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Managing Your (Paid) Leave Policies

November 3rd, 2011


Managing leave is one of the most challenging human resources functions facing employers. South Carolina companies have to navigate deftly through the maze of federal and South Carolina laws that govern (and in some cases, mandate) various leaves of absence, including the Americans with Disabilities Act (ADA), the Family and Medical Leave Act (FMLA), South Carolina Workers’ Compensation Act, and the Uniformed Services Employment and Reemployment Rights Act (USERRA). Evocatively referred to as the “Bermuda Triangle”, the various requirements under these state and federal laws can trip up even experienced human resource managers.

The focus of this article, however, is on voluntary leave policies. In today’s corporate climate, just about every employer offers various types of leave outside of those required by statute or regulation. Typically denominating such leave as vacation, sick time, paid time off, and/or personal leave, employers have significant discretion over the formation of these policies and determining how paid (or unpaid) leave applies. Coordinating these employer policies with legal requirements calls for careful planning and implementation in order to reduce your chances of employee lawsuits and governmental agency investigations. Here are some pointers to consider as you formulate and apply leave policies.

(1) Revisit the structure of your paid leave policies from time to time. Traditionally, most companies published stand-alone “sick leave” and “paid vacation” policies. Some companies have eschewed this convention and instead established a single “paid time off” policy (though some employees are skeptical of this “combination” of policies). There are costs and benefits to either grouping. For example, surveys indicate that a PTO policy reduces the number of unscheduled absences, reduces the overall leave benefits costs to the employer, and provides more flexibility to the employee. On the downside, whereas employees might not use all time available under a vacation/sick leave policy, they tend to use all PTO leave, and they seem to view all PTO as vacation and report to work when sick. You should determine what makes sense for your company and your corporate culture.

(2) Make sure your policy is clearly written and accessible to employees. There are few perks more important to employees than paid leave. Paid leave is a recruitment and retention tool, and the rules need to be clearly communicated to all employees. A good policy clearly answers the following questions:

  • What classes of employees are eligible for the benefit?
  • What happens to unused leave – is it “carried over” from year to year or forfeited?
  • How is paid time off earned or accrued? Does leave accrue incrementally or annually?
  • When can earned leave first be used?
  • How much leave is available?
  • How does an employee apply for leave?
  • How is leave approved by the company (and who approves it)?
  • Are there limitations to how leave can be used and the duration of leave (i.e., ½ day increments; no more than 2 weeks at one time)?
  • How do you address accrued but unused leave at termination (see below)?

Even if you answer these questions clearly, we also recommend that your company retain maximum discretion to apply and interpret the policy.

(3) Leave should be applied consistently. Because an employer has discretion whether and how to provide paid leave, your policies can be written to make leave is available to some categories of employees and not others (e.g., salaried versus hourly workers). And eligibility for leave can be based on any number of factors (e.g., seniority). On the other hand – and even though we counsel employers to retain discretion in the interpretation of their policies – we also caution companies to apply their policies consistently within an established category. Ad hoc or inconsistent application of the policies may not only have an adverse effect on workplace morale, it could also form the basis of a claim of illegal discrimination, or as set forth below, a claim for unpaid wages.

(4) Know your legal limitations. Even though you have broad discretion to establish and formulate paid leave policies, there are some common legal pitfalls that your company should avoid:

  • Do not offer compensatory time off instead of paying overtime. In many workplaces, offering compensatory time off in lieu of payment of overtime to non-exempt employees is viewed as a tempting alternative to employers and employees alike. Unfortunately, doing so is illegal (outside of a single workweek). While the Fair Labor Standards Act allows governmental employers to grant comp time in certain situations, this option is simply not available to private employers.
  • Guard against improper salary deductions. As we discussed last week regarding the proper classification of employees, an employee’s exemption from the overtime requirements of the FLSA hinges partly on whether the employee is paid on a salaried basis. This means that for exempt employees, an employer can make only a few authorized deductions from that salary without jeopardizing the salary basis. A common mistake is impermissibly docking an exempt employee for an absence of less than a full day. This practice can void the exemption and possibly expose the employer to overtime liability.
  • Do not mechanically establish or apply an endpoint after which an employee must be terminated upon exhausting paid (or unpaid) leave. Unlike most paid leave policies, or the FMLA’s 12-week unpaid leave, the Americans with Disabilities Act does not set a limit on the amount of leave an employer is required to provide to eligible employees. Under some circumstances, an unpaid leave of absence beyond the employer’s permitted leave, or even beyond what is required by the FMLA, may be a reasonable accommodation under the ADA and must be seriously considered. An employer may designate a limit but cannot automatically terminate an employee whose leave exceeds the designated time. Following landmark settlements against Supervalu and Sears in which the Equal Employment Opportunity Commission alleged that companies improperly terminated employees with disabilities at the end of medical leaves of absence rather than allowing them to return to work with reasonable accommodations, the EEOC held a public meeting this summer and expects to issue guidance soon on leaves of absence as a reasonable accommodation under the ADA.

(5) Determine how you will handle payment of accrued but unused paid leave upon termination of employment. The South Carolina Payment of Wages Act defines “wages” to include “vacation, holiday, and sick leave payments which are due to an employee under any employer policy or employment contract.” Upon termination, employers must pay all “wages” due (including leave payments) to the employee within forty-eight hours of the time of separation, or on the next regular payday. As stated above, it is imperative for employers to set forth expressly in their policies whether accrued but unused leave is forfeited or paid out upon termination. Many claimants take the position that accrued but unused paid time off is due upon termination unless there is a written policy stating otherwise. Because the South Carolina Payment of Wages Act provides expansive remedies and benefits to employees (including the potential for individual liability against those who “knowingly permit” a company to violate the statute!), companies are strongly urged to review their policies and be certain that all wages – including eligible paid leave payments – are timely paid out following termination.

If you have any questions or need guidance in developing and applying your leave policies, please let us know.

This information is provided by Wyche, P.A. for educational and informational purposes only and is not intended and should not be construed as legal advice. We will be pleased to discuss with you in more detail the application of any of the topics covered above to your circumstances. Please contact Mark Bakker or Ted Gentry at our firm for more information.

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