In recent years, I have noticed a movement away from the traditional categories of “vacation” and “sick” leave and holidays to hybrids like PTO, holiday hours, and personal days. While those new categories provide greater flexibility to employees and apparent ease as to record-keeping, they also complicate the question for employers about whether those accrued leave categories have to be paid out when an employee leaves the job. Some states make it easy, like Minnesota. Back in 2007, the Minnesota Supreme Court held in Lee v. Fresenius Medical Care, Inc., that, under Minnesota law, whether benefits like accrued vacation or PTO are due is “wholly contractual.”
But, what if your employee is in a state like Illinois or California that has a wage payment law requiring employers to pay “earned vacation and earned holidays” or “vested vacation time?” Can you simply relabel “vacation” as PTO or personal days and avoid the effect of these laws? What if you keep “vacation,” but also create a separate “personal hours” leave bank that employees forfeit on termination. Does that work? The answer to both questions could be no, depending on your situation and your state’s laws. When it comes to paying accrued leave, the label you attach to the leave often matters far less than how your employees can use it.
For instance, under Illinois’ Wage Payment and Collection Act (WPCA) regulations, employers may maintain a “use it or lose it” policy for vacation or similar leaves as long as they clearly communicate their policy to employees and give them a “reasonable opportunity to take the vacation.” 56 Ill. Admin. Code 300.520(e). However, at termination, the rules are a bit different. You would create a substantial risk of a wage claim by requiring terminating employees to forfeit vacation they have earned. Under the Illinois WPCA, whenever an employee resigns or is terminated without having taken all earned vacation time, an employer must pay the monetary equivalent of all of that earned, but unused, time to him or her “as part of his or her final compensation at his or her final rate of pay.”
So what about calling “vacation” pay “personal days” instead? Does that get you off the hook? Illinois regulations strongly suggest that it would treat a “personal hours” leave bank as “earned” (and therefore compensable at termination) for purposes of the Act, making a policy of forfeiture on termination is unlawful. The Department has issued a regulation explaining the classification of “paid time off” where employers maintain a single bank of hours that can be used for any purpose, rather than separate vacation and sick leave banks. In this situation, the Department states that “[b]ecause employees have an absolute right to take this time off (unlike traditional sick leave in which using sick leave is contingent upon illness), the Department will treat ‘paid time off’ as earned vacation days.” 56 Ill. Admin. Code 300.520(f)(3). In other words, the label you apply will likely not be determinative. Instead, what appears to matter is whether you give employees the “absolute right” to take the leave, as opposed to restricting it (e.g., “you have to be sick to take sick leave”). If so, then Illinois may consider the PTO “earned” for purposes of the Act, no matter the label.
Even if your state does not share similarly strict statutes and regulations with Illinois and California, most states that place restrictions on “use it or lose it” policies require employers to give employees a reasonable opportunity to take the leave in order to comply with those statutes. Depending on your situation, if you do not provide such an opportunity to employees, you might find your business running afoul of even more pedestrian wage payment laws.