“Neither a borrower nor a lender be, for loan oft loses both itself and friend.”
This quote from Shakespeare’s Hamlet advises not to lend to or borrow money from a friend, because if you do so, you will lose both your friend and your money. How do Shakespeare’s words apply to Human Resource practices? They can be seen as cautionary advice for employers who allow employees to borrow against future vacation or paid time off (PTO) accruals.
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. According to our 2016 Paid Time Off Policies Survey, 25 percent of responding organizations allow employees to borrow vacation time, while 18 percent allow borrowing of Consolidated Paid Time Off; i.e., a policy that combines both vacation and sick leave. The practice is most common in the “Software/Hardware” and “Manufacturing” sectors, and least prevalent with public employers.
Employers may treat a request for an advance on vacation time casually, considering the practice a no-cost benefit or an exception to policy. Before adopting this practice, here are some things to consider:
Workforce Planning: In many industries, production or revenue is calculated based on hours worked. These take into account standard accruals. Similar to other unexpected absences, granting additional time off may impact your organization’s ability to meet goals. Organizations that set work schedules far in advance, or require 24-hour coverage, may have less flexibility to accommodate additional absences. You may also increase competition for time off during popular times of year such as holidays and school vacations.
Fairness: Set guidelines for approving requests. These guidelines could, for example, state the maximum number of days that can be borrowed and the permissible reasons for borrowing, as well as take into account a department’s staffing needs, the employee’s disciplinary and attendance records, and length of service.
Employee Handbook: Verify whether your policies’ descriptions of vacation and paid time off allow or prohibit additional time off.
Payroll: Coordinate your practice with your payroll process. Are negative balances permitted and tracked? Are these indicated on pay statements? Is supervisory approval required?
Cost: Advancing vacation is much like advancing pay that may not be repaid until a future fiscal period. This can impact budgets and profitability. A common problem arises when the employee separates from your employment before paying back the unearned time off. And just like other wage issues, both federal and state statutes have something to say about this practice. In some states, you may be prohibited from recovering the unearned but advanced time off.
A 2004 opinion letter issued by the U.S. Department of Labor allows employers to deduct advanced vacation time from an employee’s final paycheck if the employee is advised of the deduction practice in advance. Although such a deduction may be permissible under the Fair Labor Standards Act, it is also important for employers to be aware that many states’ laws do not allow deductions from employees’ paychecks without prior written authorization from those employees. Colorado is one such state. Additionally, most state laws restrict employers from making any deduction that will take an employee below federal minimum wage.
Payroll deduction authorization agreements are a useful tool to satisfy this legal obligation prior to making the deduction from an employee’s paycheck. The agreement must be enforceable and not in violation of law.
When drafting your authorization agreement keep the following administrative and legal considerations in mind.
- Is the appropriate at-will language included in the authorization?
- Is the employee’s signature and date present on the authorization?
- Consider executing a promissory note with the employee in the event the amount to be recovered cannot be satisfied by the employee’s final paycheck.
Sample authorizations are available in our FYI library. We recommend consulting with legal counsel prior to implementation, as stated above, as state laws may require specific items to be included in the payroll authorization before it may be enforced.