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5 Costs to Analyze when converting to a PTO Plan

Many companies that currently provide traditional sick leave and vacation benefits are considering transitioning to a Paid Time Off (PTO) plan that provides paid leave in one bank.  Before making changes to your policy, you need to analyze the potential costs of transitioning to a PTO plan.

  1. How many sick days (total company…100 employees x 5 days, for example = 500 days) were available last year?  How many sick days were used? (Actual number…sick days used by all employees over the year.)  Determine the value of sick leave granted and actual cost of sick leave used.
  2. How many vacation days were available last year?  How many vacation days were actually used?  Determine the value of vacation granted and the actual cost of vacation used.
  3. Did any unused time (sick or vacation) carry over into the new year or did employees lose unused benefit time?  What is the value of any benefit time that may have carried over?
  4. Determine how many PTO days you are granting to each person and calculate the total value.  Typically, if you grant 10 days vacation after one year + 5 days of sick leave that would equate to 15 total days on the old plan.  Your new PTO plan does NOT have to be that rich.  For example, you could provide 13 days in the PTO bank.  Yes, the employees are losing 2 days; however, if they never used all of their sick leave during the year anyway, they’ll now have extra days they can use for a long weekend, a personal day off to meet with a realtor, etc.
  5. What will be your policy regarding payout of PTO at termination?  Most traditional sick leave policies do not pay for unused sick leave at termination.  However, most PTO policies do pay out the full balance at termination.  Depending on the laws of your particular state, this doesn’t mean you can’t have a policy that says you only pay out at 75% or 50% or some other number, but you do need to factor that cost of payout at termination into the equation.

This analysis can be time consuming because to get an accurate picture, you’ll have to calculate these numbers based on individual rates of pay and are going to have to “guesstimate” on anticipated usage of the PTO.

Calculating a value for exempts isn’t as critical because you pay them a guaranteed salary regardless of whether they are absent for an illness or are on vacation. That remains a constant. What you may experience, though, is more absences from exempt employees. Currently, you probably don’t track absences when an exempt employee is out sick. You may decide you need to change that when you transition to a PTO plan.  Also, if your exempt employees rarely take sick days but always use their vacation time, you can expect them to use all of the PTO days. That may not be a “real” cost but it is a productivity cost.

One of the largest obstacles is going to be the obligation of your controller to add unused time to your balance sheet as a liability if you allow employees to carry over PTO from one year to the next. If you aren’t currently obligated to do this with your current vacation/sick policies, this could have a significant impact on the balance sheet.

Our sister association wrote an informative white paper on the topic (note that laws specific to their state are documented in this article): http://www.associatedemployers.org/wp-content/uploads/2014/12/PTO-White-Paper-for-Chamber-Submission.pdf

Here are some additional articles for consideration before converting from a traditional plan:

Conducting a thorough cost/benefit analysis and evaluating the pros and cons of moving to a PTO plan will smooth the way for any changes you decide to make.

 

In need of more information regarding PTO plans? Contact EAF today!

 

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EAF provides information about current developments in labor and employment law. This information is intended for educational purposes only and should not be considered legal advice. Questions requiring legal advice should be addressed to the attorney of your choice. EAF members may be able to obtain a legal interpretation through our FREE Legal Hotline.