Creating a PTO Policy To Meet Your Business Needs
- Employee Benefits
6 min. Read
Last Updated: 07/05/2023
Table of Contents
Creating a paid time off (PTO) policy for your business? Learn how PTO works, accruals, policies, and more.
The availability and convenience of paid time off can often play an instrumental role in a prospective employee's interest in your business as well as your ability to retain your current workforce. Establishing a PTO policy can also help set employee expectations during recruiting and onboarding. If you're considering the addition of a paid time off benefit, it's helpful to understand the components that go into developing and implementing a PTO policy, including compliance with applicable laws and documenting how this time is earned and used.
What Is PTO and How Does It Work?
Paid time off is an employer-provided benefit where an employee has access to an amount of paid time off that may be used for personal reasons, vacation, or sickness. Generally, employers can either frontload an annual allotment of PTO or allow employees to accrue PTO based on time worked. Paid time off can also be applied to holidays, community service, and paid family leave, in accordance with federal, state, and local laws. The permissible uses of PTO are usually listed in an employer's PTO policy.
Why Should You Offer PTO to Employees?
At its most basic level, an employee-employer relationship comes down to exchanging compensation for time. Regardless of why an employee takes a leave for work, the bottom line is the same; the employee is taking time off from work whether it's for a few hours, days, or weeks.
Smart employers recognize there are myriad reasons employees need to take a break from work. It may be a day off due to illness or to help a sick family member, an observation of an important day, or time to recharge. A PTO policy provides workers with the ability to take paid time off, giving employees freedom to allocate their time to best meet their personal needs without losing pay. In turn, this can help employees balance their personal and professional lives and safeguard their continued productivity, energy, and creativity in their work roles.
Types of PTO
Employees have many demands on their time outside of work. To meet these demands, PTO plans will frequently indicate the specific days on, or reasons for an employee's approved use of PTO which may include, but are not limited to, the following examples.
National holidays are days that are recognized and celebrated to acknowledge a historical, cultural, traditional, or religious significance. Christmas, the Fourth of July, and Martin Luther King Day are all examples of national holidays. Companies may offer PTO, or holiday pay, for national holidays so everyone can participate in festivities, activities, and remembrances associated with each day.
There are many important holidays that are not officially recognized as national holidays. Days such as Hanukkah, Kwanzaa, Earth Day, solstice events, and many others are valued by large swaths of Americans. Known as "floating holidays," companies may offer PTO that can be used for these days because they recognize the importance for workers to celebrate the holidays that are most meaningful to each individual employee.
Jury duty is a civic obligation where an American citizen, 18 years or older, is required to serve on a panel of jurors in a courtroom. Serving on jury duty is fundamental to the U.S. court system and is mandatory by law. In some jurisdictions, employers are required to provide paid time off for jury duty. Depending on the law or the employer's PTO policy, compensation may be a set amount or equivalent to a worker's regular wage for missed hours. It's important to check with your jurisdiction(s) to make sure your PTO policy is compliant with jury duty laws and regulations.
Every worker needs time throughout the year to tend to personal business. Moving day, taking a friend or parent to an appointment, school obligations for children, or even taking some time for mental health are all various reasons why an employee may need some personal time off.
The COVID-19 pandemic emphasized the importance of an employee staying home when they don't feel well. When a sick employee shows up in the office, they put everyone at risk. Even working remotely can delay the amount of time it takes for an employee to feel well and return to full productivity. Sick time may also apply to doctor's appointments or caring for a family member who is ill (e.g., a child who must stay home from school). Companies should consider providing enough PTO for sick time, or a designated paid time off balance for sick leave, to ensure a healthy and productive workforce if it is not already required by a state law or local ordinance.
Not only does a day of volunteerism help make a positive impact in a community, but studies have shown that giving back can also give people a sense of purpose and belonging, which can improve their mental health. Community service can range from cleaning up parks and waterways, to serving meals at a shelter or helping plant a community garden. Employers that prioritize PTO for service days are setting the tone as good corporate citizens and helping their employees serve their communities.
In the event of the death of a family member or close friend, it's important for an employee to take time to grieve, tend to funeral arrangements, and handle other matters related to the loss. Employers should be aware that they might be doing business in a state and/or local jurisdiction that requires them to offer paid or unpaid bereavement leave and this should be reflected in their policies/handbook.
What Happened to PTO During the COVID-19 (Coronavirus) Pandemic?
With its stay-at-home orders and shutdowns, the COVID-19 pandemic created gray areas for many PTO policies. Familiarizing yourself with how PTO policies were handled during the pandemic can help you be prepared if and when a similar situation should arise in the future.
During the COVID-19 outbreak, legislation was passed that gave employers several things to consider regarding time off. Read more on the Federal Families First Coronavirus Response Act legislation.
Developing a Paid Time Off Policy
When developing a paid time off policy with her clients, Paychex senior HR generalist Shannon Anderson first asks, "Do you have rules about how your employees use their PTO?" If an organization does not need to set different policies around vacation versus sick leave, for example, a one-bucket approach for PTO might work best for your business. In this case, all paid time off could be grouped together, which may be granted at the beginning of the year or accrued by each hour worked or by pay period. If a company wishes to set different rules around sick leave versus vacation time for example, multiple PTO buckets can be used, although Anderson cautions that this can sometimes be cumbersome. It's imperative to understand particular laws and regulations in your state or locality governing paid time off policies.
Other items to address when writing a new PTO policy include:
- Will this policy replace existing time off policies? If so, be mindful of addressing employees' existing available time when transitioning to a new policy.
- Ensure the written policy addresses how PTO is earned and used.
- Consider whether employees will earn PTO based on anniversary periods, calendar year, or fiscal year as this may impact budgeting.
- How will you track PTO earned and taken to ensure adherence with applicable recordkeeping and notice requirements under laws and regulations where applicable?
PTO Policy Considerations
A PTO policy for small business operations in one geographic area can be relatively straightforward, while larger companies spread over different states or localities may need to address more than one set of laws and regulations.
Generally speaking, a basic paid time off policy should cover:
- How much paid time off is granted to employees
- Who qualifies for PTO and when they can begin using PTO
- How PTO is earned, front-loaded, or accrued in either days or hours
- Procedures for scheduling time off
- If PTO accrued will be carried over, expire or paid out at the end of the year
- If PTO will be paid out when an employee leaves their job
- Compliance with any state and local mandated leave requirements, for example sick and safe leave laws where applicable
You may also want to include specific reasons for using PTO, such as caring for a sick child. Also, consider clarifying when PTO may be used for other types of absences, such as bereavement time. You may also develop a policy that does not require employees to provide a reason for taking available PTO.
Crafting a PTO Policy at Your Company
Like any new benefit, the implementation of a PTO policy should be the result of careful analysis, research, and adherence to applicable federal, state, and local laws and regulations. Here are some steps you can take to help tailor a paid time off policy to your unique business and employees.
Determine the Appropriate Number of Days Off
First, determine whether any applicable federal, state, or local laws require your company to provide a specific amount of time off. Then review your staffing needs and compare your proposed program with other businesses in your industry and region. A common strategy is to offer more time off the longer the employee is with the company. This serves as a retention tool and a way of showing appreciation to long-time employees. To best determine the appropriate amount of time off you give employees, look at patterns in your staffing needs and compare your proposed PTO program with other businesses in your industry and geographic area. As one example, the U.S. Bureau of Labor Statistics found that in 2021, more than one-third of private industry workers received 10-14 days of paid vacation after one year of service and after five years of service, almost one-third received 15-19 paid vacation days.
Choose the Right PTO Policy
You may decide to offer an option within your larger PTO policy that allows for the ability to carry time over, pay for unused time, or unlimited time off. You may also choose to create a PTO policy that is for vacation and personal time off from work but also offers a separate sick leave policy. Consulting with a professional may help you determine what specific leave program matches your needs.
PTO Rollover Option
You may choose to institute a rollover plan, where employees have the option to carry over PTO into a new work-anniversary or calendar year. Keep in mind, some jurisdictions require a rollover plan for PTO. If you choose this option, you may consider implementing a cap on hours where employees who exceed that maximum number of hours must use a portion of their current balance before they are able to accrue more, where permitted under state law. Employers should be mindful of state and local laws and regulations that may have requirements related to maximum accruals as well.
Some businesses may require that hours not used by the end of the calendar or work-anniversary year are lost, and everyone begins the new year with zero hours or a set allotment of hours. However, this approach may prompt a flurry of end-of-year absenteeism by employees not wishing to lose hours. There may also be compliance considerations with this type of plan (more on that below).
Unlimited PTO Option
Unlimited time off allows an employee to use as many days as they require (in terms of a combination of vacation, sick, and/or other days), provided they meet their performance objectives and have manager approval for time-off requests.
It's up to an employer to determine how employees can accrue their paid time off and there are several ways to handle it. One approach is to base PTO accrual on the number of hours an employee works, with each hour earning a specific amount. Employers can also decide if employees are allowed to roll their unused paid time off to the next year.
Decide on How To Offer PTO
As noted previously, companies generally offer PTO in one of two ways:
- By awarding time at the start of each year, permitting employees to use it throughout the year until they run out.
- By letting employees accrue PTO each pay period, with the ability to use only the amount they've accrued to the present date.
A close look at your business's specific needs can help you make the best decision.
Define the PTO Approval Process
A PTO policy that encompasses many categories of time off (personal, sick time, vacation) may increase the likelihood of situations where employees are not always able to provide reasonable advanced notice. However, a comprehensive policy should address situations when notice can or cannot be provided. The policy should specify the required amount of time prior to the time off that the request should be submitted and who it should be submitted to (e.g., HR department, supervisor, etc.). Consider requesting that employees give a set amount of advance notice before using PTO, except where advance notice isn't practical or would violate federal, state, or local law.
Ensure Your Policy Is Compliant With Federal, State, and Local Laws and Regulations
Compliance with applicable federal, state, and local employment laws and regulations is critically important, as other leave laws (as well as wage and hour laws) can impact your policy. Another consideration: you may need to have variations in your policy if your company has employees in more than one jurisdiction. It is important to understand these requirements when creating a time-off program. Some states require that any earned but unused PTO must be paid out upon termination/separation. Others may regulate PTO accrual, consider PTO as a form of vested wages, or even require that policies about such leave be provided to employees in writing.
Clearly Communicate Your Policy
Once you've crafted a policy, you'll need to ensure that the terms are communicated to and understood by your staff. From newsletters to staff meetings, rewards statements, and your employee handbook, make sure employees understand how PTO fits in with their overall benefits package and why they should adhere to specific guidelines to make it work for everyone. Openly address the most common questions employees have, such as the amount of PTO time they're entitled to, the methods in which PTO is dispersed, time-off request/approval procedures, and what happens to unused time.
Pros and Cons of Paid Time Off
Like many business decisions, there are potential advantages and disadvantages to consider before deciding whether to put a PTO policy in place.
Paid Time Off Pros
PTO has become a key differentiator in recruiting and retaining top talent for some companies. Other advantages of implementing such a policy may include:
- PTO is a desired benefit that can contribute to ongoing retention.
- There could be a drop in administrative expenses if PTO combines vacation, sick time, and personal days or a combination of some of these types of time off from work.
- The flexibility of a well-crafted PTO policy can empower employees to make more informed choices about time spent away from the workplace.
Paid Time Off Cons
However, PTO may not be the best fit for every company. Some reasons why a paid time off policy may not work for your business are:
- If the PTO policy combines sick time and other time off from work, employees may look at PTO as "vacation" time and be less likely to take time off when they are sick, resulting in sick employees at work. The wording in the policy should remind employees that this time can be used for "sick or personal reasons" to help encourage sick employees to stay home.
- You may operate in a jurisdiction that requires paid sick leave. An employer should always review any applicable federal, state, or local laws pertaining to paid leave from work.
- You may operate in a jurisdiction that requires vacation to be paid out at termination but does not require the same of sick time. Having a PTO policy can increase the amount that you will need to pay employees when they leave.
Determining Whether a Paid Time Off Policy Is Right for Your Business
With everyone's buy-in, PTO may contribute to a better workplace environment, helping your business attract and retain quality talent in the future. To ease the transition to paid time off, consider using a high-quality time and attendance solution to accurately track hours worked.
Frequently Asked Questions About PTO
What Is Accrued Time Off?
Accrued time off refers to hours of PTO employees have earned but not yet used. This means they can use only the amount of time they've accrued to the present date. Depending on the company's policy and state and local laws, accrued PTO may expire at the end of the designated benefit year. A PTO policy may also outline that an employee who resigns will not be paid for accrued but unused PTO, unless state or local law dictates otherwise.
Do I Have To Offer PTO?
Paid time off is not mandated by federal law for most employers. There are some exceptions. For example, employers that are engaged in government contract work under the McNamara O'Hara Service Contract Act (SCA) and the Davis-Beacon and Related Actions (DBRA) may need to provide paid time off to employees. Additionally, some state and local jurisdictions may require use of PTO under their sick and safe leave laws and a few states now have paid leave laws that regulate employer provision of PTO regardless of the employee’s reason for needing the time off.
Even if it's not required by federal law, many employers choose to provide a PTO policy that meets their workers' needs. According to the U.S. Bureau of Labor Statistics, in 2021 more than 33% of private industry workers received 10-14 days of paid vacation after one year of service. Clearly, employers are recognizing the value of paid time off as a tool to safeguard their workers' physical and mental health, which can directly impact productivity and loyalty. When it comes to hiring, quality candidates are more likely to gravitate to those employers who provide paid time off.
Do I Have To Pay Out PTO When an Employee Leaves?
Do employees need to be paid out for unused PTO? It's a fair question. From the employee's perspective, these are paid hours that they have earned. However, even if an employee has accumulated paid time off, there is no federal requirement that employers provide a PTO payout upon an employee's departure. Some state or local laws may require PTO payout to an employee upon termination or at the end of a benefit year, so be sure to check your jurisdiction’s requirements to ensure compliance.
It's worth noting that how PTO payout is handled can leave a lasting impression on a soon-to-be former employee and may impact your reputation for how you treat employees right up to their final days of service. Moreover, if a full payout of PTO is part of an employee’s contract, an employer may be required to honor that agreement.
Can PTO Be Given To Exempt, Salaried, or Hourly Employees?
Employers can and do provide PTO to exempt, salaried, and hourly employees. While it's generally up to an employer to determine how PTO accrual works in their business, there are some PTO policy examples that are recommended for each. For hourly employees, as an example, an accrual method can help you avoid setting money aside for an employee who decides to leave a few months later. Because exempt and salaried employees are paid a fixed weekly salary an annual PTO bank may be easier to manage.