Employers May Cap PTO Accrual If Reasonable Time Frame Given

Our company provides a paid time off (PTO) policy to meet the paid sick leave requirement. The company plans to cap the PTO accrual at 48 hours, pursuant to the paid sick leave cap requirements. Is this cap OK?

In most cases, employers will be unable to use the sick leave cap for PTO. A valid cap on vacation/PTO accruals is different than a sick leave cap and depends on the total amount of vacation/PTO time an employee is allowed to accrue or earn in a year.

Once you establish a PTO plan that provides time off for any purpose, including vacation and sick leave, the plan is treated the same as vested vacation pursuant to Labor Code 227.3.

Capping Vacation, PTO

Vacation/PTO vests as it is earned, and a “use-it-or-lose-it” policy, in which employees lose earned vacation that is not taken by a specific time, is prohibited (except for a limited opt-out provision applying to collective bargaining agreements and vacation plans subject to the federal Employee Retirement Income Security Act).

However, a cap limiting the amount of vacation/PTO that accrues may be established, but the rules regarding this type of cap are different than the cap allowed by the mandated paid sick leave law.

To be in compliance, an employer must merge the two laws and make sure its policy meets the stricter requirements found in both regulations. Establishing a cap on earnings is optional for either sick leave or vacation/PTO.

State Guidelines

If an employer chooses to place a cap on the PTO earnings, follow the Division of Labor Standards Enforcement (DLSE) guidelines. The DLSE Enforcement Manual at Section states:

“DLSE has repeatedly found that vacation policies which provide that all vacation must be taken in the year it is earned (or in a very limited period following the accrual period) are unfair and will not be enforced by the Division. (See the detailed discussions of these issues at O.L. [Opinion Letter] 1991.01.07 and 1993.08.18).”

‘Reasonable Cap’ Criteria

Any policy instituting a cap on accrued vacation/PTO must provide a reasonable time in which to use already-earned vacation. In the interest of meeting the “reasonable cap” criteria, employers often cap accrual at 1.5 or 2 times the annual earning rate.

For example, if an employee earns 40 hours annually, the policy could establish a cap at 60 or 80 hours.

As you can see, this requirement would not allow capping the vacation/ PTO earnings at the amount accrued in one year as is allowed in the sick leave law.

Before instituting a cap, review the DLSE opinion letters and visit HRCalifornia.com for guidance.

The Labor Law Helpline is a service to California Chamber of Commerce preferred and executive members. For expert explanations of labor laws and Cal/OSHA regulations, not legal counsel for specific situations, call (800) 348-2262 or submit your question at www.hrcalifornia.com.

Staff Contact: Barbara Wilber