Zenefits Offering Payouts to Former Employees Not Paid Out for PTO


By: Allison Shrallow

The perks of working at a startup know no bounds.   From restaurant-quality meals, in-office massages, yoga classes, transportation, and beer and wine on tap to game rooms, dog-friendly offices, and casual dress code, startup culture blurs the line between work and play. There is one perk startup employees love to boast about the most to their corporate counterparts: flexible time off (“FTO”).  FTO provides employees with unlimited paid sick and vacation days.   While the majority of American workers are restricted to two to three weeks paid time off a year – and must accrue the time off prior to use – many tech workers are free to perpetually globetrot as long as their work is satisfactory and deadlines are met.  While FTO is undoubtedly a draw to potential employees, it benefits California employers as well.   California treats accrued paid time off (“PTO”) as wages, which must be paid out to employees upon their separation of employment.  By contrast, employees do not accrue FTO, so there is no payout upon separation from the company.

Ironically, Zenefits, an online HR startup, is in the midst of a legal debacle as a result of a decision to offer its employees what it likely construed as a hassle-free FTO policy. In what Zenefits refers to as a clerical error, its 2014 employee handbook included a PTO policy.  The 2015 handbook changed the policy to an FTO policy.  Recently, former employees have alleged they were not paid accrued PTO upon separation from Zenefits, per the 2014 policy.  In an effort to thwart potential lawsuits, Zenefits has offered former employees approximately $5,000 in exchange for a waiver of their right to sue Zenefits for any violations of California labor laws.

To avoid this issue, California employers should take care to either pay out accrued PTO upon conversion to an FTO policy, or maintain records of the accrued PTO and pay it out upon separation of employment. For example, if an employer switched from PTO to FTO in 2011 and an employee accrued 20 hours of PTO prior to the company’s switch, the employee is entitled to be paid out for her PTO when she separates from the company – even if that is ten years from now.  Employers wanting to transition their vacation policies from PTO to FTO should consult with their labor and employment attorney to ensure the new policy is in line with California’s labor laws and none of the employees’ accrued PTO is forfeited.