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By Roy Rasmussen Updated on October 12, 2021

Paid Time Off: How to Choose the Best PTO Policy for Your Business

A good paid time off (PTO) policy can help attract qualified workers and maintain employee satisfaction. 

Here’s how to create one for your business.

What Is Paid Time Off?

While the term “paid time off” can refer to any type of employer-paid leave, the abbreviation “PTO” often can refer to a benefits policy where employees are given a total amount of days that can be used for all types of paid leave. 

Employees may choose to use their PTO time for vacation, sick time, personal time or other reasons allowed by the policy. Depending on the employer’s policy, PTO may accrue over time or roll over from one year into the next.

PTO vs. Vacation: What’s the Difference?

PTO policies differ from conventional paid leave policies that allocate different amounts of paid leave time for categories such as vacation and sick days. 

Under a PTO plan, vacation days are included with sick days and other types of leave days for purposes of calculating paid leave time. This is one of the most essential differences between a PTO policy and a typical sick leave and vacation policy for small business employees.

An Example of a PTO Policy?

To illustrate a PTO plan, let’s say an employer grants new full-time employees 14 days of paid time off annually, plus 7 company-observed paid holidays. 

New hires must wait 59 days before they become eligible to begin taking PTO leave. After 30 days, new hires can begin accruing additional PTO at the rate of .06 days per pay period, so that after 26 biweekly paychecks, 1.56 days will be accumulated. At the end of the year, employees can roll over up to 19 days of PTO into the next year. 

Employees earn additional PTO as a bonus after being employed for milestones of 1 year, 3 years, 5 years and 10 years.

What Are Some Different Types of PTO Policies?

PTO policies offer employers a great deal of flexibility in designing plans — and they come in a number of varieties. 

Some of the more common types include:

  • PTO banks: the most common type of PTO policy, where a set number of days are granted for all types of paid leave allowed by the employer’s plan
  • Unlimited PTO (also known as flexible PTO): this type of policy allows employees to take off as much PTO as they request, relying on the employee’s work ethic and peer pressure to discourage abuse of the policy
  • Protected PTO: a special category of PTO available for emergencies, used by Walmart
  • Cafeteria plan PTO purchases: a type of benefits package where employees can choose from a benefits “menu” which includes the option of “purchasing” additional PTO at the expense of a salary reduction or the reduction of some benefit
  • PTO donations: employees can donate some of their own PTO to a pool which can be used by coworkers who need it for reasons such as illness or taking care of a family member

These different types of policies aren’t necessarily mutually exclusive. For example, a policy with a PTO bank for each employee may allow a certain number of an individual’s PTO hours to be donated to a general pool.

A wall clock has the words “Paid Time Off” on its face.

Why Should a Small Business Offer PTO?

Offering PTO to your employees can benefit your business in several ways. Employees appreciate the flexibility of being able to choose whether they want to use their time off for sick days or vacation. This can help make your benefits package more attractive to talented recruits, improving your ability to hire employees.

Another PTO benefit is employee retention. Employees who are satisfied with their benefits are more likely to stay satisfied with your company and less likely to seek employment elsewhere.

By helping your employee recruitment and retention, a PTO policy can lower your recruitment costs. This can help offset the cost of PTO compensation, making PTO a worthwhile investment.

A good PTO policy can promote higher productivity. Employees who are satisfied with their benefits, refreshed from vacation and free from anxieties about needing to take time off for personal matters are inclined to be more productive on the job.

PTO can be a way to leverage benefits you are legally required to offer employees anyway. Some states and local governments require companies to provide paid sick leave, as summarized by human resources software provider Paycor. During 2020, some employers were required to provide paid sick leave or expanded family and medical leave under the Families First Coronavirus Response Act (FFCRA), as explained by the Department of Labor. If you are required by law to provide paid leave, a PTO policy can allow you to make the most of this by incorporating it into benefits you offer employees.

Finally, a PTO policy can have administrative benefits. Unlike a traditional leave policy, you don’t have to track items such as sick time and vacation time separately. This simplifies your administrative paperwork.

How Much PTO Time Do Workers Actually Use?

When weighing the pros and cons of PTO policy, it’s important to realize that employees often don’t use all the paid time off they’re entitled to. 

For example, according to the Bureau of Labor Statistics, in 2017 to 2018, 9% of wage and salary workers who needed to take leave for reasons such as illness or personal matters didn’t do so, citing concerns such as having too much work or fearing negative consequences from employers. 

In 2017, 52% of American workers had unused vacation time, according to the U.S. Travel Association, a trade organization representing the travel industry. These factors help mitigate the cost of PTO to employers.

Can I Afford a PTO Policy?

A cost-benefit analysis of adopting a PTO policy should weigh the estimated expense of paid leave benefits against a number of offsetting factors. 

As mentioned above, many employees won’t use all their paid leave, mitigating some of the cost of PTO. A PTO policy can lower the cost of recruitment by making it easier to attract top talent while decreasing employee turnover. PTO can increase productivity by improving morale and by allowing employees to refresh their energy through periodic vacations.

While the financial impact of these benefits can only be estimated and will vary for each business, all these considerations form part of the equation. Weigh these factors in when evaluating the return on investment of a PTO policy.

What Are the Cons to Having a PTO Policy?

One of the potential drawbacks to a PTO policy is the risk that some employees will abuse it. For example, some employees may decide at the last minute to take their time off, leaving you short-staffed. A new hire may use up their PTO and then quit.

You can minimize these risks by setting limits on your PTO policy. Requiring a certain amount of advance notice can reduce the risk of employees taking time off on short notice. Delaying PTO eligibility and accrual until a certain period of time has elapsed can keep new hires from abusing the policy.

Other potential risks stem from employees not using their PTO. For example, some employees prefer to work even when they’re sick so they can keep their PTO time, which can result in them infecting other staff members. Other employees may save their PTO until the end of the year, realize they’re about to lose their annual benefit and schedule a sudden year-end vacation. In some states that require employees to be paid for unused vacation time, if you terminate an employee, you may be required to pay them for all their unused PTO.

You can take a number of steps to counter these risks: 

  • Letting employees know that they won’t be penalized or ostracized for taking paid time off can help overcome psychological aversion to taking sick days and vacation days 
  • A company culture that encourages vacations can help reinforce this message. 
  • You can offer incentives for employees who use their PTO time, such as offering employees who use vacation time health-care discounts based on the therapeutic effects of vacations 
  • To discourage employees from using up their PTO in a large block at year-end, you can allow them to roll time over into the next year

How Do I Design a PTO Policy?

To design a PTO structure appropriate for your business, here are 6 steps to follow:

1. Research Applicable Laws and Market Trends

Start by researching what federal, state and local laws apply to you, particularly with respect to sick leave. This will let you know which benefits you’re required to include in any policy you develop. A qualified labor lawyer or human resources consulting firm can assist you.

Next, research what types of benefits job seekers in your industry want. This will help you design a PTO policy that will appeal to your target recruiting pool. To investigate what benefits workers in your industry want, you can use methods such as surveying your own workers, participating in social media discussions and reading research reports.

2. Weigh PTO Against Traditional Leave Options

The best PTO policies for your business depend on your needs. After doing your background research, consider whether a traditional leave policy or a PTO policy is best suited for your business. 

A key question is whether you care about transparency into whether employees are using paid time off for illness, vacation or personal reasons. If this is important to you, a traditional policy may be what you need. Otherwise, consider a PTO policy.

3. Establish the Key Components of Your PTO Policy

If you decide to go with a PTO policy, you’ll need to make some decisions about the key components which make up your PTO policy. These include:

  • How much total PTO time you grant
  • Whether time is accessible immediately or delayed and accrued
  • PTO bonus policies
  • Use it or lose it vs. rollover
  • PTO separation policy

Total Time Off

one decision you need to make is how much total PTO time to give employees. The Bureau of Labor Statistics periodically publishes data you can use to research how much time other companies are offering. 

For example, as of March 2020, the average number of paid sick days for employees in private industry who had worked 1 year was 7 days, while the average number of paid vacation days was 11 days.

Immediate Access or Delayed Accrual?

Another key set of decisions involves whether new employees will receive access to all their annual PTO time immediately or whether access will be subject to a waiting period and time will accrue over the course of a year. If you decide on a waiting period, you’ll need to set how long it is. If it will accrue, you’ll need to decide how often it will accrue.

Common accrual options include every pay period, each month or annually. You can calculate an accrual rate by starting with the total number of days you want to grant for the course of a year and then dividing that total up into increments. For instance, you can divide by the number of hours an employee works per year to determine how much time they accrue per hour worked.

PTO Bonus Policies

If you’re going to award PTO as a bonus for tenure or performance, you should decide how this will be handled. For instance, you can create a schedule for how often employees who stay with the company more than a year will be awarded PTO bonuses.

Use It or Lose It Vs. Rollover

You’ll need to decide whether employees can roll over unused PTO time into the next year. If so, you’ll need to choose between letting them roll over all of their time or only part of their time. Note that in some states, paid time off is treated as a form of earned wages and cannot be lost through disuse. Make sure you choose a policy that is legal in your area.

PTO Separation Policy

Another key component of your PTO policy is how PTO is paid out when an employee quits or is fired. This is another area where you should check your legal obligations before deciding on a policy.

4. Set Procedures for Requesting Time Off

A paid time off policy best practice is to require managers be given a certain amount of advance notice when employees want PTO leave. This will help you avoid last-minute staff scheduling dilemmas. For example, you might require that employees give at least 2 weeks of notice for any PTO leave that will last 3 days or more. For employees who need to call in sick, you might set a reasonable deadline for notification.

5. Document Your PTO Policy

Once you’ve decided how you want to run your PTO program, document your policies and procedures in writing. This will help you communicate your benefits program to employees, and it can protect you if disputes arise.

6. Implement a PTO Tracking System

To administer your PTO program, you will need an effective tracking system. Key information which needs to be monitored includes time accrued and time used. The most efficient way to track PTO is to use human resources software designed for this purpose, such as Zenefits.

Two scenes: One is of a man in bed sick with a thermometer in his mouth. Another is of a woman sitting poolside reading a book while on vacation.

PTO Frequently Asked Questions

Now that we’ve covered some essentials, let’s consider some specific questions frequently asked about PTO policy for small business firms.

Are Employers Legally Required to Offer PTO Benefits?

Employers aren’t required to offer PTO directly. However, some paid leave benefits that can be included as part of a PTO policy may be required under certain conditions. According to the Department of Labor, there is no federal law requiring employers to offer paid sick leave, paid vacation time, paid holidays or payment for time not worked in general. 

However, federal contractor regulations and some states and local governments require paid sick leave, and employers may choose to incorporate this benefit into a PTO policy. Some states have requirements for compensating exiting employees for unused vacation time.

At the federal level, the Fair Labor Standards Act (FLSA), administered by the Department of Labor, stipulates special paid leave rules for certain employees classified as exempt. 

Generally speaking, exempt employees are salaried employees who don’t have their time or overtime tracked and meet certain salary requirements and other tests defined by the Department of Labor. For exempt employees, employers can’t withhold pay for absences caused by illness or disability unless the employer has a documented policy for how such absences are handled and the employee either is not yet eligible for PTO or has used up their PTO time. If an exempt employee who takes an absence hasn’t used up their PTO time, their employer can compel them to apply it to time missed, according to a Department of Labor opinion letter.

Laws and regulations for administering PTO benefits can be complex. To cover your bases, consult an experienced labor lawyer or human resources consulting firm familiar with your state and local laws.

What If I Have Remote Employees in Other States or Countries?

If you have employees who work in other locations, you are normally required to comply with the laws applicable in that location. Seek informed legal counsel regarding applicable laws in your situation.

What If Someone Uses More PTO Time Than They Have?

It’s up to you as an employer how to handle situations where employees want to use more PTO days than they have accrued. You can choose to disallow this, or you can allow employees to go into PTO “debt” and put their time toward future paid leave they would have accrued. Whatever policy you decide upon, put it in writing and apply it consistently to all employees.

Can Different Employees Receive Different Amounts of PTO as a Bonus?

Yes. Employers commonly offer PTO as an incentive for joining a company, staying with the company or delivering superior performance. 

For example, extra PTO might be offered to encourage a talented recruit to accept a position or to reward an employee who has been with the company for several years. If you plan to grant PTO as a bonus for tenure or performance, put your policy in writing and apply it consistently.

Draw Top Talent With a Winning PTO Policy

A well-designed company PTO policy can enhance your benefits package, helping you attract talented workers and keep your current employees satisfied. Offering PTO benefits can pay off by reducing your recruitment costs and refreshing your workers so they stay productive.

An effective PTO policy should be appealing to your market, consistent with your company culture and supported by policies that support using paid leave. To develop your PTO policy, consider whether you want to grant paid leave time through lump sum or accrual, whether you want to let time roll over and what happens to unused time when employees leave your company. 

Set policies for details of PTO usage, such as how much notice is required. Make sure your policy is consistent with any applicable state laws.

Roy is a respected, published author on topics including business coaching, small business management and business automation as well as an expert business plan writer and strategist.
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