The employer does not have to include paid vacation time when calculating overtime compensation for the week. Assume that the employee regularly works 40 hours for $10 an hour or a fixed weekly salary of $400. Her regular rate is $10, and her overtime rate for four extra hours is $15. For the week, she should receive $460 for her hours worked, plus $80 for paid vacation. The employer cannot credit any vacation pay toward its overtime liability.
Alternatively, employers may choose to treat paid vacation time as hours worked. This may benefit an employer that is contractually obligated to pay premium rates for daily overtime or weekend work, for example. Then the premium may be treated as true overtime under the Fair Labor Standards Act (FLSA) and credited against overtime compensation.
PTO or paid personal leave?
Designating an absence as PTO or personal leave probably does not matter, but be aware that neither the FLSA nor enforcement policy are clear on the point. The rules state that
an employer for overtime-pay purposes may exclude from hours worked paid absences due to "vacation, holidays, illness, insufficient work or similar causes." Does paid personal time qualify as a vacation or a similar cause?
When the rules were written, most people took vacation in one- or two-week increments and, perhaps, had a certain number of sick days. Employers rarely paid nonexempt workers for personal or partial days of absence. Over the years the Wage and Hour Division has designated funeral leave and other reasons as "similar causes." However, personal business is not one of them.
Neither regulations nor the Division's opinion letters say much about today's broader PTO policies. The agency said that compensatory time used by public employees may be excluded from overtime-pay calculations. This statement may be the best indicator that the agency would treat all time off under a no-fault PTO plan in the same manner. Until there is more explicit clarification, however, employers may want to avoid creating a separate category for paid personal leave.