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Giving Employees the Right Vacation Time

Are you following Colorado law when it comes to paying for vacation time when an employee leaves your company? What if you lump together vacation time, sick time and other time off into “Paid Time Off” (PTO)? What follows is a discussion of whether your current employee policies regarding PTO are following Colorado law, especially with regard to the limitation on the amount of time an employee can accrue PTO.

Colorado law states that employers do not have to offer their employees paid time off for vacations or sick leave. If you do offer vacation time or PTO and employee leaves, you are expected to pay the employee for any time that has “accrued”. So what happens if you have great employees who never take vacation? You are allowed to place restrictions on the amount of vacation pay an employee receives. For example, an employee earns 10 days a year of PTO. But the employee only uses 5 days and the other 5 days get forwarded to the next year. You can create a policy that an employee cannot accumulate more than 20 days of PTO. The Courts look at vacation time as a contract issue between a company and its employees. An employee handbook acts as a contract for purposes of this discussion. The Colorado Department of Labor provides: “An employer may establish a vacation policy in writing or by custom and practice. Employees must be made aware of the employer’s policy. Employers and employees must follow established policy unless and until that policy is changed.”

So, as an employer, you can provide in your employee handbook that an employee can accrue no more than 3 years of PTO (or a certain number of days). You have to make sure your employees are aware of the policies and usually employees sign acknowledgements that they have received copies of the handbook.

Here’s another example. Say an employee earns PTO each week. In other words, depending on seniority (some earn more PTO than others), an employee receives at least 3 hours each pay period for PTO. Putting a restriction on the amount of PTO time that can be accumulated is perfectly within the right of your company. A court case from 1998 that has not been overturned or received negative treatment has discussed this issue (City of Lamar v. Koehn, 968 P.2d 164 (Colo.App. 1998)). The case determined whether vacation time was to be included in the definition of “wages” for purposes of workers compensation. The Court state the following:

Both vacation and sick leave were subject to forfeiture if claimant accrued a specified maximum number of leave days. However, claimant did not forfeit any vacation leave under this policy and was paid his full entitlement. [The reason he did not forfeit any vacation was because he had not yet reached the maximum number of leave days.]

In this case, the Court discussed a prior decision where vacation time was looked at as a type of leave that had a reasonable, present-day, cash equivalent value, and that claimant had a reasonable expectation of receiving the benefits under appropriate reasonable circumstances. However, this Court found that because the employer policy had vacation time as capped and subject to forfeiture, it was not proper to be included in the definition of “wages” for determining workers compensation benefits.

Colorado wage law states that vacation pay (which would include PTO for purposes of this discussion), earned in accordance with the terms of any agreement, is classified as wages or compensation. If an employer provides paid vacation (or PTO) for an employee, the employer must pay, upon termination of employment, all vacation pay earned and determinable in accordance with the terms of any agreement between the employer and the employee. So take a look at your vacation and PTO policies. Are they similar to the following?

PTO Yearly Carry Over

Employees may carry up to two full years of accrued PTO leave into the following calendar year. This will allow employees the benefit to carrying up to three (3) years accrued PTO in their PTO banks. Any overage of PTO at the end of the year will be forfeited.

Payment for PTO Overages

If an employee accumulates more than 3 years of PTO and a calendar year is ending within 30 days, PTO for the final two pay periods of the calendar year shall be adjusted such that an employee can only earn 25% of the PTO that has accumulated over the 3-year cap for PTO for that employee. There will be no further accruals of PTO following the end of the calendar year until employee uses some of the accrued PTO. Upon retirement, termination or death during the year, the employee or his or her heirs or estate shall be paid for any accrued, but unused PTO.

The carry-over provisions in the second paragraph above may be a little complicated but they are perfectly within an employer’s rights. The company can cap vacation and PTO time to three years. This prevents a huge buildup of a company liability that will be incurred when an employee leaves the company. If an employee is not taking their earned PTO during the year, then management needs to encourage or force time off for those employees.

This is just one example of how employers can create vacation or paid time off benefits for their employees but everyone should be aware of the responsibilities employers have for properly structuring their vacation policies. Please give us a call if you would like us to review your employee manuals or handbooks about this issue.