off and return to work refreshed.
  • Con: A much higher absentee rate as employees wring out every last PTO day.

A second option is to let PTO roll over to the following year. This takes away the desire to use every last day, but a company could find staff build up enough PTO to take inconveniently long leaves. The ERC human resources firm says there are possible solutions:

  • Require employees to use carry-over PTO by a certain date.
  • Cap the amount of PTO that can carry over.
  • Limit how much PTO an employee can use at a stretch.

A third choice is to pay employees for unused PTO. This can be a straight exchange -- one day's pay for one day of unused PTO -- or it can be, for example, 50 percent of a day's pay.

Warning

  • Payments for unused PTO are taxable income. If the company gives employees a choice in whether to roll over or cash out PTO, the IRS policy is that the PTO is taxable even if employees roll it over and don't get any money.

State Limitations

States can set restrictions on PTO policies. California, for example, doesn't allow use-it-or-lose-it. Once workers receive PTO, it's theirs forever. Employers can, however, set a limit on how much PTO employees can accrue by rolling it over. Minnesota courts, on the other hand, say use-or-lose is acceptable under that state's law.

Tip

  • Using PTO has one disadvantage for employers compared to providing separate sick and vacation time. If an employer cashes out unused vacation time, it doesn't have to pay for unused sick leave. If sick leave is part of the PTO, employees can cash out all their unused days.

When Employees Leave

The Nolo legal website says that half the states give employees the right to cash out unused PTO or vacation time when they leave the company. In California, for instance, employees are entitled to that cash no matter why they left the business. In Minnesota, an employer can set limits, such as no PTO if you're fired, or resign without sufficient notice.

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