Leftover PTO or black holes: which do humans know more about? It’s hard to say!
As a small business owner, you know how important it is to follow the rules. With something as delicate as paid time off (PTO), how do you make sure you stay in compliance?
At CSI Accounting & Payroll, we’ve worked with small businesses for over 50 years. We know more about PTO than most people do! That’s why our clients ask us:
- What PTO laws do I need to know about? Do they vary by state?
- Which states require unused PTO payout? Are there other unused PTO laws?
- How can a payroll service help me follow PTO laws?
PTO Accrual Laws
Before we get into PTO payout, we should touch on laws about just offering PTO.
States Mandating PTO Accrual
Lately, more and more states have started mandating PTO accrual. They’re changing so quickly that we can’t even find a current link listing all of the states!
It’s also hard to find information since not every state is calling their PTO laws the same thing. For example, Minnesota is using Earned Sick and Safe Time (ESST). If your company’s PTO policy meets or exceeds the requirements, then you’re in compliance.
If you don’t find any information about your state online, you should ask your payroll specialist if mandatory PTO accrual laws apply to your state (or if they will in the near future). At CSI, we always keep an eye on what’s going through legislation.
Family and Medical Leave Act (FMLA)
This is an expanding law to keep an eye out for. In the past, there were no laws about offering PTO, so many businesses tracked sick time and vacation time separately and only paid out one or the other.
Now, FMLA mandates a different type of paid time off. It’s like sick leave, except it also covers you if you need time off to care for sick family members. Just like other PTO laws, its rules are changing quickly.
Unused PTO Payout Laws
There are three different kinds of unused PTO: from benefit years ending, from firing employees, and from employees who quit. Let’s talk about all of them.
Benefit Year End
Some companies have a “use-it-or-lose-it” policy each year for their PTO. If their employees don’t use their full PTO balance each year, it disappears and they start over for the following year.
There are some laws that vary by state surrounding this kind of policy. Please be aware that in some states, “use-it-or-lose-it” is illegal. It can also be seen as unethical to not let your employees use paid time off that they earned, especially if employees don’t feel like their job allows them to take the time off.
However, not having a “use-it-or-lose-it” policy or at the very least a carryover limit can result in large balances for current employees. Because this liability can add up, it can make it difficult to sell your business.
Terminated Employees
If you fire an employee, you need to follow what your PTO policy says and what your state’s law says.
In most cases, employees who are rightfully terminated should not expect to receive any payment of unused PTO. However, some states – like Illinois – require you to pay it!
Resigned Employees
If your employee quits, you also need to follow what your PTO policy says and what your state’s law says.
There are torn opinions on whether you should pay an employee their PTO balance if they quit. Again, some may see it as unethical to not grant the earned balance. In Minnesota, ESST (which we mentioned earlier) says you are not required to pay out unused ESST if the employee resigns.
How Payroll Services Help You Stay in Compliance
To make sure your PTO policies stay in compliance, you need to consider state law, then your company’s PTO policy, and any precedence you set with other employees. Let’s discuss how a payroll service can help with these.
Following State Laws
What happens if you were required by law to accrue or pay out unused PTO – but you didn’t? After all, the laws are changing frequently!
Let’s say you’re in Minnesota for this example. The affected employee can submit a complaint to the MN Department of Labor and Industry (DLI) and may start a civil lawsuit if ESST was violated. The civil penalty ranges from $1,000-$10,000 if you violate anything that the DLI has authority over.
With a payroll service, a payroll specialist can help you stay current with local and state PTO accrual and payout laws. Not only will they let you know what the requirements are, but they should also be able to tell you if your current policy meets them.
Let’s go over making a good PTO policy next.
Establishing a Compliant PTO Policy
Much of the time, payroll and HR go hand-in-hand. That’s why some payroll services will also provide HR services. With a payroll and HR service, you can make sure your PTO policy (and all other policies) don’t supersede the law.
Your PTO policy should be given to your employees in writing so they know what to expect. We recommend putting it right in your employee handbook. It should include:
- The method of accrual. You can frontload immediately with no accrual, delay a full balance with no accrual, or accrue by the hour, week, month, pay period, etc.
- The rate of accrual. This is the number of PTO hours that are earned per the accrual period. Sometimes, it’s done in tiers based on how many months or years the employee has worked for you.
- What happens to the balance at the end of each benefit year. We discussed this in the prior section. You can choose to have your benefits year follow the calendar year for all employees, or it can even be different for each employee based on when they started working for you aka their anniversary date.
- What happens to the balance at the end of employment. We also discussed this for termination and resignation in the prior section.
Once your PTO policy is placed in your employee handbook, you need to make sure that you follow it (and that it follows the law) once it’s in writing – otherwise, it’s evidence against you!
However, the main point is that you and your staff will know what to expect and have peace of mind.
Considering Precedence
Precedence is also important with PTO because if you make an exception for one employee with accrual or payout, you’ve created a precedent and could be required to do the same for all of your employees even if it’s not part of your policy. If not, it opens you up for a lawsuit.
When you have a PTO policy in writing, it also gives your employees comfort knowing that everyone received the same rules. This shouldn’t make you feel like you can give special treatment under the table, though, because the word of this special treatment can still spread.
Long story short – if you stick to the law and your policy then you’re golden!
Stay in PTO Accrual & Payout Compliance!
Now that you know about PTO accrual laws, PTO payout laws, and how a payroll and HR service can help you stay in compliance, are you ready to check out payroll services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about what goes into a payroll service fee by clicking the image below:
