How Does Paid Time off Work - Do Companies Have to Pay out PTO

Paid time off (PTO) can be one of the great perks of employment. Who doesn’t want to be paid to take vacation? Though, for employers, while on first glance not having employees take PTO may seem like a great thing because it means that more workers are available to be productive, it’s not. Employers should not ignore PTO usage, as usage rates can have implications on the health and happiness of employees, as well as create liability issues for the business.

First, not taking PTO can take a physical and emotional toll on workers, and potentially make them unhappy and unproductive. In contrast, well-rested and recharged employees may view their workplace more positively. High employee morale has a positive impact on the workplace, company culture, and the bottom line.

Cost-wise, unused vacation payouts are viewed as supplemental compensation. This means for employees that if they use their accrued PTO, it is only taxed at their normal payroll rate. If paid out upon termination or in a lump sum at year-end, an employee will take home less cash.

How Does PTO Work

To clarify, no states mandate that PTO must be cashed out. Some states do allow employers to zero out the balances at the end of the year. Though, the cash value of accrued PTO can be a detriment to employers in states that do not allow employers to zero out balances at the end of the year. For example, California does not allow for a “use it or lose it” policy, and in New York it is a matter of the specific client’s policy. So, if an employee that makes $75,000 per year doesn’t take three days of PTO, that comes out to $865.68 in liability for the employer.

In addition, employers who don’t respect workers right to take PTO by contacting employees on their days off can be penalized. Exempt employees need to be paid their full salary for any work they provide in a work week – this may be a couple hours or over 40 hours, regardless, they are paid the same. Non-exempt employees need to be paid for hours worked. If an employer asks an employee to review a document, take phone calls, etc. during PTO and they do not pay them for this work, this may result in wage claims for unpaid wages for the days the employee worked when it should have been PTO.

Clearly, taking PTO helps employees as well as employers. As a business owner, it’s your responsibility to the health and happiness of your employees as well as to your business that everyone takes their PTO.