Although PTO is an acceptable benefit, the Labor Commissioner considers the entire sum of PTO as vacation because it is not connected to a specific event and can be taken whenever the employee chooses.1

• PTO is considered wages and you must pay out the entire amount of accrued but unused PTO when the employment relationship is terminated.

The rules relating to vacation also apply to PTO:

• PTO is a form of wages that vests as the employee renders service
• PTO is considered part of the “employment contract” between you and the employee
• No use it or lose it policies allowed
• Reasonable cap on PTO accrual allowed
• Pay of accrued PTO at termination
• Partial-day absence rules for exempt employees
• Payment rules

For more information, see the discussion of these topics in Vacation.

PTO and Paid Sick Leave

California employers are required by law to provide a set amount of paid sick leave (PSL) to eligible employees working in California.2

• California's mandatory paid sick leave law calls for a careful review of PTO policies. For more information, see Paid Sick Leave.

Employers have various options for providing the PSL entitlement to employees. One option is to have a PTO policy and a separate PSL policy that complies with the Act. For example, you could have:

• A PSL policy providing a lump-sum of five days or 40 hours that meets all the stringent requirements of the PSL law; and
• A separate, “richer” employer-provided PTO bank that operates separately and apart from the requirements of the mandatory PSL law.

Alternatively, you can incorporate the mandatory PSL requirement into your PTO policy. If your company’s PTO policy will cover time off under the mandatory paid sick leave law, you will need to:

• Ensure that your policy meets one of the PSL options for providing paid time off. For more information, see Calculating Leave - Employer Options.
• Review the cap requirements for PSL; employees must be allowed to accrue at least 10 days or 80 hours of paid sick leave so you cannot impose a lesser cap. Make certain to consider these cap requirements along with the rules regarding reasonable caps on PTO. A minimum of 1.5 times the annual accrual rate is generally accepted.
• Ensure that employees can use PTO for all of the reasons permitted under the PSL law. For more information see Permissible Usage.
• Review absence control policies. If you incorporate mandatory PSL into your PTO policy, these absences are considered protected from discipline.
• Pay employees for PTO time that is taken as paid sick leave using the required PSL method for calculating pay. Under a PTO plan, you may compensate employees for vacation or other personal time at a “base rate” of pay whereas time taken as PSL must be paid at the higher regular rate of pay set forth under the mandatory PSL law.3 For more information, see Paying the Employee for the Sick Day.
• Comply with other mandatory PSL requirements and protections under the law.

• Although you are not required to pay accrued PSL to an employee at the time of termination, if you choose to combine sick leave and vacation into a PTO plan, you will be required to pay out the accrued time.

Under the mandatory PSL law, employees who leave employment and are rehired within one year must have those previously accrued sick days put back into their sick leave bank. However, an employer is not required to reinstate accrued PTO to an employee who was paid out when they left employment. For more information, see Employee Leaves Employment and Reinstatement.

1. DLSE Enforcement Policies and Interpretations Manual sec. 15.1.12