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EPISODE 124: Crafting Your PTO Policy

Jarrod is joined by Stevy Levy, CPA & JD, and Stacy Phillips, CFP™ to discuss the importance of having a PTO policy in place in your practice.

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EPISODE 124 TRANSCRIPTION

Announcer
Hello, everyone. Welcome to the Millionaire Dentist Podcast brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices, to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Jarrod Bridgeman:
Hey, welcome to another episode of the Millionaire Dentist. Casey is out of town. He is working the event circuit, so meeting and greeting and doing all that kind of stuff. In-studio, today, I have Steve Levy, he is our CPA and a JD, which is... Apparently, he likes to keep himself busy. I also have Stacy Phillips, who was our CFP, our certified financial planner. How are you, fellas?

Stacy Phillips:
Good morning, Jarrod. How are you, sir?

Jarrod Bridgeman:
Good, feeling excellent.

Steve Levy:
Hey, Jarrod, how you doing?

Jarrod Bridgeman:
Hey, Steve. We were chatting the other day because I like to use this and I'm sure other people do, vacation pay, paid time off. How... Let's just get started with this. This is a subject that often comes up with practice owners, involving their employees. You guys know a lot more than I do, besides I just send a request and they say, yay or nay, "We're busy that day," so let's get started.

Steve Levy:
Well, there's a lot to talk about. There's vacation policies that employers should have in place, written ones. There's policies for the actual PTO and how it's handled, both from accruing and also from potential payouts of PTO and certainly requesting it and how it is earned. There's a lot, really, here.

Stacy Phillips:
What is it called? Is it paid time off? Is it vacation pay? Is it sick pay? There's all these different things that it is or has been in the past, that means it might not imply now.

Jarrod Bridgeman:
In terms of having your policies and stuff in place, what are some of the dangers that could happen from if you have an employee, you don't have any plan in place, maybe it's your first or second, or you're pretty new at the whole gig? What are some dangers that can occur from not having a policy in place?

Stacy Phillips:
That's a very good question, Steve. I kind of talked about this a little bit earlier, how one thing about small offices, not just dental practice, but any small type of office, people talk. If you're giving one person X number of days of PTO, you can count on, they're probably talking to their buddies and everybody's going to know what they got. If it's not equitable, you're going to have a problem.

Jarrod Bridgeman:
People do tend to get jealous. "Why is Samantha, there, getting three weeks and she just started?" kind of thing. I can definitely see that.

Stacy Phillips:
That is a one main reason to have a specific written policy. In a specific way that the amount of PTO is determined or accrued, however, you want to do it, but it needs to be something that is spelled out, basically.

Jarrod Bridgeman:
Right, because you could also accidentally set a precedence, too, by giving out too many. Then, people guilt you into taking more days off. It doesn't work here, we have a PTO policy in place.

Stacy Phillips:
Another thing to consider too, most dental practices are small operations, so if one employee is out of the office, it's a major headache for everybody.

Jarrod Bridgeman:
Basically, the entire office would have to shift and work around...

Stacy Phillips:
Potentially. What we try to tell our clients, here, is try to have your employees take their time off when the doctor is off, if at all possible.

Jarrod Bridgeman:
Since the place will be closed, more than likely.

Stacy Phillips:
That's obviously the ideal situation, that's not going to happen all the time. If you plan ahead and plan your vacations out far in advance, then, it's easier for your employees to work around that schedule. That saves some of those other days that are outside those periods, that will limit those, which helps to practice overall.

Jarrod Bridgeman:
Going off of that, if we're setting that policy in place, what's a good way to determine how many vacation days, PTO, whatever you need, to give out?

Stacy Phillips:
That's a great question, Jarrod.

Jarrod Bridgeman:
Thank you.

Stacy Phillips:
A lot of times, you have people who are just willy-nilly giving out a number of days, like, "I'm going to give Sue, over here, 10 days of vacation," and there's no rhyme or reason to how they came up with that number. We would highly suggest having some type of accrual policy. Most people use a payroll service. A lot of those can help you with that. They can actually do the calculations for you, and maybe have it accrued per payroll. That way it's equitable for everybody, that everybody's earning the same.

Jarrod Bridgeman:
For a lot of people out there, depending on the company they have, it really is like a turn-on feature, almost.

Stacy Phillips:
More than likely.

Jarrod Bridgeman (04:46):
Kind of like a set and forget?

Stacy Phillips:
Right. There's a lot of people use a set number of hours per payroll. An example would be typical payroll would have like 26 pay periods in a year, so if you accrue like two hours per pay period, that would be 52 hours total for the year, which is equivalent of, assume an eight hour day, would be six and a half days. That's the way to think about it.

Jarrod Bridgeman:
Probably, on top of that, you'd want to reward loyalty and all that kind of stuff and long-term employment. You could always do something like after a year or two years or something, you may get more?

Stacy Phillips:
Absolutely, yeah. Have a determined schedule after, like you said, a set number of years, maybe after their first year, you get a little bit of increase in your accrual. Year three, year five, whatever it is, as someone shows loyalty to your practice, you give them a little more PTO along the way.

Steve Levy:
Also, you may not want to have it put in place right away for someone just starting day one. You may want to say, "Okay, let's have maybe 90 days that they're in the office."

Jarrod Bridgeman:
Like a trial period?

Steve Levy:
Yeah, so they can show at least some longevity with the company before implementing or having it apply to that person.

Jarrod Bridgeman:
That makes sense, how we don't get a job and be like, "All right, I'm going to go ahead and take my week and a half, my two weeks, right now."

Stacy Phillips:
I'm glad you brought that up, Jarrod, because I've seen situations where people will give employees the bank of time, at the beginning of the year. Say, "Here's your 10 days and you get it all at the beginning of the year." That's probably not a great idea, because, like you said, they could turn around a month from then and they leave the practice and you've already given them that time, so, technically, you would owe that to them. It's better off, to accrue it as they go.

Jarrod Bridgeman:
That, and on top of that, if they use up all their days pretty quickly and right away, they still have 11 months of possibly being sick or their kids being sick or daycare's closed. There's all kinds of other things that would-

Stacy Phillips:
That brings up another key point, in a potential policy, is limit the number of days in a row that can be taken off, possibly, or in a month period or three month period, to avoid that situation where it's all used in a short amount of time and they have nothing left. That creates animosity.

Jarrod Bridgeman:
Going with that, I'm guessing, in the policy too, maybe you want to do something that speaks about unpaid time off, like there is the possibility, if something does come up and you're out of days, what would be a penalty for having to take a day off without pay?

Stacy Phillips:
Absolutely. I think that's language that you would need to include in your policy is, do you or don't you allow unpaid days off.

Jarrod Bridgeman:
That would save your own butt, in the long run, Mr. Lawyer?

Steve Levy:
Yeah, absolutely. Also, speaking of non-vacation days, holidays is probably also something you want to spell out in the policy. The office is typically closed, so that's typically a day that-

Jarrod Bridgeman:
Usually fall on Mondays.

Steve Levy:
Right, and an employee wouldn't have to necessarily use their vacation pay for having, also, that day off. That's a typical situation.

Jarrod Bridgeman:
Along with that, how do you determine... Let's say I didn't take all my vacation this year, would you... Some places offer a rollover, some places, they'll just pay you out at the end of the year. I'm assuming that's something else that needs to be really well spelled out.

Steve Levy:
Yeah, it really does, because there are also some IRS impacts for that, like let's say there was a big accumulation of PTO and someone's ready to have a big payout, that's going to be a tax. It's compensation and it could bump people up to a higher bracket even, depending on how much has been accumulated.

Jarrod Bridgeman:
It affects their taxes personally. Does that affect anything on the practice side?

Steve Levy:
It's a write-off, for the practice, just like any other compensation. That payout becomes a nice juicy deduction, for the company.

Stacy Phillips:
It does, however, it's also a cash flow issue if there's a large sum, that's paid out at any one point in time.

Jarrod Bridgeman:
That's true.

Stacy Phillips:
Another consideration would be 401k. If somebody has a 401k plan at their practice and they don't use their PTO, it gets paid out in a one-time lump-sum bonus. If you don't tell the payroll company what you want to do with that money, they're going to use the same calculation that's been on file the whole time. If you were somebody, like a doctor, for instance, or an associate, and you were already max funding your 401k, and you had some other bonus in there that gets thrown in, if you don't tell the payroll company, it's going to automatically calculate that deferral and you're going to be overfunded.

Jarrod Bridgeman:
A lot more work involved than I thought, huh?

Steve Levy:
Yeah, certainly. Related to that, that also gets to the topic of people leaving and they have PTO accumulated. That's a whole different thing, in that there should be some kind of policy mention as to what happens there. As Stacey and I were talking today, there are state laws that require, that if someone is resigning, that there's a payout of that accumulated PTO. Now, obviously, you want to check with your state, to see how the rules apply there.

Jarrod Bridgeman:
It's usually not the full 100% of the pay, right?

Steve Levy:
It depends, really, on that.

Jarrod Bridgeman:
Obviously, keep a check and figure out what your state does.

Stacy Phillips:
Again, to your point of is it a percentage, is it the full amount, if it's written in a policy, then there's no question.

Jarrod Bridgeman:
That's right.

Stacy Phillips:
I wanted to swing back for a minute, talking about the accrual process. One thing that is unique, kind of to dental practices, is there are a lot of times there are employees that don't work five days a week. Maybe their practice is only open four days, whatever, or you might have a part-timer that works two days. Well, that needs to be in the calculation as well, because somebody that works two days versus four days should not accrue as much PTO. There needs to be a calculation-

Jarrod Bridgeman:
That you set to what's considered full-time and not full-time?

Stacy Phillips:
Right. Maybe, if you're open four days, then they get 100% of whatever the accrual is. If you work three days, then maybe they get 75%. If you work two days, you get 50%. That all needs to be spelled out, so it's very clear and evident to everybody.

Jarrod Bridgeman:
I wanted to ask you, and I meant to do this at the beginning, as you said, different places may refer to it as different things, vacation pay, there's PTO, there's some places have sick days. That was more common, I think, in the past than now. Is there a recommendation on what is a proper way to call it?

Stacy Phillips:
My recommendation would be paid time off, and that includes everything. Like you said, in the past, a lot of places would do sick pay. I don't think people recommend that nowadays. That promotes people taking sick days, even when they're not sick, so it's better off to give them... Everything's PTO. If you're out, you're using the PTO period. It makes it very simple.

Jarrod Bridgeman:
Does that make any difference, in terms of the language in the policy, outside of, let's say, vacation pay versus PTO?

Steve Levy:
You'd want to clearly define what PTO includes, and to have it all-encompassing, like Stacy said, of it's vacation, it's times where they're sick, to make sure it's well defined.

Stacy Phillips:
It's bereavement. It's everything, all in one, basically. You're not singling out any category. It's all lumped into one bucket.

Jarrod Bridgeman:
I believe that, as someone who benefits from a program like that, there's been jobs in the past where if you did a sick day, they require like a doctor's note, like you're back in high school. Stuff like that, which I always thought was a little odd, to prove it. I get it too, because you don't want people cheating you out of it.

Steve Levy:
Have it all-encompassing avoids that whole uncomfortableness.

Stacy Phillips:
I think you noted another podcast. You get into a whole nother area of people being out extended periods and doctor's notes and all that. That's a whole nother podcast, I think.

Jarrod Bridgeman:
I think that's a good idea. I wanted to ask you, Steve, to get back to you, you'd mentioned putting in the policy certain holidays. When it comes to federal holidays, is it pick and choose? I believe there's always a couple, there's a handful, that's considered it's going to happen no matter what, like on Labor Day or Memorial day. Those are pretty traditionally days off. If you're closing the office, we kind of talked about it a little bit do you have to pay your staff still?

Steve Levy:
If you're closing the office, it's good policy, to do so, because business isn't happening and people are... It's a benefit, it's enticement, for the employee to see and compare with other places. "Hey, am I getting paid for this holiday here? Am I not getting paid for this holiday here?" It's common practice, to do that, and like you said-

Jarrod Bridgeman:
Really, it's good for hiring?

Steve Levy:
It really is.

Stacy Phillips:
Absolutely.

Steve Levy:
It's expected too.

Stacy Phillips:
That's a recruiting tool, for sure, that, "Hey, you have paid holidays here."

Steve Levy:
It's going to be the basics to sometimes people go farther. It kind of depends on-

Jarrod Bridgeman:
What if you're a state employee dentist? You get lots of days off.

Steve Levy:
You certainly do. That's a whole different ball of wax there.

Stacy Phillips:
Steve kind of got into like payroll earlier, talking about that. One of the issues there is properly coding time off in your payroll system, and not just entering it as normal hours. You want to be able to track that, so it needs to be coded as PTO or vacation pay, however, your payroll company defines that. The important thing is that it's put in there properly, so it can be tracked later.

Jarrod Bridgeman:
In terms of... Sorry to cut you off there, Steve. Is PTO pay taxed any differently?

Steve Levy:
No, it's all compensation.

Jarrod Bridgeman:
It's not like... I guess, sometimes things that are marked as bonuses will have a different tax rate?

Steve Levy:
Right. Sometimes, though, if it's a big lump sum that's paid either from resignation or a cash-out of PTO, it might be considered what's called supplemental wages. Those might have a tax rate withholding of 22%, so it's important, certainly, to categorize it properly. Also, like Stacy was saying, if you put the hours as regular hours, then the person is getting PTO that should be used not used. It hurts the company that way.

Jarrod Bridgeman:
Is there... Let's say you don't have a policy in place or you're looking to improve and expand upon what you have currently, who's a good person to talk to, to get help with that?

Stacy Phillips:
That is a great question. There are a number of companies out there that deal in HR-type stuff. I would highly recommend if somebody is trying to develop a policy, that you contact somebody like that. They can usually give you some type of template to go off of. Ask a lot of questions and really get to the point of, "What do you want to offer?", because-

Jarrod Bridgeman:
They would probably be the expert in, "Here's the state laws for Indiana or Wyoming."

Stacy Phillips:
Yep, they'll be able to help you with all that kind of stuff. There's going to be a lot of stuff that you never thought about, that they'll ask questions about. Then, you can decide whether or not you want to put that in your policy or not.

Steve Levy:
You really want it designed for what meets your goal, so there'll probably be a discussion, with that company, what you want to accomplish. Sometimes there's templates that really don't fit your situation. You want to design as to how you want to entice the employees to join your company.

Jarrod Bridgeman:
Is there anybody else you should loop into that conversation with this type of HR person? Would you maybe like a numbers, money person on your team?

Steve Levy:
I think that would be wise to do that, because, obviously, your policy affects your bottom line, and it also affects you as receiving compensation as well. It affects you personally but affects the entire practice. I think crunching the numbers is a great idea, to see what's the impact of this change or putting in this provision in your policy.

Stacy Phillips:
Another thing to consider as well is you go through this process, you develop your written policy. What do we do with it, at that point? Obviously, you're going to give it to the employees, but a good practice would be to have, in your documents, signatures to where everybody signs off on it. Employee can sign it. Employer can sign it. You can keep it in their HR file. That way they can't come back later and say, "Well, I didn't know about that." "Well, you read the policy, you signed it, so..."

Jarrod Bridgeman:
You signed that, you said you did.

Stacy Phillips:
That protects you, from that standpoint. Both sides.

Steve Levy:
It's also good to have it available electronically. It might be sent to the employee, but it's nice to have it, maybe, on some kind of portal for the company, internal portal with other HR documents, that this is the policy for that. If there's any questions, you can just go to it.

Stacy Phillips:
Another thing to think about as well is, with this type of item, there's never going to be a perfect policy. You may need to make changes, at some point. Don't go into the process thinking, "Oh, we're going to develop the best policy. Perfect. We're never going to have to change it." That's not very likely.

Jarrod Bridgeman:
No, that might be good for now, but who knows how trends go with business and stuff like that in future.

Stacy Phillips:
Business. Laws can change, which brings up another point. You need to review this, on a periodic basis, because there may be changes you are forced to make if a law's changed. Maybe you've experienced some things with the policy that didn't work the way you thought they were going to, and it's a good time to sit down and work it out and maybe make some changes.

Jarrod Bridgeman:
How frequently would you say that should be looked at?

Stacy Phillips:
At least, annually, I'd say.

Steve Levy:
Also, it's a private internal document for the company and the employee. You certainly don't want to... You want to discourage the employee to start passing this around your friends. It's really a private situation there.

Stacy Phillips:
You could even build in a nondisclosure paragraph or something into the document.

Jarrod Bridgeman:
Thanks, fellows. I really appreciated all your expertise with this one. Steve, you did a great job, as usual. Stacy, you're good as well.

Stacy Phillips:
Thanks, for having us, Jarrod.

Steve Levy:
Thanks Jarrod.

Stacy Phillips:
We really appreciate it.

Jarrod Bridgeman:
Folks, keep in mind that on August 5th we will be hosting an event at Topgolf in Fishers, Indiana, and August 12th we will be in Auburn Hills, just outside of Detroit, also hosting an event at Topgolf. You can check us out on Fourquadrantsadvisory.com/events, and we have all our upcoming stuff happening there. All right, thanks, fellas.

Stacy Phillips:
Thank you.

Steve Levy:
Thank you.

Announcer:
That's all the time we have today. Thank you to our guests, for their insight and for sharing some really great information. Thank you, to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to Fourquadrantsadvisory.com, and see why, year after year, they retain over 95% of their clients. Thank you, again, for joining us, and we'll see you next time.