How to choose a PTO policy for your business

Even the most dedicated employees need a break sometimes. Paid time off is essential to your employee benefits and compensation package. As such, your PTO policy will be one of your most important company policies.

A solid PTO policy will make administering paid time off easier on human resources and more straightforward for employees. There are many factors to consider when creating a solid paid time off policy, so we’ve outlined them here to help you through the process.

Types of PTO

The primary categories of paid time off are as follows:

Sick leave

Sick leave provides days off for health-related matters such as illness or injury. It is often used for unscheduled absences when an employee wakes up sick and cannot go to work. Sick leave can also be scheduled in advance if an employee needs time off for a doctor’s appointment or medical procedure.

Vacation

Vacation time allows employees to take time off for vacations, personal days, and any non-health-related time off they would like to request. These are generally planned absences, so it’s a good idea to include vacation request procedures in your vacation policy.

Let employees know how vacation is accrued when available (there is often a 90-day waiting period) and how to request a vacation.

Holidays

Holidays are paid days off that do not come from the PTO mentioned above banks. Federal holidays are generally like Christmas, the 4th of July, Thanksgiving, and New Year’s Day. The exact list of holidays recognized can vary by employer. A list of paid holidays should be included in the employee handbook.

It’s also becoming increasingly popular to offer “floaters” or floating holidays that can be used on a day of the employee’s choice. These holidays are meant to allow an extra paid day off for significant days such as birthdays, anniversaries, religious or culturally significant dates, and others. Some employers offer a paid day off for the employee’s birthday rather than leaving it open-ended.

Separate vs. combined PTO balances

Many companies combine vacation and sick pay into one all-encompassing PTO bank.

However, it’s more common to list vacation, PTO, and sick leave separately. Each type of policy has its benefits.

Combining them gives employees more flexibility in how they use their PTO.

Some employees may only need to take a few sick days throughout the year and may prefer to repurpose those as vacation days.

Tracking PTO usage with one combined bank can also be more accessible. You don’t need to worry about whether a day off counts as sick leave or vacation.

However, you risk having employees roll their sick days into a more extended vacation and returning to a depleted combined PTO bank. If they get ill and do not have paid time off to cover it, they may come to work sick and infect other staff members.

It could also create an administrative hassle if the employee cannot go in there and needs more sick time to cover the absence. We’ll discuss your options for handling this scenario further down the road.

Researching whether you must legally pay out unused vacation at termination is also essential. This varies by state. Some states view vacation pay as part of an employee’s wages and require that all earned time be paid out upon termination of employment.

These laws often do not include sick leave, so keeping them separate may benefit your company if you operate in any state requiring vacation payout.

How much PTO to give?

There are several ways to determine how much paid time off each employee should be granted. Sick leave is often consistent across the board, but vacation varies.

Some companies increase the annual vacation allowance by years of service. New employees all receive a week or two off per year, and extra vacation days or weeks are earned at set intervals, such as 5 years of service, 10 years of service, etc.

Management and executives often receive more PTO days than other staff due to the increased stress and demands of their roles.

Alternatively, some companies allow candidates to negotiate additional vacation time for their salary negotiations. This may lead to a less equitable disbursement of paid vacation among staff members.

However, it’s an excellent option for small businesses with limited budgets. Providing additional vacation time instead of extra pay can help you compromise with the talent without compromising your overall budget for the role.

Another option is to offer an unlimited PTO policy.

Should you offer an unlimited PTO plan?

Unlimited PTO doesn’t always translate to more PTO taken

Many employers fear that offering unlimited PTO will result in a massive increase in absences. However, this is often not the case. HR vendor, Namely
conducted research that indicated that employees with unlimited PTO take fewer vacation days than their counterparts with limited PTO (13 days versus 15 days). So, in some cases, offering unlimited paid time off can actually result in employees taking less time off.

It’s important to understand an important point. Fewer absences seem like they would improve productivity and company operations. However, this isn’t necessarily the case. I don’t recommend moving to an unlimited PTO program to reduce vacation usage or call-outs.

Some employees may take more time off because they need more time off. It’s good to allow employees the time off they need to return to work energized, motivated, and refreshed. Many employees are burned out, especially as many cancel vacations due to the pandemic.

Burnout hurts employee productivity, creativity, engagement, and retention. Discouragement of PTO usage under an unlimited PTO plan is counterproductive and actually works against the plan’s goals. We have learned a lot over the past year.

For example, it is good to keep our distance from others while sick. Therefore, employees should be allowed to use their PTO when needed. If you notice excessive absenteeism, you can speak to the employee.

PTO won’t have to be paid out on termination

As mentioned, some states require employers to pay unused accrued vacation at termination. Unlimited vacation policies generally do not require any form of payout.

Less administrative work

Tracking PTO balances and usage takes time. If you’re a small business and don’t have a dedicated HR or Payroll department to keep track of PTO usage, unlimited PTO can ease the administrative strain.

This change can also save time for People Managers throughout the company. As a result, they may be able to avoid lengthy PTO approval processes.

Additionally, they can avoid tracking down Doctors’ notes or absence documentation. Finally, this allows them to stop tracking their employees’ PTO usage. Ask.com implemented an unlimited PTO policy and calculated that they saved 52 hours of administrative time in one year.

Attractive to potential recruits

Perks like unlimited PTO packages can help you edge out your competition in recruiting top talent. Work-life balance is essential to today’s candidates. In an increasingly competitive job market, policies showing that your company values work-life balance and flexibility can make the difference.

Other PTO considerations

How to administer your PTO program

Most businesses choose to administer PTO on an accrual basis. Employees accrue a set amount of PTO hours per paycheck or per a certain number of hours worked.

You can easily set the accrual rate for full-time staff. First, divide the total annual PTO the employee should earn by the number of pay periods. Then, add that amount to each PTO balance.

Employees see the same number of hours added to each paycheck. Consequently, it is easy for them to calculate future PTO balances. For example, they can easily calculate balances if they are saving up hours to take a vacation.

Part-time employees may be ineligible for vacation days or paid time off. If you do decide to offer PTO to part-time staff, setting the accrual rate based on hours worked is a suitable method.

For example, an employee may accrue 1.54 hours for every 40 hours worked. This would add up to 2 weeks off per year for a full-time employee or 1 week off per year for an employee averaging 20 hours per week.

On the other hand, some employers skip the accrual process and provide employees with an annual lump sum of PTO. They often add the full amount to each employee’s PTO bank at the beginning of the year and let them work through it however they desire.

If your company has low turnover, this may be a fine option. It gives employees greater flexibility in using their time off.

However, I do not recommend this approach if you have a high turnover. The start of a new year is a popular time to job hunt. If you pay out unused PTO, you may pay the total annual balance to an employee quitting in January or February.

Under an accrual method, they would have earned only some of that balance. Even if you do not plan to or must pay the balance, employees will often try to empty it before leaving.

Unused PTO

As discussed above, some states require certain types of paid time off to be paid out upon termination of employment. Check the state laws for each state where you have employees to verify what is required regarding payout on unused PTO days.

Another consideration for unused PTO is whether you will allow unused PTO to be carried over to the next calendar year. You can operate under a use-it-or-lose-it approach. However, allowing a limited amount of PTO time to carry over into the next year is expected.

PTO requests

Including PTO request procedures in your PTO policy is a good idea. Let employees know how far in advance they should request approval for planned absences and to whom to submit the request.

Be sure also to include how employees should handle unplanned absences. Who is their contact if they need to call out before the business is open? What is the follow-up procedure if that contact doesn’t answer or they have to leave a message?

Setting clear expectations and procedures for sick days relieves employees’ stress and helps managers and human resources track absences.

Additional time off

Sometimes employees need more time off than they have accrued. Consider how you will handle this problem if it arises. Of course, if you choose to have an unlimited paid time off policy, this won’t apply.

One option is to allow employees to go into the negative or use the time they have not yet accrued but will accrue. Don’t make a habit of this one, though.

An employee may be missing a few hours of PTO. However, they will accrue enough to even out the advance in the next pay period. In this case, it’s not a large concern.

However, advancing large amounts of PTO can take time and effort. You may or may not be able to deduct a negative PTO balance from an employee’s last check if they leave or are let go before they get caught up.

Check your local laws to verify. It also means they will have no PTO balance for some time and could need more time off, causing the negative balance to grow.

If you allow employees to go into the negative for their PTO, have a clear written policy. In addition, consider having the employee sign a PTO advance agreement. This agreement should state that they understand the negative balance will be deducted from future PTO accruals.

Alternative solutions for more time off

Some workplaces allow employees to donate PTO to other employees. Employees who have accrued time off and have not used it can give it to another staff member or a general PTO fund for needed employees.

You can also allow employees to take unpaid time off.

Always check your company’s applicable leave policies if an employee has exacerbated their PTO balance and needs more time off. If an employee takes a lot of time off due to a medical condition or caring for a family member, they may qualify for FMLA leave.

The Family Medical Leave Act allows up to 12 weeks of job-protected unpaid leave per year to care for your health condition or a family member. This leave can be broken up throughout the year.

More resources:
Sick leave policies: A comprehensive guide for employers and employees
Professional employer organization (PEO): Right for your business?
No-call no-show: Crafting an effective employee absence policy

Additional resource: Updating your handbooks and company policies? Check our guide to employee handbooks.