February 16, 2017

Should I Give My Employees Unearned Paid Time-Off?

If you’re thinking about letting your employees borrow paid time-off, put a real plan in place.

Americans take less vacation time than our international counterparts. 41% of Americans leave vacation hours on the table, resulting in what Project Time-Off believes is 658 million vacation days wasted. And while the usual epidemic discussed is on how we can work less and rest more, we can have the opposite problem, too.

burned through paid time-off now needing unearned time off negative PTO balance

Employees can ask for unearned paid time-off for a number of reasons, living in one of two major areas of need. Either your employee has already used their allocated time for the year or they are newer to your team and have not yet earned it.

If you’re asking yourself, “Should I Give New Hires Unearned Paid Time-Off?”, there’s a few ways to answer the question.

It’s a loan

Just because you’re trading company time, doesn’t mean it’s not cash on your employee’s side. Make no mistake about it, offering your employees unearned paid time-off isn’t just a benefit, it’s also a loan.

If your company intends on allowing folks to take paid time-off that was not earned yet and requires them to pay it back, they’ll have to do that as they accrue paid time-off. The only difference between a regular loan and a negative paid time-off balance is the charge of interest or fees for administrative costs, which, according to the United States Department of Labor’s Wage and Hour Division is illegal.

Under normal circumstances, your employee will accrue back their negative time, effectively paying back the company. But what happens if the employee leaves your company? This is where you’ll need to weigh the potential risks and benefits of offering your folks unearned paid time-off.

Exempt versus non-exempt

In the hours following a resignation or termination, you’ll have to piece together information to determine whether or not (and how) your company can recover its costs in fronting the unearned paid time-off to your departing employee.

Recouping unearned paid time-off is a straightforward process with non-exempt employees. Under the Fair Labor Standards Act (FLSA), the federal government allows employers to reduce a non-exempt employee’s wages as long as the employee receives what would be the minimum wage after all deductions are made.

With your exempt folks, only specific deductions are allowed. To prevent FLSA violations, any deductions from an exempt former employee’s last paycheck must be for full day absences.

This means that if your exempt former employee took an hour here and a half-day there, these times won’t add up and don’t qualify to be recouped in a separation with your employee. You’ll also need to keep detailed paperwork on your staffs’ use of unearned paid time-off to prove that you’re asking to be reimbursed for full days only.

Have a written unearned paid time-off policy

Best practices will always include having a written policy, and having one for unearned paid time-off is no different.

Be sure your unearned paid time-off policy is clear on how an employee is expected to repay their negative time-off balance back to your company in the event they leave your business.

Bake the policy into your company handbook so when you hire new folks they’ll be notified that they are expected to reimburse the company for any paid time-off that was used but not accrued if they leave your company. Have them review and accept the handbook prior to their first day in Kin, and your legal requirements to notify staff of intent to repay the company is complete.

Include guidelines on how your company goes about granting permission to borrow paid time-off. This puts the qualifications into your policy and keeps decisions at top-level, preventing other managers misusing the policy and preventing unfair treatment.

While a policy doesn’t need to be for all of your staff, it does need to be consistently applied to a class of employees. State the number of days that can be borrowed and keep it low. One to three days at most. The more days you offer to provide unearned, the higher risk your company assumes with each employee.

Create a paper trail for each unearned paid time-off request

When an employee requests to use unearned paid time-off, file the request seriously and with a digital paper trail to track in case the situation turns for the worst.

Include a statement on why the company feels that advancing the time-off is permissible and within the policy. And most importantly, include an agreement from your employee that they will reimburse the company for any negative time-off balances if they were to leave the company for any reason before they were able to earn it back.

If you included the general policy in your company handbook, refer back to the fact that your employee previously acknowledged it, furthering the paper trail.

While federal law is pretty clear, the state you do business in may have different laws. Before finalizing any decisions, talk with your employment lawyers or get in touch with your state’s department of labor.

Maybe, maybe not

Whether or not an unearned paid time-off policy is right for your company is up to you. Be sure to understand if an unearned paid time-off policy would aid in recruitment and retention of new folks, if the policy is compatible with your needs, and what message your business is looking to convey to your employees. And most importantly, discover if fronting paid time-off for your folks will interfere with your business.

A consensus across HR folks says to not even think about an unearned PTO benefit. There’s a lot of reasons why HR professionals and legal councilors agree with not providing unearned paid time-off to your staff. The risk is high.

An unearned paid time-off policy isn’t the only way to provide more value to employees. You could include smaller, more reasonable benefits at a fraction of the cost and with much less risk on the table.

Other ways to give extra paid time-off benefits without as much risk

While creating an unearned paid time-off policy demonstrates a level of trust in your employees, you may run a business in a high turnover industry or aren’t comfortable with loaning time.

In our feature on providing folks paid-time off, we discussed at length why PTO is an important piece to your benefit strategy. Some of the ideas mentioned there could help prevent your staff from requesting unearned paid time-off, like:

  • Allowing staff to telecommute on a regular basis
  • Letting folks leave early for personal and family obligations
  • Creating a flexible schedule your employees can opt-in to (e.g., four ten-hour days)

Another way to provide a type of unearned paid-time off is to allow employees to “purchase” additional time off. Add this option at the enrollment period, so that the employee can begin to “pay” for their additional week. After their paid-time off is used up, allow the employee to “purchase” a week by giving them a week of unpaid time-off, including the cost to the employee as a small deduction each pay cycle over a longer period of time (up to 26 weeks is a good idea).

Donating paid time-off is slowly becoming a viable policy in many small businesses. This type of policy would allow employees to donate their earned paid time-off to other folks in the company who have either used up their time or have not yet earned it.

While there are a lot of variables for the company’s cost, like the difference in compensation between the employee donating time and the employee receiving time, this is a great way to offer an additional benefit to your paid time-off policy. It also promotes camaraderie among your staff.

Consider including the conversation about time-off needed in the first year of employment with new folks during the interview process. Knowing about their needs early helps to eliminate surprises that could be risky for your company to take on. This also serves as a great way to honor their requests and put your company ahead of others they are interviewing with.

Creating an unearned paid time-off policy could be a great addition to your benefits line-up, but be sure to explore the possibilities of unearned paid time-off and whether or not your business could alleviate the need before it exists.

Before coming to any decisions, talk with your employment lawyers or get in touch with your state’s department of labor for more information.

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