How to create a PTO program

In the past, many companies gave employees a certain number of paid days off for vacation, then some for sickness and a few more for personal time.

These days, many employers are giving a lump sum of paid-time-off (PTO) days per year to cover any type of absence. But now, there’s a new trend gaining some traction: unlimited PTO.

Made popular by Virgin founder, Richard Branson, unlimited PTO lets people take off as many days as they want – no questions asked.

While it may sound like a pretty cool perk to offer your employees, an open-ended PTO policy isn’t right for every business. There are several factors to consider.

Let’s walk through the choices you have when creating a PTO program, and I’ll share what I’ve seen work well in my experience.

1. Unlimited or standard PTO?

Unlimited PTO programs are based on trust and the idea that employees will do what they need to do to get their work done, and then take time away from the office only when it makes sense.I’ve seen unlimited PTO be a success, and I’ve seen it turn to disaster. Keep in mind that it never works for hourly employees.

The company that tried it and got burned ended up with employees who were taking “sales trips” that were really personal vacations. Their harder-working colleagues caught on to the hoax and brought it to management’s attention, and that was the end of unlimited PTO at that company. Unfortunately, it was an experiment that contributed to a huge revenue dive.

At the other end of the spectrum, another company I’ve worked with has been very happy with offering unlimited PTO. This company gives unlimited days off to its sales staff, executives and executive assistants. Everyone else is on a traditional PTO program. Despite the somewhat complicated arrangement, it has served the company’s and the employees’ needs very well.

Could unlimited PTO be for you? If you have a results-driven company culture, trustworthy salaried employees, and the technology to support that level of flexibility, it could be a great, maintenance-free PTO option for you.

2. Flat or tiered PTO?

On average, most U.S. employers offer 12 to 15 days of PTO to start. If you want, you can give all your employees the same flat number of PTO days. But if you want to reward employees for their length of service at your company, you could increase PTO on a tiered system. The longer an employee stays with your company, the more PTO they’d receive each year or each time they pass set milestones. For example, an employee who has been with the company for one year may receive 15 days of PTO each year, while an employee who has been with the company for five years may receive 20 days of PTO.

Although it requires a little more tracking, I recommend a tiered system because it’s a nice opportunity to encourage loyalty.

Think about your company and the type of staffing demands you have. Research other businesses in your industry to see what their PTO programs offer.

3. Granted or accrued PTO?

You’ll also need to decide whether to grant employees all of their PTO days at the beginning of the year or to have them accrue days throughout the year. Granted PTO allows employees to use as much of it as they want at any point during the year. The risk here is that an employee may use all of his or her PTO in February and then quit in March without having to pay you back for any of that time.

An accrued PTO system lets you prorate earned days off. I recommend accrual by pay period. Again, it’s more to track but makes it easier for you to keep things fair when employees come and go mid-year.

If you choose the accrual method, you should also decide whether to allow negative accrual (i.e., letting your employees use days before they’re earned). These options can make a big difference to your employees.

For example, if you have an employee who takes his family on an extended vacation in February, negative accrual would allow him to use both earned and unearned PTO during the trip. If he left your company soon after, the employee would have to pay you back for any unearned time off that he’d already used.

Without negative accruals, your employees wouldn’t be able to take off for large blocks of time—five consecutive days or more—until the last half of the year. This means several employees could be out for more than a week at the same time, which could create significant staffing challenges.

Allowing negative accrual or granting the time at the beginning of the year can be beneficial to your company and employees as long as everyone understands the repayment policy for unaccrued time at separation.

4. Rollover or use-it-or-lose-it PTO?

You can counteract year-end absenteeism associated with accrual-based PTO by allowing employees to carry over PTO into the next year.

To prevent employees from accruing massive amounts of PTO over the years, most companies with rollover programs also have a cap or max number of PTO hours allowed per employee. Once employees reach this amount, they’re no longer allowed to accrue more PTO until they’ve used some of what they already have.

Some companies have found that keeping track of rollover PTO can be too much of a hassle, so they stick to the use-it or lose-it system. Whatever employees don’t use by the end of the year is lost, and they start back at zero at the beginning of the year.

The problem with use-it-or-lose-it is that it can promote large gaps of absenteeism at the end of the year to avoid losing it. It’s also illegal in some states, like California. Think about your company, check your state’s laws and decide which system would be the least harmful to your business.

A few more decisions

Before communicating your PTO policy to your staff and recording it in your employee handbook, you’ll need to make a few more choices:

  • How many days notice must employees give their managers?
  • What will the request process look like?
  • How will you keep track of your program?
  • Will you allow half-days off or only full?

Put as many or as few rules into your PTO program as you want. But before you make anything official, take time to closely consider those rules to make sure they’ll work well for your company.

Need further assistance?

Discover how a PEO’s dedicated team of HR specialists can help you not only create the best policy for your business, but also track your employees’ PTO and stay in compliance with related state and federal laws. Download our free e-book, HR outsourcing: a step-by-step guide to professional employer organizations (PEOs).

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