Summer is when employees start submitting time off requests, and it is also when we see a lot of employers realize their leave policies are not structured the way they assumed.
First and foremost, it may come as a surprise to many but employers in California are not required to offer vacation. All applicable employers must offer the relevant paid sick leave and other time off as required by law, but that’s it. You may choose to offer additional time off to attract and retain the best talent, create a certain culture, ensure your team has time to refresh and come back to work ready to go, but it’s a choice.
If a company does choose to offer additional paid time off, the most common source of confusion on this topic is the difference between paid time off (PTO), vacation, and sick leave. In California, how you label and structure your leave policy has real legal consequences, including what you owe an employee on their last day. And if you’ve been at one of our seminars, you know we have a lot of opinions about this!
There are two basic approaches: (1) You can offer a combined PTO policy; or (2) you can maintain separate vacation and sick leave policies. Each has tradeoffs, and the right choice depends on your business, financial situation, leadership philosophies, industry and more.
Friendly Reminder: If you have a PTO policy, never say you have a vacation policy. If you have a vacation policy and a sick leave policy, never use the term PTO or it may change the nature of what the company offers. These are terms of art that have legal significance so move forward with specificity and intent!
Option One: PTO
PTO is a term of art in California employment law. A combined PTO policy gives employees one bucket of time off they can use for any reason including vacation, illness, or anything else. It is often simpler to administer and employees may prefer the flexibility.
The tradeoff is at termination. California treats PTO the same as vacation: it is earned wages. Whatever balance an employee has accrued must be paid out in their final paycheck. That applies whether the employee was planning to use it for a beach trip or a sick day. You also cannot have a use-it-or-lose-it policy, but you can set an accrual cap. California generally recognizes a cap of 1.5 times the annual accrual rate as reasonable. Once an employee hits the cap, accrual stops until they use some time down. You cannot take away what they have already earned, but you can set the ceiling.
Option Two: Separate Vacation and Sick Leave
Vacation is optional in California. No law requires you to offer it, but if you do, it is treated as earned wages, and accrued balances must be paid out at termination.
Sick leave is not optional. California law requires it. The significant difference from vacation is that accrued sick leave does not need to be paid out when an employee leaves. Keeping sick leave as a separate policy, distinct from vacation, preserves that distinction. When an employee departs, their sick balance stays with the job.
This approach takes more administration. You are tracking two balances instead of one, and the policies need to be genuinely separate, not just labeled differently while operating as a single pool. But for employers who want to limit what they owe at termination, the separation is worth it.
A Word on Local Ordinances
If your employees work in San Francisco or certain other California cities, local sick leave ordinances may require more than state law does, and the requirements can vary based on your size as an employer. A policy that meets the state minimum may not meet the local one. Whether you are running a combined PTO policy or keeping vacation and sick separate, that policy needs to cover at least the minimum required by the ordinance that applies to your workplace. Pay attention to which jurisdiction governs your employees and make sure your policy reflects it.
Our Advice
If you are not sure which approach you have, or whether your current policy is structured correctly for what you intended, summer is a reasonable time to find out. The consequences for getting it wrong tend to show up at termination, when the timeline is compressed and the stakes are highest.
Reach out if you want us to take a look at where you stand.
