Paid Time Off: How to Draft and Administer an Effective PTO Policy that Complies with Both California and Federal Law Presented by: Marc L. Jacuzzi Simpson, Garrity, Innes & Jacuzzi, PC Tuesday, May 8, 2012 10:30 a.m. to 12:00 p.m. Pacific www.blr.com or www.hrhero.com For CD and other purchasing information, contact customer service at: 800-274-6774 or E-mail: [email protected] © 2012 BLR ® and HR Hero® —Business & Legal Resources and HR Hero. All rights reserved. These materials may not be reproduced in part or in whole by any process without written permission. California Employer Resources is an approved MCLE Multiple Activity Provider, and this program has been approved for 1.5 hours of MCLE credit by the State Bar of California. For more information, please contact our customer service department at (800) 695-7178 This program has been approved for 1.5 credit hours toward PHR and SPHR recertification through the Human Resource Certification Institute (HRCI). This program is also a California-specific continuing education activity for PHR-CA and SPHR-CA recertification. The Program ID number will be emailed to the registered 1 participant at the completion of the conference. For more information about certification or recertification, please visit the HRCI website at www.hrci.org. What is PTO? z Combining all (or some) categories of paid leave into one bank, particularly paid sick leave and paid vacation. Paid holidays are not included if operations close on the holidays. Should Your Organization Adopt a PTO Policy? z z z Problems with unscheduled one-day absences? Desire to establish enticing benefits plans. CA - payout upon termination. Why do employees use sick leave when they are not ill? Employees understand well the effect of a contingent benefit vs. a non-contingent benefit. What is a contingent benefit? z z A contingent benefit is one that the employee does not receive unless a qualifying event occurs. For example: z z z z Bereavement leave is contingent upon the death of a specified close family member. Jury duty leave is contingent upon being called upon and selected to serve on a jury. Holidays – you have to be employed as of 12/25 to get the Christmas holiday pay. Sick leave is contingent upon being ill or going to the doctor. What happens to contingent benefits if the contingency never comes to pass? z z z z The benefit never accrues. The benefit is essentially lost to the employee. The employee gets nothing. Contingent benefits can be set up as “use it or lose it” benefits. Employees are smart. z z z They understand that if they don’t use their sick leave, it will go away. They feel that they have been cheated when their paid sick leave is lost. They want to maximize their fun time – they don’t want to use vacation time for personal business (court, car repairs, home repairs, other personal errands) So they “cheat” to take advantage of accrued sick leave z My Mom had “eye trouble” for years before she retired: “If I don’t use up my sick leave it will drop off the books at the end of the year, so ‘I just can’t see going to work today’” So, what are non-contingent benefits? z z Those benefits the right to which accrue by virtue of continued employment without the requirement that any additional event occur. Examples: z z z z Vacation Personal days Floating holidays These cannot be forfeited and must be cashed out at termination. What does this have to do with paid time off policies? z z z z PTO is legally the same as vacation. An employee may use the time for any reason s/he likes, subject to notice and scheduling requirements. In California, PTO, like vacation pay, “vests” as it is earned – that is, PTO vests as it is accrued over time. There are no other contingencies. “Use it or lose it policies” are unlawful. (Suastez v. Plastic Dress-up Co. (1982) 31 Cal. 3d 774. Accrued (vested) vacation/PTO must be cashed out at termination of employment. (Labor Code §227.3) Don’t confuse enjoyment/ scheduling limitations with contingencies z z Vacation/PTO vests as it is earned, as a matter of California law, but you can establish policies for how it is used. For example: z z z Employees may not schedule vacation time off during the first 6 months of employment or during the first year of employment. Employees may not schedule vacation time off during peak business cycles. Employees may not take off more than two consecutive weeks of vacation. PTO v. Vacation + Sick Leave Policies z z z z All the time becomes “vacation” – that is there is no contingency on its use and it cannot be forfeited, you cannot set any part of it up on a “use it or lose it” basis. It might be more expensive if all time is actually used. You might have better control over scheduling. Employees may still try to cheat, because they often see the PTO as all vacation and don’t want to use it for illness. Pros z Typically better scheduling because employees save time for “vacation” purposes and use in longer blocks of time. z Employees like increase vacation entitlements. Drafting considerations:* z Who is eligible? z z z z Full time employees? z How is full time defined? Part time employees? z How is part time defined? Commissioned employees? z Can be excluded – you may want to exclude or determine what rate to use for PTO. Inactive employees? z Generally defined as those employees on unpaid leaves of absence of 2 or more weeks. Will you define this differently? Drafting considerations : z Will there be a waiting time period before accrual begins? z PTO is essentially a matter of contract (with the legal limitations that it vests as it is earned and cannot be forfeited) you can decide when employees begin to earn vacation. z E.g., “Beginning in the 13th month of employment, employees earn .5 days of PTO for each month of employment.” How will PTO accrue? z z Will PTO accrue as time (most common) or as dollars? State a rate that is based on time worked (by the hour, day, week, month). z z z Be clear – state the rate and give examples. Will the accrual rate be pro rated under any circumstances? z z If PTO accrues based on hours worked, does that include overtime hours? Be specific. What circumstances? Part time employment? Consider local ordinances, e.g. SF Paid Sick Leave Is a limitation on accrual desirable? z Caps: Use it or lose it policies are unlawful, accrual caps are lawful. z z z For example: “PTO accrual is capped at 150% of annual PTO accrual rate. If the employee's earned but unused PTO reaches the maximum, the employee will not accrue any additional PTO until the employee uses PTO such that the accrued balance falls below the cap. At that time, the employee will resume accruing PTO. For example, if the employee earns PTO at the rate of 10 days per year, his/her accrual is capped if s/he reaches an accrual balance of 15 days.” Cash out: Annually? Bi-Annually? Other? Mandatory scheduling (“If you won’t schedule your PTO, we’ll do it for you!”) What will be the increments for use? z z z z z z Full days? Half days? 2 hours? Hourly? Minutes? Consider how this may apply differently to exempt and non-exempt employees. z Exempt employees are not paid based on hours worked and should not have use increments of less than half days. Combating Absenteeism z Complete tracking z z Surprisingly, studies show many absences unreported! (Maybe up to 4% of payroll costs!!) Implement electronic or paper system and track all time off. Tracking Absences z z z z Stop “informal” make up time policies. Track duration, reasons, time of notification of absence. Counsel for abuses (Absenteeism patterns – e.g., Mondays and Fridays) Unexcused occurrences policies. (Often more problems then worth.) Rewards Programs z z z Production vs. “perfect attendance.” FML – As long as non-FMLA leaves are treated the same as FML leaves perfect attendance policies do not violate FML. But… ADA workers’ comp, local laws may prohibit counting “protected absences” when determining perfect attendancy. Consider scheduling/enjoyment restrictions. z z z z z z Except in the case of illness, do you need a certain amount of advance notice for scheduling? Whose approval is necessary? When would you need a doctor’s note to curb abuse of unscheduled time off? Are there limitations on the amount of time that can be taken consecutively? Are there certain periods of time which will be blacked out and during which PTO cannot be scheduled? Are there minimum number of days? Statutory Considerations z San Francisco Paid Sick Leave z z z PTO can be used to meet SF PSL requirements. “Kin care” – Labor Code §233 – an employee must be allowed to use up to half of his/her annual sick leave accrual to care for illness of specified close relatives. FMLA/CFRA when you can require employees to use accrued vacation and sick leave differ. FML regs and PTO: z z z FMLA regulations state than an employee may choose to substitute accrued paid leave (e.g., PTO) for unpaid FMLA leave (i.e., have the paid leave run concurrently with the unpaid FMLA leave). (825.207(a)). The FMLA regulations further provide that an employer may require an employee to substitute accrued paid leave for FMLA leave. (825.207(a)). Employee’s ability to substitute accrued paid leave is determined by the terms and conditions of the employer's normal leave policy. (825.207(a)). FML regs and PTO: z z z Whenever paid leave will be substituted for FMLA leave, employer must inform employee that s/he must satisfy any procedural requirements of the paid leave policy (e.g., notice ) only in connection with receiving the pay (i.e., failure to comply with paid leave policy does not affect FMLA rights)(825.207(a)). If employee is receiving private or state disability pay or workers comp pay during FMLA, then the FMLA leave is not “unpaid”—i.e., neither the employee or the employer can require the substitution of PTO. (825.207(d) & (e)). Employer and employee can mutually agree, however, to supplement disability benefits with paid leave (825.207 (d) & (e)). CFRA, PDL and PTO: z z Employer or employee may require use of vacation, other PTO (7297.5(b)(1) & (b)(2)) or sick leave (for employee’s own SHC). Employer or employee may mutually agree to use sick leave for any other reason. (7295.5(b)(3).) No Cal. regulation stating that employee’s ability to use paid leave is determined by terms of leave policy. No Cal. regulation on supplementing disability benefits with other forms of paid leave. Employees can elect to use vacation/PTO during PDL; but employers cannot require it. Employers can require using sick leave. (Gov. Code §12945(a) & 7291.11(b)(2).) CA employers must give employees notice of SDI/PFL benefits at hire & when given notice of qualifying event. SDI and Private Short Term Disability Benefits z z Under SDI there is no legal requirement that you integrate PTO (or sick leave) with SDI. Employees cannot double dip – so the employer will be asked to affirm that the combination of PTO payout plus SDI benefits do not exceed the total gross weekly compensation. For private short term disability programs, be sure to read the policy terms and take those into account when drafting. When can you change accrual rates? z An employer may unilaterally terminate a policy that contains a specified condition, if the condition is one of indefinite duration, and the employer effects the change after a reasonable time, on reasonable notice, and without interfering with the employees' vested benefits. For Example: Consider Asmus vs. Pac Bell z z z California Supreme Court, decided June 1, 2000, 23 Cal. 4th 1. "Once an employer's unilaterally adopted policy--which requires employees to be retained so long as a specified condition does not occur--has become a part of the employment contract, may the employer thereafter unilaterally terminate the policy, even though the specified condition has not occurred?" We conclude the answer to the certified question is yes. An employer may unilaterally terminate a policy that contains a specified condition, if the condition is one of indefinite duration, and the employer effects the change after a reasonable time, on reasonable notice, and without interfering with the employees' vested benefits. What was at issue? The “Management Employee Security Policy” Pac Bell’s MESP z In 1986, Pacific Bell issued the following "Management Employment Security Policy" (MESP): "It will be Pacific Bell's policy to offer all management employees who continue to meet our changing business expectations employment security through reassignment to and retraining for other management positions, even if their present jobs are eliminated. This policy will be maintained so long as there is no change that will materially affect Pacific Bell's business plan achievement." Business conditions changed: z In January 1990, Pacific Bell notified its managers that industry conditions could force it to discontinue its MESP. In a letter to managers, the company's chief executive officer wrote: "[W]e intend to do everything possible to preserve our Management Employment Security policy. However, given the reality of the marketplace, changing demographics of the workforce and the continued need for cost reduction, the prospects for continuing this policy are diminishing--perhaps, even unlikely. We will monitor the situation continuously; if we determine that business conditions no longer allow us to keep this commitment, we will inform you immediately." What came next? z Nearly two years later, in October 1991, Pacific Bell announced it would terminate its MESP on April 1, 1992, so that it could achieve more flexibility in conducting its business and compete more successfully in the marketplace. That same day, Pacific Bell announced it was adopting a new layoff policy (the Management Force Adjustment Program) that replaced the MESP but provided a severance program designed to decrease management through job reassignments and voluntary and involuntary terminations. The lawsuit: z z z Plaintiffs were 60 former Pacific Bell management employees who were affected by the MESP cancellation. California law permits employers to implement policies that may become unilateral implied-in-fact contracts when employees accept them by continuing their employment. The court held: once the promisor determines after a reasonable time that it will terminate or modify the contract, and provides employees with reasonable notice of the change, additional consideration is not required. What role did the contingent nature of the benefit play in the decision? z z z What was the contingency? If the employee’s present job were terminated, then Pac Bell would offer reassignment and retraining. Pac Bell could not have changed the policy after the contingency had come to pass – that is, it could not have unilaterally withdrawn the MESP for any management employee who had already had his/her position eliminated. Vested benefits cannot be forfeited. What to do when PTO is exhausted? z z Exempt employees can only be “docked wages” (i.e., go home with less than a full week’s salary) for full days of absence. For half day absences when the employee’s accrual is zero – take the balance into the negative. For non-exempt employees, consider: z z Time off as unpaid Discipline for excessive absenteeism z z Do not base discipline on legally protected absences. Address this issue, in writing, in the policy. How to Communicate the PTO terms? z z IN WRITING!! Consider the case of Lisa Owen v. Macy’s, Inc., decided 6/29/09 by the California Court of Appeals. The facts: z July 6, 2009 In 2006, Lisa Owen, a former sales associate sued Macy’s, alleging that the store did not pay her all of the accrued, vested vacation pay to which she claimed that she was entitled. (Plaintiff started work at Robinson’s-May, which was acquired by Macy’s.) The R-M employee handbook stated that “all eligible sales associates earn and vest in paid vacation after they have completed six months of continuous employment.” that is, new employees at R-M had to wait six months before they began to earn any vacation. Ms. Owen claimed this delayed vacation accrual policy violated California law. Both the trial court and the court of Appeal disagreed, with judgment for Macy’s affirmed on appeal. Owen v. Macy’s, Inc. (filed June 29, 2009) B207719 (Los Angeles Sup. Ct. No. BC 355629). The principles: z z The Appellate Court, Second Appellate District (L.A.), made clear that the law permits an employer (1) to offer no vacation time whatsoever; (2), adopt a policy specifying the amount of vacation pay that an employee is entitled to be paid as wages; (3) that a company has complete discretion to determine the point at which vacation benefits begin to accrue; (4) and that employers may also warn employees, in advance, that employees will cease to accrue vacation time in excess of an announced limit (a cap on accrual). The Appellate Court stated that none of these provisions violates California Labor § 227.3, in which vacation pay vests as its earned and cannot be taken away subsequently by an employer. Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774. This case highlight the employer’s legal right to determine the timing and extent of vacation benefits when choosing to provide vacation benefits to its employees. It further highlights the critical importance of having a written policy – the semantics may make or break the case if the policy is challenged. Do not rely on people’s recollections or differing explanations of terms. This has been complicated, let’s take a vacation! Disclaimers *This webinar is designed to provide accurate and authoritative information about the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. *This webinar provides general information only and does not constitute legal advice. No attorney-client relationship has been created. If legal advice or other expert assistance is required, the services of a competent professional should be sought. We recommend that you consult with qualified local counsel familiar with your specific situation before taking any action. QUESTIONS Marc L. Jacuzzi, Esq. (650) 650-615-4860 fax (650) 615-4861 [email protected] Speaker Biography Marc Jacuzzi Marc L. Jacuzzi, Esq. is a shareholder at the South San Francisco-based law firm of Simpson, Garrity, Innes & Jacuzzi P.C. Mr. Jacuzzi has broad experience in employment law matters. He has represented numerous employers as defendants in civil rights actions (including claims under the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (ADA), Title VII of the Civil Rights Act, the California Fair Employment and Housing Act (FEHA), and other state discrimination statutes), trade secret misappropriation claims, wage claims, wrongful termination claims; unfair business practices claims (Section 17200), noncompetition claims (Section 16600), contract disputes and various tort claims filed with the Equal Employment Opportunity Commission (EEOC), the Division of Labor Standards Enforcement (DLSE), various other state agencies and in various State and Federal Courts. Mr. Jacuzzi's practice also involves employment law counseling. He regularly advises clients regarding all aspects of the employer/employee relationship including hiring and termination issues, wage and hour requirements, employee classification issues, civil rights/discrimination issues, commission plans, employment contracts, employee handbooks and policies, confidential information agreements, reductions in force, leaves of absence issues, employment audits, M&A employment issues, violence in the workplace issues and international employment issues. Mr. Jacuzzi has also conducted numerous in-house training programs on a number of employment law topics.
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