What’s the better policy: vacation or paid time off?

John Hildebrand

What’s the better policy when it comes to offering employees vacation time, sick time and paid time off? While the answer depends on the needs and goals of a company, the one certainty is good policy is good business.

When I meet with business owners and managers to discuss vacation policies, we frequently discover their policies are out of compliance. So perhaps the best place to start a discussion about vacations, sick time and paid time off is to consider what the law states.

In Colorado, employers aren’t required to offer vacation time to their employees. But once vacation is accrued or awarded, it’s considered an “earned benefit” that, just like wages, can’t be withdrawn. If an employee is fired or quit and has vacation “in the bank,” employers are required to pay it just like any other wages. Moreover, the old “use it or lose it” vacation policy is illegal in Colorado. You can’t take away earnings once they’re earned.

Vacation is, in essence “banked earnings.” So if you check your records and see employees with weeks worth of vacation on the books they’re not taking, there’s a huge liability sitting out there.

One solution is to create a policy that puts a ceiling on accrued vacation. Say you choose 80 hours for your maximum. When an employee reaches 80 hours, their “bucket” is full and they will cease to accrue vacation until they use some. They will begin to accrue vacation again after they have made some room in their “accrual bucket” by using some of the vacation time.  This sort of policy reduces the employer’s liabilities and encourages employees to use their vacation. If you institute a policy like this, you must pay out the vacation overage — anything in excess of the new 80-hour ceiling.

One last thought on vacation accrual. I really don’t recommend that you give “lump sum” vacations — like 40 hours — starting on Jan. 1. If you do, the savvy employee who plans to leave will wait until Jan. 2 to quit. And now you owe an additional week of wages to this person.

Sick time is not considered an “earned benefit” in Colorado. Consequently, employers aren’t required to offer it to employees or pay it out at separation. In many cases, accrued sick time “expires” each year and the employee gets a new batch at the beginning of the year.  For this reason, many employees try to use up their sick time close to year end, which creates its own issues. 

Paid time off — or PTO — is a combination of vacation and sick time. If you terminate an employee and he or she has 40 hours of PTO accrued, you must pay it all on separation.

So what policy is best?

There are a lot of different ways to work this out. Many think PTO is the way to go. PTO is by far the easiest to manage. There is only one type of accrual to manage, and you don’t need to worry about how employees use the time. It’s all PTO. And if they have it in their bank, they can use it. PTO eliminates one of the hassles of sick time accrual — employees taking days off using sick time when you know they’re not sick. While it feels like cheating to the employer, the employee frequently sees it as something they “own” and have every right to use. Sick time can create conflict and distrust. With PTO, that’s not an issue. 

Statistically, employers find that employees who get PTO save it for actual vacations and come to work when they’re a little sick. Employees tend to return refreshed and ready to work after their vacations.

I think that when employees “sneak” or “steal” a day off by using a sick day, they feel guilty about it and don’t come back rested.

Here at Autopaychecks, we’ve worked out a solution that uses a little of both policies. It works for us and offers something to consider. 

We separate vacation and sick time. We want our employees to take their earned vacation and only use sick  time when it’s necessary for real sickness. So we pay out sick time on the last check of the year. This lets the employees know they won’t lose it and they don’t “cheat” and try to use it up prior to year end. We operate a small shop and really do need all hands on deck — especially at year end.  The other advantage for us is that if an employee leaves for any reason, we pay out only accrued vacation time. If an employee walks out or is fired for cause, I don’t want to pay them more than I really owe them. I think our policy creates a win-win all the way around.

When you craft your policy for vacation, sick and PTO, give some thought to what you’re trying to accomplish in the mind of your employees. Vacation is a benefit that helps you to employ better people. It helps your folks to tale a break and then return to work in better shape and ready to work. You also need to consider the implications for your business and the liabilities you incur with accruals on the books. Employees who feel valued produce more, which helps you succeed. A good policy is good for your company.

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