Creating a PTO Policy to Meet Your Business Needs

The availability and convenience of paid time off (PTO) often plays 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 help to 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 documenting how this time is earned and used.

What is PTO and how does it work?

Paid time off (PTO) is an employer-provided benefit where an employee is allotted an amount of time paid time which may be used for vacation, sick, or personal time at their discretion. Employers can either frontload an annual allotment of PTO or require employees to accrue PTO based on time worked.

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, accrued PTO may expire at the end of a calendar or work-anniversary year. A PTO policy may also outline that an employee who resigns will be paid for accrued but unused PTO, unless state law dictates otherwise.

What happens to PTO during the COVID-19 (coronavirus) pandemic?

Due to recent COVID-19 legislation, there are several things to consider regarding time off during the coronavirus pandemic:

• Employees taking leave under the Emergency Family and Medical Leave Expansion Act must be permitted to elect to use any available paid time off including vacation, personal time, medical leave, and/or sick leave during the first 10 days of their FMLA leave.
• Employees may not be required to use available paid time off before using paid sick time under the Emergency Paid Sick Leave Act. These benefits are in addition to any existing sick time policies at your company.

Read more details about the Families First Coronavirus Response Act

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 care 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 can work. In this case, all paid days off would be grouped together, which can be granted at the beginning of the year or spread equally over all pay periods. 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 policy include:

• Will this policy replace existing time off policies? If so, be mindful about addressing employee’s existing available time when transitioning to a new policy.
• Ensure the written policy address how PTO is earned and used.
• Consider whether employees will earn PTO based on anniversary periods, calendar year or fiscal year. 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?

Sample PTO policy language

A PTO policy for small business operations in one geographic area can be relatively straightforward, while larger companies spread over different states may need to address more than one set of laws and regulations.

At a minimum, your basic paid time off policy should cover:

• How much paid time off is granted to employees;
• Who qualifies for PTO and when can they begin using PTO
• How PTO is earned, frontloaded or accrued in either days or hours
• Procedures for scheduling time out of the office;
• If PTO accrued will be carried over 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 sick leave requirements, if 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 which does not require employees to provide a reason for taking available PTO.

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 keeping top talent for some companies. Other advantages of implementing such a policy may include:

• PTO is a desired benefit that can contribute to ongoing employee satisfaction and 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 better 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. Wording in the policy should remind employees that this time can be used for "sick or personal" to help encourage sick employees to stay home, Totman notes.
• You may operate in a state that requires paid sick leave time. 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.

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, review your staffing needs and compare your proposed program with other businesses in your industry and region. Totman suggests, "Create a PTO policy that offers more time off the longer the employee is with the company. This can be a retention tool and a way to show 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 private industry workers in 2017 received 10 paid vacation days after 1 year of service, and an average of 15 paid vacation days after 5 years of service.

Choose the right PTO policy

You may decide to offer an option within your larger PTO policy that revolves around options such as 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 offer a separate sick leave policy. Consulting with a human resource professional may help you determine what specific leave program matches you 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 states require a rollover plan for PTO. If you choose this option, 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.

Use-it-or-lose-it option

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 claim 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 on time-off requests.

Decide on a dispersal method

As noted previously, companies generally dispense 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

Totman specifies that a policy encompassing many categories of time off (personal day, sick time, vacation) may provide an outcome where employees are not always able to provide reasonable advanced notice. However, the policy should address situations when notice can be provided. The policy should state 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.

Ensure your policy is compliant with federal, state, and local laws and regulations

Make sure your policy fully complies with applicable federal, state, and local employment laws and regulations. This is critically important, as other leave laws (as well as wage and hour laws) can impact your policy. Also, you may need to have variations of your policy if your company has employees in more than one jurisdiction. Federal, state, or local laws may affect the type of policy you offer. It is important to understand these requirements when creating a time-off program — especially if you are considering offering an unlimited PTO policy. 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 new policy

Once you've crafted a new 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 number of PTO hours they're entitled to, the methods in which PTO is dispersed, time-off request/approval procedures, and what happens to unused time.

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.