How CFOs can defuse the time bomb of PTO liabilities

There’s a ticking time bomb on many companies’ balance sheets, and it’s getting larger by the day: paid time off liabilities. 

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PTO accounts for a quarter of the overall cost of benefits, which is over $1 trillion — around $7,600 per full-time employee. But the majority of employees don’t use all the PTO available to them, which means many companies are steadily accumulating a huge line item on their balance sheets.

In many states, companies are responsible for paying out the full value of unused PTO upon employee separation — and this liability is increasing as employees take less time off. A few simple numbers illustrate the magnitude of the problem. An employee with 32 hours of unused PTO at $50 per hour creates a $1,600 liability. Multiply that across 500 employees, and you have $800,000 sitting on the balance sheet — a total that will continue to rise with cost of living adjustments. And as employees continue to avoid taking time off, their individual liabilities will keep ballooning. Although finance teams didn’t create this problem, they must solve it.

There are two lenses through which CFOs can view the task of addressing PTO liabilities: cultural and structural. Employees should be encouraged to take all the PTO they need to recharge. “Always on” workplace cultures increase stress and turnover while contributing to compounding PTO liabilities. Employees should also have greater flexibility with their PTO. By enabling them to repurpose unused time, companies can slash their PTO liabilities while giving employees more ways to improve their personal and financial well-being.

Why unused PTO is a growing crisis

Benefits account for nearly 30% of overall employee compensation, and PTO takes up a big share of this total. But it is also widely underused — a Harris survey found that just 22% of employees use all their time off. A recent global survey found that work-life balance has surpassed pay as a top motivator for employees, which is why the failure to take time off is a disturbing trend. Three-quarters of American workers say they wish they could take all their time off, but they’re deterred by the pressure to always be responsive, heavy workloads, feelings of guilt about creating work for colleagues, fear of missing opportunities and many other factors.

At a time when 40% of employees report they feel “a lot of stress” on any given day at work, the failure to take time off can be a leading indicator of low morale, productivity problems, and even turnover. Meanwhile, 86% of employees worry about their finances and 46% say this affects their work. Hardship withdrawals from retirement accounts just hit a record high, household debt is rapidly approaching $19 trillion, and a majority of Americans say they don’t have the liquidity to cover a surprise $1,000 expense. Yet the average employee has abandoned more than three times that amount in unused PTO.

The lack of PTO utilization is a crisis on multiple fronts: It leads to employee burnout and turnover while simultaneously inflating already-high balance sheet liabilities. CFOs must cooperate with HR teams to get this crisis under control as quickly as possible.

The growing financial consequences of unused PTO

Some companies have adopted “use it or lose it” policies to avoid PTO liabilities, which means employees must sacrifice the full value of their hard-earned time off if they don’t take it. This creates resentment and increases the risk of turnover. However, there are also many states — such as California and Colorado — that prohibit “use it or lose it” and require companies to pay employees for their unused PTO upon separation. This has created hundreds of billions of dollars in unpaid PTO liabilities across the country.

As if this status quo weren’t costly enough, many states also charge significant fines and impose other penalties when companies fail to pay employees the value of their PTO. This has led many companies to establish ad hoc cash-out programs, but this creates another set of risks. For example, IRS constructive receipt rules require employees to pay tax on PTO that is available for cash — even if they don’t actually exchange it. Ad hoc programs create legal risks that can lead to fines, regulatory scrutiny, operational disruptions, and reputational damage.

At a time when employees are increasingly dissatisfied with static benefits like traditional PTO and unfunded liabilities are continuing to rise, it’s no wonder that HR teams are looking for alternatives. This is where CFOs have a vital role to play — they must ensure these alternatives won’t do more harm than good by failing to address the core balance sheet problem and opening the company up to legal exposure, fines, and a host of new problems.

Turning a liability into a strategic asset

While it’s crucial for companies to focus on the cultural issues that lead employees to leave PTO on the table, this is only a partial fix — particularly for CFOs. There’s no sign that employees will suddenly start taking all their time off, which means PTO liabilities will keep climbing for the foreseeable future. Fortunately, there are structural fixes that can reduce these liabilities and improve employee well-being at the same time. As PTO requests have declined, the demand for a new generation of benefits has surged. Employees increasingly want benefits that are flexible and personalized — one-size-fits-all benefits like conventional PTO are no longer enough.

For example, companies can deploy convertible PTO programs that redirect the value of unused time off toward other priorities: retirement contributions, student loan payments, HSAs, charitable giving and so on. This will reduce balance sheet liabilities within a compliant, audit-ready structure and provide employees with a much wider range of funded benefit options. Over 90% of employees say they’re more likely to stay at a company that provides customized financial benefits. It’s possible to offer such benefits in a way that drastically reduces balance sheet liabilities.  

CFOs and HR teams must work together to implement a structural fix to the PTO liability crisis. This won’t just help CFOs cut a significant line item from their balance sheets — it will also give employees more robust support and flexibility at a time when they need it most.