Dear Mary, I’m hiring my first team of employees and I’m not sure how to set up vacation leave and sick leave. I read about “Paid Time Off” and it sounds like it might be a better fit. Can you explain the difference? Which is a better system for my business?

Let’s start with sick leave. Sick leave is not required by law (with rare exception) and you are free to establish your own conditions whereby an employee can accrue and use sick leave. That may include eligibility for leave, the number of hours an employee may accrue each month, the minimum increment by which employees may use sick leave, how it’s calculated, any restrictions on use, and when a doctor’s verification is necessary.

Paid vacation leave is also not required by law (again, with rare exception). However, if provided, it constitutes earned wages and it may not be forfeited (unlike sick leave). For example, you may not have a “use it or lose it” policy in which your employees forfeit their accrued vacation leave if they don’t use it within a certain amount of time. However, you may cap or limit the number of vacation hours employees accrue and prohibit your employees from earning more until they use them up.

Sick leave is for when an employee or their family member is actually sick, but vacation leave can be used for any purpose. If you end up using a paid vacation policy, be very clear about waiting periods, the number of hours accrued per year, whether or not you’re going to allow cash-outs of unused vacation time, and whether or not you’re going to require vacations be approved in advance.

Some examples of the issues that arise in drafting a comprehensive, written leave policy include whether employees accrue vacation while on unpaid leaves of absence, and whether an employee who is injured on vacation and cannot return to work can use sick time during the paid leave. You may think these situations are unlikely, but you should address all of the possible scenarios to avoid ambiguity and conflicts with your new team.

Keep in mind that since accrued vacation hours constitute earned wages, any unused vacation hours must be cashed out if the employee leaves or is terminated.

Paid time off (or “personal days off”) may be used instead of creating vacation, holiday and sick leave policies. With paid time off, an employer grants their employees a certain number of paid days off, which can be used for any purpose. These paid days off are the legal equivalent of paid vacation leave, meaning that those days cannot be forfeited and must be paid upon termination, unlike traditional sick leave.

Be careful about letting employees use sick leave for personal business; you must treat this leave like vacation leave and pay it out if the employee is terminated. It can be a little messy, unlike paid time off, where time off is treated like vacation leave regardless of the situation.

You could benefit from using a paid time off policy if you really don’t want to have to track vacation leave separately from sick leave. Remember that you can change or eliminate your paid time off policy at any time, although you may not take away paid time off that has already accrued.

For example, if you set up a policy that allows employees to earn 15 days of paid time off per year, and then you decided to reduce that amount to 10 days, you couldn’t take away an employee’s earned paid time off. And if that employee quit or was terminated, you would still have to pay the full amount of unused accrued paid time off.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.