As the tight economy continues with no foreseeable end in sight, employers are challenged to find ways to compensate, motivate and reward employees while adding minimal costs to their bottom line. As health insurance premiums continue to skyrocket, many employers are utilizing paid time off (PTO) as a recruiting tool to entice qualified applicants to join their company. PTO policies such as paid vacation, sick, holiday, and jury duty are common-place within the workforce; however, state regulations restrict how employers may implement such policies. Non-compliance with these regulations may result in wage and hour lawsuits that can be costly for employers. In the next two posts, we review some important PTO rules and guidelines.
Vacation Pay
The most common form of PTO is vacation pay. According to Salary.com, 86% of employers offer some form of vacation pay. According to the California Chamber over Commerce, of 90% do. However, contrary to popular belief, vacation is not required under any Federal or State statutes. If offered, it is contractual in nature, meaning it becomes an employer policy that must be adhered to. As a result, many states impose restrictions on vacation pay. For example, in California, vacation pay is considered a vested, earned benefit which accrues over time and must be paid out at the time of termination.
“Reasonable Cap”
Vacation pay cannot be forfeited, and a “use it or lose it” policy may not be enforced. However, employers are entitled to impose a “reasonable cap” to the amount of vacation an employee may accrue. A general guideline would be a vacation accrual equal to double (2x) their annual amount. As an example, if an employee accrues 40 hours of vacation per year, a reasonable cap would be 80 hours. After the employee has earned 80 hours of vacation, their accrual would stop. The DLSE (the Division of Labor Standards Enforcement) has determined that an employee must have at least nine months after the accrual of the vacation within which to take the vacation before a cap is effective.
Accrual Methods
Accrual methods are flexible. Most commonly, vacation days are accrued by the day, week, or pay period. According to the CalChamber, the most common vacation policies are:
• Two weeks after one year
• Three weeks after five years
• Four weeks after eleven years
While some employers enjoy using their vacation policy to show off their corporate creativity, they are cautioned to avoid making policies overly complicated or difficult to track. At best, errors in calculations may occur. At worst, disparate policies may result, leading to potential discrimination violations. Additionally, the vacation accrual rate cannot decrease from one year to the next.
In summary, while vacation pay is a well accepted practice by a vast majority of businesses, it carries a range of obligations and rules that must be adhered to. If you have any questions or concerns about your current vacation policy, or would to create one, please contact one of our Human Resources Consulting experts who can assist you.
In our next post, we will review sick, holiday and personal days off.