5 best practices to avoid surprises and liability related to accrued vacation time and “Use it or lose it” policies
It’s Thursday after work and you’re trying to enjoy a well-deserved happy hour with your friends, but you’ve got that “Did I leave the stove on?” feeling.
Then it hits you:
Eddie, in accounting, just put in his two weeks’ notice. Which is fine, except Eddie, in accounting, hasn’t taken a day off in 21 months. That’s your recollection anyway—but wait! His records say 24 months. So that’s your first problem: a discrepancy. Your records say you’re on the hook for 21 months; his say 24.
You’ve got a date with a filing cabinet.
But that’s not all. Eddie has a large salary, and you don’t have a clearly stated max accrual policy. 21 months’ (or is 2 years’) worth of accrued vacation time means your company is about to take a big hit.
Also, even if there were a max PTO accrual policy (which suddenly seems imperative), you don’t have a signed document stating the terms in Eddie’s file. So damn.
We’ve seen too many situations like this. “Use it or lose it” and other PTO policies are also continuously being tested in courts or amended at the legislature level, so keeping up to date on best practices can be challenging even if your paperwork is in order. Bleh.
“Use it or lose it” PTO policies, like unlimited PTO and everything in-between, are two-edged swords. These tips will help you avoid PTO-related liability (and situations like Eddie’s), from formulating the right policy, setting clear expectations and streamlining documentation.
#1. Automated data entry and workflows
Modern HR solutions should automatically update PTO balances and transaction logs, eliminating discrepancies and human error.
Accrual balances are often managed by spreadsheets, which can lead to errors and miscalculations. These tend to be disputed in court, which nobody enjoys except lawyers.
With a modern HR platform like BizRun, you can set up the PTO formulas within the employee’s profile, based on your company policies. Max cap balances, max accruals (we’ll define these policies in a moment) and real-time balances are all consistent across payroll and management-facing systems.
Spreadsheets? To hell with ‘em.
“I love manual data entry.” – nobody, ever.
Not only do these automation features eliminate human error, they facilitate seamless communication between HR, employees and supervisors. So no more chasing people down for signatures and rubber stamps.
- Seamless coordination between HR, supervisors and employees
- Easily reference up-to-date PTO transaction logs in employee files
- Automatically adjusts PTO balances in employee files and payroll (no more spreadsheets!)
- Allow employees to run “what if” vacation scenarios for advance travel planning
- Smiles!
#2. Policy and compliance tools
Courts and state legislatures frequently modify regulations surrounding paid time off policies. While you can’t run auto updates amending your policies to comply with your state’s labor laws, there are things you can do to keep it simple from the outset.
Several states have banned “use it or lose it” PTO policies, and labor courts often frown on them even where they’re legal. At the other extreme, unlimited PTO sounds quite progressive, but comes with its own set of problems.
You have a certain amount of freedom within any regulatory framework. Two policies that are generally *okay* from a regulatory standpoint, limit your liability and are perceived as fair are Max/Cap Balance and Max Accrual. Each, in its own way, can limit your liability exposure related to having to pay unused time-off wages when employees terminate.
- The Max/Cap Balance option allows the employer to specify a CAP or a MAXIMUM amount that this person is able to earn, or accrue. Once this amount is earned, the person stops earning or accruing additional time off until their balance falls below the value specified. In other words, the person would need to TAKE time off once they reach that maximum balance amount, in order to continue accruing MORE time off.
- The Max Accrual option allows the employer to specify an ABSOLUTE MAXIMUM amount of hours that an employee is able to earn in a calendar year. Once this amount is earned, the person stops accruing additional time off until Jan 1st of the following year. In other words, even IF the person TAKES time off once they reach that maximum accrual amount, they WILL NOT continue accruing MORE time off UNTIL the following year
Depending on the individual state labor laws this liability can be further strengthened by incorporating these features within a Use it or Lose it policy as well.
To keep up-to-date on PTO-related labor laws and regulations, you can also turn to resources like these:
- “Vacation pay laws by state,” courtesy of Helpside
- Society for Human Resources Management (SHRM)
- US Department of Labor website
- Your state’s Department of Labor website
#3. Culture and communication
A lot of PTO-related problems stem from unclear expectations. For instance: Will taking paid time off compromise my advancement or job security? Hopefully this isn’t part of the culture, but it’s a common perception. Some policies are more prone to misunderstanding and abuse than others, but clear communication is key.
One problem with “use it or lose it” PTO policies is that people don’t like “having” something that is later taken away from them because they didn’t have the opportunity to use it. This can become a contributing factor to disengagement. On the other hand, you want people to use at least a portion of their vacation time. Capping accrual is a nice way to strike a balance here.
In our experience, max cap or max accrual policies (defined above) create the right incentives and are most likely to be perceived as fair.
Whatever the case, make sure you make it clear that these policies are in place to encourage people to take time off; not to encourage a toxic meritocracy.
#4. Documentation
Companies must have a well-defined time-off policy signed by the employee even if that policy is use it or lose it.
The terms of your PTO policy should be signed by the employee and easily accessible within their electronic file. If your lawyers will let you, draft a humane (meaning you don’t need to be a lawyer to interpret it), 1- 2-page PTO policy document. Ideally, they should be able to esign this so it can be automatically uploaded into their file.
An automated “system of record” that incorporates accrual formulas and tracks each employee’s hours worked, time-off requests, etc. will keep things from going off the rails. Together with a PTO policy that’s well-conceived overall, this will limit compensation liability when an employee terminates for any reason.
#5. Keep it simple for employees
Submitting and waiting on PTO requests is stressful, especially when employees have to cross-reference their own documentation.
As with our other features, our PTO workflows have a strong employee satisfaction element. Traditionally, trying to figure out what their PTO balance is going to be three months into the future can easily gobble up 20 or 30 minutes of an employee’s time. Forget that! With BizRun, employees know where they stand on any given day and can even run “what if” scenarios for future travel planning.
A modern HR management system that allows employees to easily view their PTO balance and run forecasts for planning future trips is a clutch. It de-stresses things for all involved.
Balancing objectives like a boss
A sound PTO policy means balancing objectives: compliance, perceived fairness, financial objectives, and limiting the potential for both confusion and abuse. Because labor laws and regulations vary widely across the U.S., and because each business has its own culture and goals, there’s no one-size-fits-all approach. But capping accruals, communicating effectively, documenting, and automated workflows can significantly reduce PTO compensation liability.
Send us your policy and we’ll demo how well it integrates with our system!
HR software that simplifies it all
- Eliminate PTO snafus
- Optimize performance management
- Get rid of spreadsheets
- Streamline employee onboarding
