Accounting for Sick leave and Absences if you’re a Small Business Owner

With the recent coronavirus outbreak, discussions of paid leave, and states of emergency, more attention has been paid to sick time and paid time off than ever before. If you’re a small business owner with just a few employees, you might not have an official sick time policy. Or, you might not have paid much attention to tracking employees’ time off, relying on the honor system.

A lot has changed in the past few weeks. With a focus on self-isolation and quarantine, you might have realized that it’s time to look at your policies on sick time and absences. 

What Does the Law Say about PTO?

The Fair Labor Standards Act governs small businesses labor policies. While companies with fifty or more employees must offer up to 12 weeks of unpaid leave to some employees, there’s no requirement to give them paid time off or vacation. It’s up to the employer’s discretion.

However, state and local laws may mandate sick time - such as in the city of Minneapolis, which requires that employers offer sick and safe paid time off for part-time employees. Always check the laws with your local labor department when writing human resources policies. 

Even though there is not a legal requirement to offer PTO, many businesses know that PTO attracts qualified workers, keeps them motivated and engaged, and protects the health of their overall workforce. Offering sick days and vacation time is just good business, which is why employees have come to expect it. 

When you first started, you might not have written formalized policies. But, if you grow, they will become necessary. 

What Should go Into a PTO Policy?

Given that it’s up to your discretion how much PTO to offer employees, as long as you are in compliance with state and local laws, you can formulate your own PTO policy. In it, you should include information on who receives paid time off, how hours accrue, and how many hours employees are eligible to receive annually. 

Here are a few questions that your policy should answer so that you know how to account for the PTO your employees earn and use properly.

Who Receives PTO, and When?

A comprehensive PTO policy should first address who’s eligible for PTO. 

Will you only offer it to salaried employees, or will hourly workers be eligible? Then, ask yourself when they can take the PTO and if they need supervisor approval. If your business would be severely disrupted if all four hourly workers took the same day off, you might want to require supervisor oversight and approval of PTO requests. 

When they take PTO also relates to years or months of service. Will you only allow a new employee to start taking time off after they’ve been with you for six months? 

How Will Hours Accrue?

Do you want to track accrued PTO by hours worked or years of service? Does a new employee receive all their PTO benefits on their start date? If they earn PTO as they work, you’ll have to track hours. For some businesses, this doesn’t make sense. 

Does Vacation Time Carry Over?

Will vacation time carry over? This is one of the biggest questions, from an accounting perspective, that you must answer. If employees can carry over accrued vacation, you will carry that liability on the books from year to year. It adds a layer of complication to closing the books at year-end. 

Will you pay out employees for unused time off? 

If an employee quits and hasn’t used five hours of vacation time, will you pay them for those hours? Again, this has accounting and cashflow implications. Accrued PTO is a liability on your Balance Sheet, so it’s important to track it accurately. And adding an extra ten hours of pay to a last paycheck could harm your ability to pay suppliers one week. 

What about Longer Absences?

If you have decided to revisit your sick leave policy in the light of coronavirus, consider the following; will you allow employees to work from home? If an employee goes negative on sick time or PTO, how will you handle it? It’s important to answer these questions before they become an issue. 

Accounting for Sick Time

Accrued PTO is a liability on your balance sheet. As employees earn hours, you must increase this liability. 

For example, if you have a policy where they earn one hour for every eight hours worked, at the end of a 40 hour week, you would record 5 more hours of PTO in your liability account. Proper time tracking is essential, both for accruing and using PTO.

When an employee takes a sick day or goes on vacation, it reduces the liability. Note that you only need to record a liability if the employee earns the vacation time in one period but defers using it until another - if they use it as they earn it, it rolls into compensation. 

When booking accruals, you can factor in anticipated forfeitures. Many PTO policies state that employees must have been with the company for a certain time to take vacation. If you’ve been dealing with a high turnover rate and PTO forfeitures, then it wouldn’t make sense to book 100% of the vacation that new employees accrue. Your accountant can help calculate a forfeiture rate.

Small or large - no matter your company size, there are many variables you must consider when formulating a PTO policy. Paid time off and sick leave impacts everyone in your organization, and also has a financial impact. It will appear on your balance sheet and affect your cash flow. 

A documented sick time and PTO policy, fairly applied to all employees, protects you from lawsuits, and helps your business keep running smoothly.