Arizona employers often ask me what kind of flexibility they have in adopting paid time off (“PTO”) policies. Below are some common questions:

• Can employers have a “use it or lose it” policy where employees will not be paid any PTO upon separation, regardless of the reason?
• Can a PTO policy state that employees who quit will not be paid any accrued PTO, unless they give two weeks’ notice?
• Can employers have a policy where unused PTO is forfeited at the end of the year or where only a portion of the accrued hours roll over to the next year?

The short answer to these questions is that these kinds of policies are likely enforceable, so long as there is a clear, written policy provided to employees. There is, however, no statute or court decision addressing the legality of “use it or lose it” policies in Arizona. Some states such as California prohibit such policies.

In my opinion, the Arizona Supreme Court would likely hold that Arizona employers may adopt use it or lose it policies, as long as there is a clear, written policy provided to employees outlining the circumstances under which accrued PTO will be forfeited. I believe Arizona courts would ultimately give employers broad discretion to adopt PTO policies for these reasons:

• The Arizona paid sick time law does not require paid sick time to be paid upon separation, regardless of the reason. Paid sick time is a more important right than PTO.
• Arizona courts generally allow parties the freedom to contract.
• Employers are not required by law to pay PTO. Instead, PTO is a benefit that some employers choose to pay. They should therefore be able to offer PTO on any terms or conditions they wish.

This means that the various types of use it or lose it policies discussed above are likely enforceable under Arizona law. Such policies can be beneficial to employers because some employees use little of their PTO. A long-term employee can end up with hundreds of hours of accrued PTO that can be an expensive liability upon separation if required to be paid out. Employers also want to encourage employees to use their PTO because they recognize that when an employee never takes time off of work, their health, well-being, and work tend to suffer.

Although employers may have broad discretion to implement the PTO policy of their choosing if clearly communicated to employees, they should still be very careful when making changes to an existing PTO policy. Employers may have to pay out employees for accrued PTO under the old PTO policy because the employees’ right may have already vested. Employers may have to wait until calendar or fiscal year end to make changes. Employers also need to ensure the new policy is carefully drafted and published to employees, with signed acknowledgements. Employers should consult with an experienced employment attorney to ensure they do everything correctly because there is a lot to know and consider, and the consequences for making a mistake can be significant.

I also strongly recommend that PTO be separated from paid sick time because there are serious consequences for violating the Arizona paid sick time law, whereas employers have much more freedom when it comes to regular PTO.