PTO plan design must recognize mandatory sick-day provisions

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Paid time off banks give employees flexibility to take time off when they need it and can be less complicated for employers to administer than more traditional vacation, sick and personal leave programs. However, PTO plan designs must also recognize and accommodate mandatory sick leave provisions enacted by an increasing number of states and municipalities.

PTO plans typically offer employees an aggregate number of days off in lieu of separate allocations for vacation, sick days, personal days and even holidays in some cases. “It is less common for fixed holidays to be included in PTO because from an operations standpoint it’s often just easier to close the plant on a holiday like Thanksgiving or Christmas,” says Rich Fuerstenberg, Mercer’s national practice leader for benefits.

A new report from WorldatWork reveals the percentage of companies currently using PTO programs is 43% and that number has remained relatively flat since 2010. However, 79% of study respondents in the healthcare and social assistance sector have embraced PTO.

That’s because hospitals are where PTO banks started, says Lenny Sanicola, senior practice leader at WorldatWork. In fact, high PTO participation by medical facilities has been the rule since the study’s inception in 2002. “PTO plans have really reduced absenteeism and helped with scheduling in hospitals because staff required to cover shifts 24/7 can book the time off they need instead of taking personal sick leave on short notice to attend their child’s school play,” he says.

Such was the case at South Shore Hospital in South Weymouth Massachusetts, one example of a healthcare facility that shifted to a PTO program several years ago. South Shore’s former VP of human resources Bob Wheeler noted in a 2014 presentation that the hospital’s productivity was being diminished since employees used sick leave as expanded discretionary time on an unscheduled basis, creating an undesirable impact on staffing, budgeting and care.

In addition, because the company’s short-term disability plan was voluntary, some sick or disabled workers without banked sick time or STD coverage found themselves minus a paycheck for up to 26 weeks until the hospital-funded long-term disability coverage kicked in. To address these issues, South Shore adopted a new PTO program plus a more comprehensive hospital-paid STD plan covering all eligible employees for 60% of pay after a seven-day elimination period.

How much PTO is enough?

According to the 2016 WorldatWork study, the average amount of PTO allocated to employees annually ranges from 16 days (less than one year of service) to 26 days (16-19 years of service). On average, employees with nine or 10 years of employment are entitled to 23 days a year off.

At South Shore, under the traditional plan, nonexempt employees with up to nine years of experience had a generous 38 days of vacation (15), sick days (12), holidays (nine) and floating holidays (two). The new PTO program reduced total time available yearly to 23 days (less than a year of service); 29 days (one to four years of service); and 34 days (five to 10 years of services). Exempt employees saw comparable reductions.

While the reduction in total available time off when companies shift to PTO may appear to be a significant take away, typically a lot of thought goes into how many PTO days employees at different service levels are allocated, says Jackie Reinberg, national practice leader, disability management at Willis Towers Watson.

“Actual vacation days are not usually touched unless they greatly exceed the industry benchmark,” she says. “But if a company has 12 days of sick leave and the average number of sick days taken are five, it doesn’t make sense to retain the full number.”

She also suggests that PTO plans should be integrated with STD waiting periods. So with South Shore employees eligible for STD for 26 weeks (after seven days), 12 days annually of sick leave were no longer necessary.

“The way I would sell a reduction of total available vacation, sick days and personal days when a company transitions to a PTO plan is to communicate that employees who are not sick will have five extra days they can manage as they wish and use for an extended vacation,” Sanicola says.

Managing costs

Another key issue employers must address when designing a PTO program is how many PTO days can be carried over from year to year and the number of days available to cash out if an employee is terminated or voluntarily leaves the company.

In a recent Work Span article, Debbi Davidson, HR partner at Willis Towers Watson, notes that carryover of PTO time can be expensive to organizations with costs compounding as years pass and salaries increase.

“In addition, unused vacation or PTO time that is carried over from period to period, related to work already performed by an employee — and paid even if an employee leaves the company and can be reasonably estimated — must be accrued as an accounting liability, according to the FASB Standards No. 43,” Davidson writes. “When compounded year-over-year, this liability can amount to millions of dollars.”

Fuerstenberg says Mercer data reveals that employers are all over the map when it comes to how much PTO employer can carry forward, but almost two-thirds of employers recently surveyed limit the number of days. “By far the most common provisions are a carryover for a limited number of days. But looking at both ends of the spectrum, about 20% of our PTO plans allow no carryover and 3% allow unlimited carryover,” he says.

This lack of consistency is reflected in 2016 WorldatWork data which shows that 8% of companies have no maximum number of hours an employee can accumulate in his/her PTO bank at any given time; 14% set maximums depending on tenure; 15% allow 1x the annual allocation; and 16% permit cumulative accruals of 200-299 hours.

Statutory constraints, other risks

One of the most positive features of PTO plans from an employer and employee perspective is that neither group has to track and report how PTO days are used.

In fact, the simplicity of offering PTO banks makes them feasible for even very small employers, says Andy Roe, general manager for SurePayroll, which provides online payroll services for over 10,000 very small clients (fewer than 10 employees).

“Small businesses tell us PTO programs are easy to administer and because it is the one benefit that is not heavily regulated, they feel they have some control and sense of empowerment when they decide on a plan design.”

“Small businesses tell us PTO programs are easy to administer and because it is the one benefit that is not heavily regulated, they feel they have some control and sense of empowerment when they decide on a plan design,” he says.

However, Roe cautions that with certain states and municipalities now requiring mandatory sick leave and vesting accrued PTO, plan design is growing more complex.

“To meet the statutory sick leave requirements mandated by certain states and municipalities, the most prevalent requirement is that employees have to accrue one hour of sick leave for every 30 hours worked,” says Willis Towers Watson’s Reinberg. “But for example, in Philadelphia it is one hour for every 40 hours worked.”

She believes that one reason the 2016 WorldatWork Survey revealed a big uptick (from 45% to 69% over the last two years in PTO plans at very large companies with 10,000 to 19,999 employees) is because large companies have a broad geographic footprint and a properly drafted PTO plan can satisfy the plethora of new state and municipal sick pay programs.

In addition, in states like California, paid time vests, which definitely influences conversations about whether or not to go with a PTO plan. “The more PTO you allow, the more it becomes a vested benefit which can definitely increase the cost of the plan,” Fuerstenberg says.

And while in theory, tracking how PTO days are taken is unnecessary, in practice, employers may have required reporting requirements to comply with provisions of the Family and Medical Leave Act. “If an employee uses PTO to take a vacation, it doesn’t matter. But if she uses PTO because she’s out with the flu for a week, she is entitled to FMLA job protection,” says Fuerstenberg.

Furthermore, not tracking when employees are out sick can mean that employees are never informed about resources in the employer’s health plan that can help reduce their recovery time. “There are some PTO programs where the manager may not even be aware of the employee’s condition and when he runs out of PTO, the company has an unexpected STD claim on their hands,” Fuerstenberg says.

PTO or no PTO?

So what factors should employers keep in mind if they are weighing the pros and cons of shelving their more traditional program for a PTO bank?

Reinberg says employers should seriously consider the following questions:

· What kind of culture do you have? What is your current program like and what is the compelling business case for change?
· Are you competitive? Are you in sync with your business rivals and your clients?
· Are your demographics changing? Millennials put a high value on discretionary time off.

“One of the things that I think is still lacking in the transition to PTO is really good decision-support tools for employees so they understand the implications if they burn through all their PTO by taking a three-week trip to Australia in January,” Fuerstenberg says, “Or if they hoard their PTO all year and then find out they can’t roll it over.”

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