Some companies give employees the option to cash out PTO when it accumulates to a certain number of hours. So if an employee maxes out their PTO at 400 hours and they get paid $40/hour, they’ll get a $16,000 check in addition to their regular wages.
Sounds pretty nice, right?
We don’t think so. And we’ll tell you why. But first, let’s talk about the crucial difference between PTO cash outs and PTO payouts.
How PTO Cash Outs Differ from PTO Payouts
The key difference between a PTO cash out and a PTO payout is the timeframe when each is paid out.
For a PTO cash out, an employee gets their unused PTO hours in cash after a set number of hours have accrued. Then their PTO bank resets and they continue working for the same company.
With a cash out, an employee essentially decides to treat the unused PTO as a cash bonus rather than as an opportunity to rest and relax.
A PTO payout, on the other hand, happens when an employee separates from employment. Instead of forcing the employee to forfeit their unused PTO when they leave, the employer adds the value of the unpaid time off to the employee’s final paycheck.
In states like Colorado, California, and Montana, employers are required to pay out unused PTO when an employee leaves a company.
How PTO Cash Outs Work
Let’s say that as an employer, you have a PTO accrual cap of 400 hours. Your policy states that if an employee reaches 400 hours, the PTO stops accruing. Instead, the employee receives a check for those 400 hours.
Some of your employees love this idea. One of your employees—we’ll call her Deb—is especially committed. She would rather get that sweet PTO cash out than take actual paid days off.
Say Deb earns 8 hours of PTO during every two-week pay period. There are 26 pay periods a year and Deb earns a wage of $40 an hour. To accrue 400 hours of PTO, Deb works for just under two years without taking a single break.
She gets her paycheck of $16,000, but she’s exhausted—and she has no PTO to take a break with. She feels irritable and her creativity isn’t what it used to be. She tries her best to maintain a high level of productivity, but she’s human and simply can’t.
You notice her exhaustion and you want to tell her to take PTO the next time she gets it, but your policy gives her the choice to cash it out. So you stay quiet, hoping she won’t become so burned out that she can’t function at your company anymore.
How PTO Payouts Work
Let’s go back to Deb. She’s exhausted from her nonstop work at your company so she moves to another employer to take a job with fewer responsibilities.
At her new company, Deb accrues PTO every pay period just like she did at her old job with you. But her new employer has a different policy.
There’s no PTO cash out. Instead, the policy sets an accrual cap of 300 hours.
Deb can work herself to the bone if she wants to get to 300 hours. But she won’t be able to cash that money out unless she decides to leave the company for good.
And she won’t be able to accrue her normal hours unless she takes some of the paid time off.
We’ll say Deb loves her job and isn’t interested in leaving. So every time she starts getting close to that 300-hour mark, she takes a week off. Deb feels relaxed and refreshed each time she does this. Before long, Deb starts strategically accruing her PTO so that she has enough to:
- Take a weeklong vacation around the winter holidays
- Extend her weekends from time to time
- Travel the world with her girlfriends for three weeks every summer
- Spend extra time with her aging mother who lives an hour away
Thanks to these paid breaks, Deb’s life is a rich balance of work, family, friends, vacation, and travel. She feels rejuvenated when she returns to work. Her mental health, creativity, and productivity are buoyed by her paid breaks.
Seven balanced years later, Deb decides to take a job in the same town where her mother lives. Even after taking breaks all the time, Deb has 150 hours of unused PTO when she leaves. She’s climbed the ladder and now makes $70 an hour.
When she sees her final paycheck from her beloved company, she smiles. There’s a $10,500 payout for those 150 unused PTO hours inside.
Should You Offer PTO Cash Outs?
As you probably guessed from Deb’s story, I’m against offering PTO cash outs. Here’s why.
The Value of PTO is in Taking Time Off
Time and again, studies show that taking time off work decreases burnout, increases motivation, improves mental and physical health, and helps you build greater bonds with your community.
On the flip side, not taking adequate time off work increases the risk of burnout and decreased productivity.
Despite the clear benefits of taking time off, companies often fail to create a culture in which time off is a valued part of a person’s work life. In a 2018 survey by the American Psychological Association, only 38% of American employees reported that their employers encouraged them to take time off.
This is a problem. And PTO cash out policies contribute to it. These policies dangle the carrot of extra cash, not-so-subtly encouraging employees to avoid vacations in favor of a cash out.
But we all need a break. The last thing I want to do is incentivize the workaholics on the team to work more.
This is why we have a PTO cap at our company. I want the whole team rested so they don’t get burned out. Cash outs would allow some folks never to take PTO. And I do believe their performance will degrade over time as they don’t get the rest they need.
Being a good employer means valuing your employees’ work-life balance.
So be an employer who checks in with employees and encourages them to take time off. If they feel like their workload is too big to leave for a week, find a way to help lighten it.
If a PTO Cash Out Makes a Difference Financially, Your Pay is Too Low
The one hypothetical benefit of a cashout is that an employee could increase their wages temporarily to handle an emergency.
But if employees feel like they can’t get by without sacrificing PTO in favor of a cash out, they’re not getting paid enough.
It’s that simple. With inflation and the rising cost of living, it’s more important than ever to make sure your employees are getting paid fairly.
Yes, bumping your employees’ pay will come at a cost to you—at least initially. But it’ll save you in the long run.
Your employees will feel like they can afford to take paid time off. And if you actively encourage them to take those paid days, employees won’t feel judged or resented for taking their well-earned vacations.
The result? Happy employees and less turnover, which means fewer recruiting and onboarding costs for you.
As an employer, I’d much rather look at getting wages to a sustainable level than worrying about a minor benefit like a PTO cash out.
Keep Policies as Simple as Possible
For me, every extra system needs to carry its weight. A PTO cash out system is one more thing to manage, one more thing that can break, and one more thing that can conflict with other policies and systems.
And since I don’t believe that cash outs carry any real value, it’s extra complexity without any added benefit for the company or employees.
The Taxes on Cash Outs Get Messy
If you provide a PTO cash out option, employees might be required to pay taxes on their accrued PTO—even if they haven’t cashed it out yet.
So it’s crucial to run this potential legal issue by your CPA and attorney before putting a cash out benefit in your PTO policy.
In my opinion, the tax thing is a huge headache that I’d rather avoid entirely.
How to Offer a PTO Cash Out
If you really want to offer a PTO cash out policy, we suggest setting a cap on how many hours can be cashed out each year. In addition, you can make it so that employees have to maintain a minimum balance of accrued PTO days in their bank after the cashout.
For example, you could offer employees the option to cash out up to 80 hours of unused PTO in December of each year. But to take the cash out, employees must have at least 30 hours of PTO left in their bank to cover unforeseen absences.
This allows your employees to get their PTO in the form of cash without draining their entire PTO bank. It keeps the cash outs small, which might convince your employees to just take the darn vacation instead.
And if you’re thinking of other creative ways to encourage employees to use PTO, like donations, read our article on why PTO donations are toxic and terrible.
For me, the most important thing when it comes to PTO is creating a company culture that encourages and celebrates vacations.
When everyone’s well-rested, the company thrives.