7. ‘Use it or lose it’ clauses, and accrual caps

This is a post in the continuing series about 10 things to know when creating a PTO policy.

To limit the total amount of paid time off your business has to pay out, you might like to consider putting in place a “use it or lose it” policy.

This means that staff have to use all of their accrued PTO in any given year, or they forfeit all their remaining time off.

Another common policy is to instead allow some days to carry over into the next year, up to a certain amount (i.e. up to 2 weeks carry over per year).

Both policies can have the positive effect of encouraging staff to actually take their allocated time off in order to recover and come back refreshed.

Be aware that some states consider earned paid time off to be equivalent to wages earned by the employee. California, Colorado and Montana do not allow employers to take away vacation that staff have already earned, so “use it or lose it” clauses and carry over limits don’t work there. Massachusetts allows “use it or lose it” only if you give staff adequate notice of the policy and a reasonable chance to use their time. Nebraska requires you to pay out earned but unused vacation when an employee leaves.

California, Colorado, Montana and Massachusetts do allow employers to put in place maximums on how much time staff can accrue. For example, you might set the accrual cap to 1.5 times the annual accrual rate of say 18 days per year, giving a maximum PTO balance of 27 days.

If you do have staff in one of these states as well as other states, and you would like to put an accrual cap in place, the simplest thing to do is to allow staff everywhere to carry over their PTO balances and to apply the accrual cap across the board.

Our guide to creating a PTO policy covers this, along with the rest of your policy, in one place.