Paid time off (PTO) is one of the most common and popular benefits offered by employers to employees. But to implement this benefit with the least amount of administrative and interpersonal hassles, your business needs a strong PTO policy along with an HR technology to track employees’ use of PTO and ensure accuracy of records.
The purpose of a PTO policy is to establish ground rules and transparency while promoting objectivity and consistency in the application of those rules.
For businesses with multiple locations, leaders may have to decide if they will create a companywide PTO policy applicable to all offices or have specific policies applicable to specific offices based upon state or local mandatory paid sick leave requirements.
Generally speaking, however, your PTO policy should be documented in writing within your employee handbook and include:
- The number of PTO days employees – or certain categories of employees – get off annually
- The maximum amount of PTO that can be taken at once, if desired
- The procedure for requesting and approving time off
- The amount of notice that employees must give managers
- How unused PTO is handled when an employee leaves the company
- Any other special rules or parameters you want to put in place around employees using PTO
On this last point, your PTO policy should address the following questions that have become timely of late.
Combine PTO with sick leave – or separate it?
Traditionally, employers have given employees a set number of PTO and sick days lumped together. For example, let’s say that Company A has historically given employees 15 total days of PTO, to be used for either vacation or sick time.
But that’s starting to change.
Now, many states require companies to provide employees with a certain number of hours of paid sick leave each year – separate from PTO. Check with the laws of the individual states in which you operate to determine whether these laws might apply to your business.
Furthermore, companies want to be able to track the difference between PTO and sick time to better assess how employees use this benefit. And separating the two types of leaves tends to be more popular with employees, who usually prefer to not have to use up valuable vacation time when they’re sick.
Trends seem to indicate that fewer U.S. employers combine PTO with sick leave. In 2021, 41% of companies combined leaves – down from 44% in 2020.
Standard or unlimited PTO?
Standard PTO is when employees have a finite number of PTO days to use throughout each calendar year. Although it can make employees feel more restricted, these plans offer important advantages to employers:
- Enables more control over the costs associated with PTO (e.g., lost productivity)
- Makes scheduling easier
- Offers more peace of mind that business needs will be covered
Unlimited PTO lets employees take off as many days as they want – no questions asked – as long as they get their work done and their time away from the office accommodates business needs. Certainly, for employees, unlimited PTO:
- Provides a great recruiting and retention tool
- Increases satisfaction
- Promotes the sense that their company cares about their wellbeing
On the other hand, unlimited PTO can be abused by employees, which can jeopardize business operations and productivity.
Yet offering unlimited PTO doesn’t mean you can’t impose any restrictions. If you implement an unlimited PTO policy, make sure that you:
- Define the type of leave that is approved under the policy and what is not approved (for example, long-term absences associated with medical or disability leave)
- Implement a separate sick leave policy
- Set parameters around how much PTO an employee can take at once
If you have nonexempt hourly employees, unlimited PTO isn’t recommended because you need to be able to track their time actually worked. This option only makes sense for exempt, salaried employees.
It’s worth noting that there’s seemingly a resurgence in support for standard PTO plans. In 2021, 51% of employers reported offering standard PTO plans, up from 49% in 2020.
So, which option should your business choose? It depends. Weigh the pros and cons for your business and consider your workplace culture.
Flat or tiered PTO?
On average, most U.S. employers offer 10 to 14 days of PTO for employees who have just started with their company.
If you want, you can give all your employees the same flat number of PTO days, regardless of tenure. This option certainly involves less tracking and administrative effort. If your company is smaller, employees may even desire equal treatment across the board.
However, if you want to reward employees for their loyalty and duration of service at your company, you can increase PTO on a tiered system. So, the longer an employee stays with your company, the more PTO they’re eligible for each year or each time they pass a set milestone. For example, Employee A has been with your company for one year and receives 15 days of PTO annually. Meanwhile, Employee B has been with your company for five years and receives 20 days of PTO annually.
Employees’ desire to be rewarded for tenure tends to increase as companies (and staff size) grow.
Overall, a tiered PTO system can:
- Serve as a great recruitment and retention tool
- Reinforce for long-term employees that they’re valued
Frontloaded or accrued PTO?
Frontloaded PTO is when employees are granted all of their allotted PTO for that calendar year on January 1, to use as soon as they want or at any point throughout the year. Employees tend to favor frontloaded PTO for its lack of restrictions. However, employers run the risk of an employee using up all their vacation time in the first few months of the year and then quitting.
In an accrued PTO policy, employees earn an increased amount of PTO per pay period or at other designated increments. This option requires more tracking and administrative effort, but it also gives employers more control over PTO costs, planning and scheduling throughout the year.
If you choose the accrual method, consider whether you’ll allow employees the flexibility of negative accrual – the use of PTO time before it’s earned. For example, if an employee wanted to take a vacation in February that required more vacation time than they have in their PTO bank, negative accrual would permit them to apply both earned and unearned PTO toward the trip. If they left your company soon after, you may be able to “charge” them – deduct the cost of the unearned PTO from their final paycheck – depending on the laws of the states where your company operates. (Again, check regulations before implementing this practice.)
Negative accrual can also counteract end-of-year absenteeism. Without negative accruals, employees wouldn’t be able to take off for larger blocks of time – five days or more – until the second half of the year. This means that several employees could be out of the office at overlapping times, which could create staffing challenges.
Another compromise could be frontloading an allotted amount of PTO time at the beginning of the year, and then requiring employees to accrue additional time beyond that.
Rollover or “use it or lose it” PTO?
In a “use it or lose it” PTO policy, employees must use all of their allotted PTO before the end of each calendar year to avoid losing it. Some states prohibit “use it or lose it” PTO policies, so be sure to check whether the state(s) in which your business operates allows it.
From an employee perspective, the downside is that they can feel like they’re:
- Being forced to use PTO when they’d rather save it and use it at a more personally advantageous time
- Losing out on an earned benefit
From the employer perspective, although “use it or lose it” PTO policies enable easier, cleaner tracking of PTO, they can spur a sharp increase in end-of-year absenteeism and can impair employee relations.
A rollover PTO policy allows employees to carry over unused PTO into the next calendar year. However, this can get out of control fast. Set limits on the amount of PTO that can be carried over into the next year, as well as the amount of rollover PTO that can be used at once.
It can also be beneficial to:
- Place an expiration date on rollover PTO
- Establish a maximum cap on the amount of available PTO, meaning that employees can’t accrue any more PTO until they use what they’ve carried over
- Will your company mandate that employees use a minimum amount of PTO each year?
- How will you address the use of PTO during the most sought-after times of the year (e.g., major holidays and spring break), when many employees want to take time off?
- In an effort to embrace diverse cultures and religious beliefs, or to allow greater flexibility for employees, will you allow employees to take floating holidays?
Summing it all up
Of course, your company’s PTO policy should address all the basics – who’s eligible for how many days of PTO, procedures, notice periods and major restrictions, for example. But then you should consider some of the more pressing and timely issues that employers today grapple with, including whether to:
- Combine or separate PTO and sick leave (according to what your state and local laws say)
- Select standard or unlimited PTO
- Choose flat or tiered PTO
- Opt for frontloaded or accrued PTO, or some combination thereof
- Adopt rollover or “use it or lose it” PTO
These decisions must all be evaluated against:
- Your workplace culture
- The general pros and cons
- What your competitors are doing
- What your employees prefer
- The needs of your business
For more information on developing a competitive benefits program that boosts employee satisfaction and retention, download our free magazine: The Insperity guide to employee benefits.