If you offer paid sick leave, there’s a chance you have at least a few employees who don’t use all their sick days. Most companies that provide paid sick leave put a cap on how much their employees can accrue.
But what if your employee quits with their max accrued paid sick leave hours? Do you have to pay that unused sick leave back to them? Or maybe you’ve implemented a sick leave payout policy where you let employees cash out unused sick leave at the end of the year.
And then you notice some employees consistently come in to work even when they’re ill because they want that payout.
The situation gets even trickier if you have employees in multiple states since different states have different paid sick leave requirements.
So how can you handle unused sick leave payouts without getting a massive headache?
It’s easier than you think. Not only is our solution easier on your accounting team, but it also ends up giving employees more time off. In other words, it’s a clear win-win.
Do Employers Have to Make Unused Sick Leave Payouts?
There’s no federal law for unused sick leave payouts. However, state PTO payout laws may include specific rules regarding sick leave and how to compensate workers who quit or are terminated.
You could scramble to find out if your state—or, rather, the state your employees live in—requires you to pay out unused sick leave. If you have employees across several different states, you’ll need to untangle the laws for each one.
Or you could save yourself a bunch of time, money, and headaches by offering unused sick leave payouts regardless of state laws.
How, you ask?
By including paid sick leave as part of a broader PTO payout policy.
The Simple Way to Handle Unused Sick Leave Payouts
Here’s how it works: you give your employees 3 weeks of PTO every year and let them use the time however they want. Include sick leave as part of this paid leave program.
You can either pay it out upfront or let several hours of PTO accrue each pay period. Or, to give employees a buffer in case they get sick before they’ve accrued enough PTO for sick days, you could do a hybrid version of this.
For example, let’s say you offer three weeks of PTO. This is equivalent to 15 workdays, or 120 hours of annual PTO.
You could offer 2 days—equivalent to 16 work hours—of PTO upon the employee’s hiring date or at the beginning of a new year. Then, in every pay period thereafter, your employees would accrue more PTO.
If you do payroll on a monthly basis, for example, you’d offer 8.6 hours of PTO each month.
After 6 months, your employees would have 67.6 hours—about 8 work days—of PTO to use for sick days, vacation, mental health days, or whatever they need.
Is it Legal to Use PTO as Sick Leave?
It depends on the state, but in general, yes. As long as you provide a certain number of PTO hours each year, many states allow you to count those hours as paid sick leave.
Take Michigan, for instance, where the state law says employers must provide at least 40 hours of paid medical leave to each employee. If that’s all the employer wants to offer, there’s no law saying they must provide more than 40 hours of paid leave.
But they must provide at least those 40 hours, and those hours must be able to be used for anything from mental illness to caring for a sick family member.
So if you’re a Michigan employer, offering 15 days of PTO, or 120 yearly hours, more than fulfills the state’s paid medical leave requirements.
Make sure you check your state’s laws to make sure your PTO policy complies with the rules. Keep an eye out for local laws, too. In California, the state law says that most employees who work 30 or more hours a week are entitled to 24 hours of yearly sick pay.
But many cities—including Los Angeles, Berkeley, San Diego, and San Francisco—have additional paid sick leave laws to follow. In San Francisco, employers must pay sick leave to all employees, including part-time or temp workers. If the employer has 10 or more employees, they can cap an individual employee’s sick leave balance at 72 hours. If the employer has fewer than 10 employees, they can cap the balance at 40 hours.
Handling Sick Leave Payouts
So what do you do about sick leave payouts? Some state and local laws don’t require employers to pay out unused sick pay or PTO when an employee leaves the company. Others, like Montana, Colorado, and California do.
But if you have a sick leave or PTO payout policy in place, you must follow it even if your state law doesn’t mandate PTO payouts. Usually, state laws that don’t call for payouts only don’t require them if your policy doesn’t require them.
So let’s say you and your employees live in Michigan. You offer a PTO package of 120 hours a year for the employees to use for sick days, personal days, vacation days, and everything in between. This fulfills Michigan’s paid medical leave law.
But within that PTO policy, your company also states that you will pay out up to 200 hours of accrued, unused PTO when an employee leaves the company. Since you’re including sick leave as part of your broader PTO package, you’ll need to follow the payout policy your company has put in place.
Keep things simple by offering PTO payouts up to a certain amount. As long as you have that PTO accrual cap in place, you’ll never be stuck paying someone for 400 hours of unused paid leave when they quit.
Why You Should Use a Generous PTO Policy for Sick Leave
Even though different states, counties, and cities have different paid sick leave laws, a generous PTO policy can usually take care of the minimum requirements—and then some.
Here’s how this benefits your company. Instead of having to keep careful tabs on sick leave and your state’s payout laws, your HR department will only need to track one thing: PTO.
A generous PTO policy that makes room for sick leave also benefits your employees. They’ll only need to remember one type of paid leave: PTO. They don’t have to wonder about the implications of using a sick day or a personal day. It’s their PTO to use how they need it.
This simple policy erases the need for HR to keep track of separate leave policies. You’ll still want to know specific state and local policies to make sure you are handling everything appropriately on that end. But with a generous PTO policy, you’ll find it a lot easier to stay in compliance with those laws.
