Therefore, let’s look at two models.

Model 1:  The traditional program is to have separate vacation and sick policies.  Under this model, employees request vacation time out of their vacation “bucket” which for illustrative purposes is five (5) days.  If the employee is sick, then they draw out of their “sick-time” bucket which, in this example, is three (3) days.  This gives the employee eight (8) total days available per year for respective purposes.  By company policy, vacation time can rollover to the next year; however, courts view vacation time as a “vested” benefit and must be paid if not used.  Sick time on the other hand does not have to be paid under this model nor rollover.  This is important when an employee leaves employment; the vacation balance should be paid within accrual and rollover policies as a vested benefit which courts have upheld (nationwide) regardless of any “use-it-or-lose-it” policies.  Vacation, therefore, should never be considered a non-compensatory benefit.

Model 2:  PTO programs are becoming very popular since they just have one bucket of time for both vacation and sick time (note, there are also personal days, bereavement, etc., which I am not using in this example).   In my example, under a PTO program the days available in Model 1 above, would be simplified into eight (8) days for any purpose.  Once those days are used, employees have no further paid leave.  This all seems like an easier way to handle things; however, state laws specifically have not been altered in any substantive way to delineate between types of leave within a PTO program and therefore, are generally treating the entire PTO balance as a vested benefit.  What this means is that instead of being required to pay for the five (5) days of vacation in Model 1, under this model an employer would be required to pay the full eight (days) of PTO.  Consequently, as companies are becoming acutely aware of these differences (see Target vs. California which cost $10 million to settle), many are opting to return to the traditional model until states can alter their laws.

Regardless of which model you utilize, having clearly defined policies is key.  We have written both programs for many clients dependant primarily on which state they are operating in.  Florida and Texas, for instance are very “employer” friendly with PTO, while California is very “employee” friendly.  Be sure to ask about your state before you try and write your own policy.

Since this is exclusively a North Carolina company, you may wonder how the fed’s had jurisdiction.   It is simple; the jurisdiction test can be met simply by accepting credit card transactions in a business since processing typically takes place across state lines.   There are other requirements which I will not go into in this blog.  My main point is with regard to time cards for managers who typically would be exempt from overtime under the Fair Labor Standards Act (FLSA) as long as they met the guidelines.  Four managers were selected to review under the FLSA guidelines.  The investigator has authority (and did) to “look-back” exactly two years from the moment of entering the establishment.  Since exempt pay levels were questioned in this case, each employee was subject to potential overtime compensation for the “look-back” period.  Given that time cards were not available for one of the managers (as they were routinely discarded for this manager); the investigator has the right to accept the verbal confirmation of how many hours the employee worked from the employees’ mouth directly.  It is then up to the employer to prove any inaccuracy.  In the end, the employer in this case had to pay up due to employee recollections of time worked and their own description of their job.

My recommendation is to first evaluate and document every “salaried” job to ensure compliance with FLSA since paying a salary does not automatically exempt an employee from overtime.  Second, keep time records in a format that can be easily reproduced if ever audited and have employees actually sign their time sheets.   Third, train your managers who have authority of hiring and firing within defined federal and state guidelines.  Finally, maintain time and attendance records for three (3) years.  The DOL requires two (2) years, however the IRS can require three (3) years, so it is best to follow the longest period requirement.