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When an employee leaves an organization, one issue the employer often confronts is whether to pay the employee for unused vacation time or other paid time off (PTO). The employer may seek to withhold PTO for myriad reasons: from encouraging employees to use their PTO during employment, to offsetting an employee debt, to encouraging compliance with an obligation (e.g., providing advanced notice of a resignation). But regardless of the reason, the extent of the employer’s ability to withhold PTO (at least in Ohio) depends on the terms of its PTO policy. This lesson comes harder to some employers than others, as a recent case from the Ohio Court of Appeals for the Seventh District confirms.
In this case, 48 employees sued their employer, an area non-profit Company, after the Company declined to pay out their accrued PTO when their employment ended. The Company’s Handbook contained the following provision:
Any employee with PTO hours to a maximum of 200 hours remaining at December 31, 2011 under the former PTO policy shall have those hours "grandfathered" and banked going forward. The banked PTO hours will be available to those employees for any use that would have been allowable under the old PTO policy. Program and operation requirements will continue to override any request for leave, and the rules for using those banked hours remain the same. At the end of employment with [the Company] unused PTO balance hours will be paid out according to the schedule.
In defense of its position, the Company rightly argued (among other things) that its Handbook contained a disclaimer expressly stating that the Handbook was not a contract; thus, the Company asserted, the PTO policy was not enforceable. Nevertheless, the Court granted summary judgment in favor of the employees. The Court noted that “although employee handbooks and policy manuals are not in and of themselves contracts of employment, they may define the terms and conditions of an at-will employment relationship if the employer and employee manifest an intention to be bound by them." The Court then concluded that by placing the above PTO policy in its Handbook and disseminating that policy to employees with the expectation that they would rely on it, the Company manifested an intent to be bound by it. Therefore, the Court held that the employees had a right to enforce the policy’s terms.
This case serves as a good reminder that when it comes to PTO policies, Ohio employers have a lot of flexibility in determining (1) whether to offer PTO; (2) the manner in which PTO time is earned and accrued; (3) the extent to which PTO carries over from year to year; and (4) whether PTO is paid out on termination, and if so, the terms of eligibility for or forfeiture of the payout. However, employers must practice what they preach by ensuring that the policy accurately conveys its intent.
Multi-state employers should also know that some states are less flexible than Ohio. In California, for example, vacation and other paid time off that can be used for any purpose (as opposed to sick leave) is considered wages, and generally, this time must be paid out upon termination regardless
of the employer’s policy. Therefore, it is important to comply with the PTO laws of each state in which the employer operates.