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Going into Leave Debt

HR Magazine, September 2005 Agenda: Compensation & Benefits

If you let employees borrow vacation time, provide a clear, consistent policy that fits your business needs.

Time is money. Benjamin Franklin’s 18th century maxim is sage advice for 21st century companies. But when it comes to time and money, employees often want an ample supply of both. That’s why more companies are letting their employees go into “debt” when it comes to paid time off.

The policy of advancing vacation time appeals especially to new employees who haven’t worked long enough at the company to accrue time off. And it helps long-term employees who may have had to expend their leave under special circumstances. The policy gives employees added flexibility in managing their vacation time.

“Employees cannot plan time away from work with 100 percent certainty,” says Wayne Wendling, senior director of research at the International Foundation of Employee Benefit Plans in Brookfield, Wis.

But the appeal doesn’t end with employees. There’s an upside for the company as well, according to Lisa Franke, SPHR, CBP, a workplace analyst at CCH Inc., a provider of employment law and human resource information in Riverwoods, Ill. Among those benefits, she says, is a morale-boosting demonstration of trust in employees.

However, attorney John Levine, chair of the labor and employment group at Michael Best & Friedrich LLP in Milwaukee, is skeptical. “When we get calls from employers who do this, they always have remorse that they did.” He says they often feel that it leads to the employees taking unfair advantage of the company, mostly by leaving before the time is paid back.

Even with his Pandora’s box warning, Levine says the company should not have an absolute hard line against use of unearned days. He advises companies to think through the positive and negative implications of the flexible stance.

Indeed, advancing vacation days depends on the nature of the organization, the turnover rate and other considerations, says George Faulkner, principal in the Princeton, N.J., office of Mercer Human Resource Consulting. “I don’t think it’s just a black-and-white, yes-or-no issue,” he says.

Employers need to consider several factors before they allow employees to borrow against vacation days:

  • Is this policy compatible with the company’s business needs?
  • Is it necessary for recruitment and retention?
  • What message is the company trying to convey to employees?

The Business Need

Vacation days generate costs in terms of wages or salaries and lost productivity in the short term. According to the 2004 Employers’ Time-off and Disability Programs survey report by Mercer, scheduled time-off benefits accounted for 10 percent of payroll, consistent with previous years.

So, the first question a company must answer before setting a policy is whether advancing vacation days will interfere with business.

In the tourism industry, for instance, Vicki Banks, director of benefits for The Biltmore Estate in Asheville, N.C., believes it would. Biltmore’s “schedules are done way ahead. It would be somewhat of a nightmare for some of our supervisors to also have to worry about vacation that isn’t earned,” Banks says.

The only exception: Staff members at or above the department head level are allowed to borrow against unaccrued time, Banks says. New hires who know they will need time off before earning it must negotiate that in the hiring process, she adds.

Employers in high-turnover industries where full staffing is an issue also may not want to exacerbate the problem by advancing vacation time, says Shelly Wolff, health and productivity practice leader for Watson Wyatt Worldwide in Stamford, Conn.

“Absenteeism is one of the most uncontrollable problems that employers face,” says attorney Stephanie Dutchess Trudeau, a partner at Ulmer & Berne in Cleveland. “Allowing people to take time before it’s accrued adds to the difficulties employers face.”

Trudeau usually recommends against the policy. “The employer may already be subject to various [state and federal Family and Medical Leave Act] laws,” she says. “Why would an employer add more reasons for people not to come to work?”

A similar view is held by Gregory Johnson, director of employee benefits at the Joint Commission on Accreditation of Healthcare Organizations in Oakbrook Terrace, Ill.

The commission has separate policies for vacation and sick days, and allows employees to carry over two weeks of vacation to the next year. That arrangement forces the staff to plan vacation time and use at least some of it in the year it is earned, Johnson says. Exceptions to the no-borrowing policy are rare and require approval by the vice president of human resources.

The need to recruit and retain high-quality employees prompts an employer to grant the privilege of using time before it’s earned.

“When the economy and job markets are such that employers want to be competitive to get the best talent, you might want to offer that flexibility,” says Mercer’s Faulkner.

A flexible time-off policy is part of being an “employee-centric company” at Calibre Systems Inc. in Alexandria, Va., says Michelle Voisinet Caylor, PHR, CBP, director of human resources for the employee-owned management and technology services company. The policy contributes to a positive attitude and helps recruit and retain talented people, she adds.

Calibre employees have immediate access to the minimum five weeks of paid time off (PTO) earned every fiscal year, Caylor says. The flexible access policy has been in effect for at least five years with very few pitfalls, she adds.

“Recognize that time off is one of the most important items in the benefits portfolio, and the flexibility to use that time is considered very important,” Wolff says. “Balance that with business needs.”

The Policy

Consultants and attorneys have some suggestions for eliminating as many trouble spots as possible:

  • Craft a clear-cut, comprehensive written policy. Mercer’s Faulkner says the policy need not be applied to all employees, but it must be applied consistently within a class of employees.

    The written policy allows employers to set limits, says Carol Sladek, work/life consultant at Hewitt Associates, an HR consulting firm in Lincolnshire, Ill. Sladek says less than 25 percent of the employers the consulting firm works with have a written policy.

    “A lot of this [is approved] at management discretion,” Sladek says. “You don’t have the consistency if you’re doing it at managers’ discretion, and employees may feel it’s not fair.”

    Sladek recommends the written policy state the number of days that can be borrowed, the permissible reasons for borrowing and a statement that, when resigning, the employee must reimburse the company for a negative time-off balance. She also suggests stating the formula that will be used to calculate the amount owed for borrowed time.

    Another element Trudeau says should be written into the policy is a set of guidelines that will be used in granting permission to borrow leave. The guidelines should be applied consistently and should take into account a department’s staffing needs, the employee’s disciplinary and attendance records, and length of service or passage of the probationary period.

  • Know the law. Because of what consultant Wolff describes as “a very dynamic” legislative landscape relating to borrowing against unaccrued time and recouping time owed, she advises companies to check with their employment lawyers about state law. (According to the National Conference of State Legislators, California and Maine have statutes that mandate that when an employee leaves a job owing vacation time to the employer, the employee must pay it back. New Hampshire passed legislation effective Jan. 1 that allows employers to go after the unrecouped vacation time if there is a prior written agreement with the employee. For more information on issuing final paychecks in accordance with state wage laws, see “The Unkindest Cut”.)

Attorney Levine says how the issue of recouping time is resolved varies not only by state law but sometimes also by federal guidelines. A 2004 opinion letter issued by the U.S. Department of Labor says employers can deduct advanced vacation time from an employee’s final paycheck if the employee is advised in advance, according to Levine.

For that reason, employers should clearly state in their policies that they “reserve the right, consistent with state and federal law,” to deduct unreimbursed time from employees’ paychecks, Levine says. Specify the value of the time the employee is receiving, what the employee is expected to pay back and on what schedule, and the consequence of not doing so.

In many states, employers can ask employees to sign a payback agreement that includes a statement that the employee is responsible for attorneys’ fees if the employer is forced to take legal action over non-reimbursed unearned time.

At Washington, D.C.-based Fannie Mae, the policy and procedures manual states that when an employee is resigning, the employer may withhold a salary equivalent amount of used but unaccrued days off, says spokeswoman Gabrielle Barry. Conversely, employees are paid for days accrued but not used.

Administration of the time-off policy is eased by Fannie Mae’s human resources technology. Employees report their attendance to their manager online, and the manager signs off and transmits it to payroll.

At Calibre, an automated standard field on pay stubs indicates the employee’s PTO balance expressed in hours. As part of the process when an employee leaves the company, the accounting system will indicate if the employee has a negative PTO balance, Caylor says. As the policy and procedure manual indicates, the value of the time owed will be deducted from the last one or two paychecks. Similarly, the company pays the employee the value of any unused accrued time.

“It’s very easy to administer, because it’s one bank of time,” Caylor says.

Layaways And Donations

Companies may want to consider alternatives to allowing employees to borrow against unaccrued vacation time. For instance, instead of allowing an employee to go into “debt,” allow them to put the time on “layaway.”

In addition to borrowing leave, Fannie Mae employees also are allowed to take one week of unpaid leave for vacation. Such “purchased” leave can be used only after paid leave is consumed, and employees’ money is refunded for unused purchased days, Barry says.

The option was implemented because many employees go to Fannie Mae from companies that offer more vacation time, she says. An employee survey indicated that half the workforce wanted more vacation.

“A lot of employees love the idea of buying a week,” Barry says.

Susan MacHolda, SPHR, senior director of work/life and diversity at Carlson Companies in Minnetonka, Minn., says that for the past 15 years the company has allowed employees to purchase an additional two weeks of vacation and pay for it over 26 pay periods. Employees must elect the purchase during the benefits enrollment period or within 30 days of being hired.

Another successful Carlson program is a hardship policy that enables employees to donate time to a colleague who may have a situation that requires additional leave.

Borrowing unaccrued time should be examined in the context of all compensation, paid and unpaid time off, and flexibility offered, says Wolff of Watson Wyatt. “Don’t over-enrich or under-enrich,” she says.

Roseanne White Geisel, a freelance business writer and editor in Arlington, Va., is the former managing editor of Business Insurance Magazine .

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