16 Aug How To Manage Leave Deductions
Tracking leave deductions accurately is tricky for many employers. If you are doing this by hand there are lots of opportunities to create compliance issues. For example, if you don’t accrue appropriately, employees could have a case against you for not providing the right amount of time off based on published policy.
Automated systems take care of this for you. An automated system accrues hours based on your policy. When an employee requests time off, the system will show how much time is available. When the manager approves the request, the system will earmark those hours for use. When the employee uses the hours, the system will automatically deduct them from the employee’s account.
An automated system can track any type of PTO:
- Paid Family Leave
- Paid Sick Leave
- Paid Bereavement Leave
- Parental Leave
- Maternity Leave
- Jury Duty
An automated PTO system synced with timekeeping and payroll tracks leave accurately according to company policy and applicable laws.
PTO and Small Business Compliance
Leave management impacts compliance in several ways:
- Employers must track qualifying FMLA separately
- 23 states have laws that regulate PTO payout upon separation
- 4 states restrict use-it-or-lose-it PTO policies
- Employers that fail to grant leave requests equitably risk a discrimination challenge
The foundation for all wage and hour compliance is proper recordkeeping. A PTO/Timekeeping/Scheduling system automatically tracks accruals as employees clock in for shifts. Most systems only support basic accruals policies, however. Because we offer custom scripting, our PTO system can administer any accruals structure.
Employees Can See Accruals 24/7
It’s impossible to overstate the benefits of employee self-service when it comes to anything related to time and labor. With our PTO solution, employees can view their accruals on their phone through our timekeeping mobile app. This includes the forecasted balance for any future date.
Anytime, anywhere access to timecard information helps employees plan how to use their time off. No more requests for unearned time. No more errors in computation. And no more strained relationships due to PTO mix-ups.
Make Life Easier for Administrators
Your managers and HR team have better things to do than respond to employee emails and calls about PTO. Modern small businesses provide employee self-service time and attendance. This includes timecards, pay stubs, shift schedules and accruals.
How Does Paid Leave Affect the Balance Sheet?
Let’s discuss PTO in light of finances and accounting. In most cases, PTO is an accrued liability as employees earn it. If an employee leaves the employer, many states require the company to compensate employees for unused paid leave. With a front loaded system, there is full liability on the balance sheet the day the employees are given the PTO. If an employee leaves, then the employer will usually cash out the unused PTO to the employee. In contrast, with unlimited time off policies, there’s no accrued liability on the balance sheet and therefore no cash out obligation upon separation.
If you are required to pay out unused PTO, and an employee receives a raise between the time the PTO is earned and when they separate, consult your accountant about which wage on which to base the pay out. In most circumstances, the employer must use the wage at the time of separation.
Beware of Cash in Lieu
Perhaps you are considering a cash in lieu policy. This allows an employee to trade earned paid leave for cash. In the past two years, this has become more common because millions of U.S. employees haven’t used their PTO due to pandemic-related issues.
Before you adopt such a plan, beware of the tax implications.
The problem with these plans is they create unintended tax consequences due to an arcane tax concept called the constructive receipt doctrine. In short, this doctrine taxes income, whether or not received, if the taxpayer has an unrestricted right to such income and may draw upon it at any time. Daniel Mayo, Jeremias Ramos “Unintended Tax Consequences of PTO Buyback Programs”
Again, consult your accountant to make sure you withhold accurately for cash in lieu policies.
What if an Employee Requests Leave Which Includes a Paid Holiday?
The best practice for this situation is not to count the paid holiday(s) toward an employee’s PTO. For example, suppose an employee requests the first week of July off and July 4th lands on a Thursday. If your company provides July 4th as a paid holiday, the employee should not have the hours deducted from their PTO balance.
Small businesses that aren’t managing leave with an automated system are missing out on key benefits. Our timekeeping clients enjoy automated PTO included in our solution. To learn more, contact us today.
This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.