Repaying Advanced Time Off

Steven Cesare, Ph.D.

A business owner from Ohio called me the other day to talk about a situation many of us have encountered: Giving employees an advance on their PTO or vacation balances before it has been earned. Giving the time off is usually the easy part; getting “paid back” for that time can be more complex.

In this case, a new employee surprised the owner with a request to take some time off from work due to a medical procedure. Naturally, the compassionate business owner granted three weeks of paid time off to the employee in a gesture to facilitate the employee’s financial condition while on leave of absence.

State laws notwithstanding, granting an employee “time off” is usually done with minimal fanfare when taken and “repaid” within the same payroll period, in that the exact amount of time taken by the employee is returned by the employee to the company on an hour-for-hour basis. We’ve all done it. No harm, no foul.

However, this transaction could have become more bureaucratic if the passage of time spanned multiple payroll periods. At its essence, most business owners make the mistake of viewing this process as a temporal exchange: time granted, time returned.

Factually, that is not the case. The transaction is financial, not temporal: The company is actually providing a financial loan to the employee by paying the employee wages for time not yet worked. It’s not hour-for-hour, it’s really dollar-for-dollar.

Good-natured landscapers would likely draft a brief repayment agreement specifying the number of hours granted to the employee and the timeframe for repayment (e.g., “employee will work three hours of non-scheduled time until all granted hours have been brought to zero”, “employee will repay all granted hours by the end of the July 2022”), with the Company and the employee signing the agreement.

Did you read the word “dollars” in that agreement?

Me neither. It’s really a financial loan, remember?

Technically, the owner should calculate the anticipated wages granted to the employee, and then develop a schedule by which that sum of money is repaid by the employee to the owner.

Steve, you’re being too bureaucratic again. Trust me: I know. But here’s the rub.

If the employee is paid $1,000 per week, and is granted three weeks of advance leave, technically that appears to be 15 workdays that must be repaid, when in financial terms it is really $3,000 that must be paid back. Believe it or not, if the employee receives a commission check (e.g., sales, enhancements), a non-discretionary bonus payout, or gets a pay raise, at any time during that timeframe in which the employee is repaying the debt, the employee’s weekly wage rate increases and as such will be able to pay off the entire financial debt in fewer than 15 days.

For example, bypassing FLSA terminology for the moment, an employee making $1,000 per week, is “likely” making $200 per day. Three thousand dollars divided by $200/day is 15 days. However, if the employee gets a commission, bonus, or pay raise that increases his/her weekly rate to $1,100, the employee’s daily rate is now $220. Three thousand dollars divided by $220/day is now 13.64 days. If the employee repays hour-for-hour instead of dollar-for-dollar, the owner legally now owes “money” to the employee.

Looking forward, draft repayment agreements, that span multiple payroll periods, using dollar terms, not time. Don’t pretend some wage and hour attorney will not come after you years later for unpaid wages with interest.

If you have any questions or comments about this topic or anything else related to human resources, simply call me at (760) 685-3800.