- A PTO policy is a set of rules regarding your employees' time off that your company pays for.
- There are three main types of PTO policies: bank, accrued and unlimited.
- Each type has its benefits and drawbacks, so it's important that you carefully consider which one is right for your business.
A paid time off (PTO) policy is a necessary aspect of your business once you hire employees. It governs sick leave, vacation and personal time for both you and your workers, and enables a certain amount of time to be treated as paid hours, to be used at employees' discretion.
There are multiple types of PTO policies, and you must carefully consider your company culture and your employees' wants and needs before you decide on which type is right for you. Keep reading to learn about the different types of PTO policies and what makes a PTO policy effective.
What is a PTO policy?
A PTO policy is a set of rules and expectations regarding employees' paid vacation, sick days and personal time in a calendar year. Though there are no federal laws requiring employers to offer PTO, most companies do in order to provide workers with work-life balance and eliminate the need for the employee to ask the employer for permission to take off work, which supports a healthy and trusting work environment.
Some PTO policies can also provide financial benefits for your business. For example, an open PTO policy that allows employees to take as much PTO as they want eliminates the need for the company to pay out unused days if an employee quits or is laid off.
Types of PTO policies
There are three basic types of PTO plans that you can consider for your small business. Carefully consider your company's own needs and culture before deciding on a policy type.
Bank PTO
A PTO bank policy pools all of an employee's PTO into a single source that they can draw from as they see fit, whether it is sick, vacation or personal time off. This policy generally does not require the employee to provide a reason to their employer, unless they are taking several days off in a row.
- Benefits: Each employee gets the same number of PTO days that they may use however they like, which creates a sense of trust and responsibility. Employees can also make PTO requests on their first day of work.
- Drawbacks: This type of policy may encourage sick employees to come into work to try and save their banked PTO for vacations or personal days.
Accrued PTO
This policy allows employees to earn time off according to how much they work, or based on their years of service. For example, an employee could accrue four hours of PTO for every 40 hours worked, meaning they would earn one day off every two weeks. Unless capped, PTO days continue to accrue until the employee uses them.
- Benefits: This type of policy can serve as a motivator for employees to work to earn their PTO and result in a sense of accomplishment when they do.
- Drawbacks: This policy can encourage workers to come in when they are ill, as they may not want to "waste" their hard-earned PTO days. It can also be demotivating for new employees to start with zero days.
Open PTO
An open policy, also known as unlimited PTO, operates on a basis of trust between the employer and employee. An unlimited PTO policy means that there is no cap on how many PTO days an employee can take, provided their work gets done and the unlimited vacation policy is not abused.
- Benefits: Employees feel trusted and that work-life balance is a priority for the company. Also, as mentioned above, if an employee quits or is laid off, you're not required to pay out any unused vacation days.
- Drawbacks: In some company structures, this policy could backfire and be taken advantage of. Carefully consider your company's culture and whether your employees will treat the policy responsibly.
The costs of PTO
In 2018, the U.S. Bureau of Labor Statistics reported that the average wage per hour was $25.03, which accounted for 68% of employee compensation costs for employers. The remaining 32% is attributed to benefits such as insurance, retirement and paid leave. On average, paid leave accounts for $2.59 of the average cost of an employee per hour.
This may not seem like much, but it accounts for 7% of a business's total employee costs, making it the third highest behind wages and insurance. As such, it's important to consider what you can afford when deciding which type of PTO policy is right for your business.
If you choose an accrual policy, for example, you can use this method to calculate how much PTO each employee is eligible for and how you track their hours.
What makes a good PTO policy?
A good PTO policy is beneficial to you (the employer), your employees and your company as a whole. When a PTO policy is comprehensive, generous, and flexible, employees feel valued and cared for, which increases their loyalty to your company and can increase productivity.
"The best PTO policy offers flexible, diverse and portable benefits to mirror today's workforce," said Rob Whalen, CEO and co-founder of PTO Exchange. "It's a win-win if both the employee and the employer are happy and benefiting from the policy."
Here are some ways you can create a good PTO policy.
1. Make it attractive.
Flexibility in jobs has become more important than ever, particularly for millennials and Gen Z, who are quickly becoming the largest generations in today's workforce. Millennials tend to stay longer at jobs that offer more pay flexibility and employee benefits, so try to make sure your policy meets those expectations. The main characteristic of a flexible policy is that it bundles all types of PTO, allowing employees to choose which type of leave policies they need.
A flexible policy accommodates a diverse workforce by allowing for various religious and national holidays or any sort of alternative day off, such as a mental health day, doctor's appointment, or medical leave.
An open PTO policy also conveys that you trust your employees and do not run a controlling work environment.
2. Make it clear and understandable.
It is vital that your PTO program is clearly defined, with no question as to what is permitted and what is not. This protects you as a business owner from getting into trouble, and it helps employees feel supported and informed. The PTO policy should be clearly written, detailed and accessible to everyone employed at your organization. Be sure that every type of employee you have is covered by the policy.
3. Create a policy based on company culture.
An unlimited PTO policy may look great on paper, but it may not work out so well in real life if your business does not encourage time off. You must have a good understanding of your business, your employees, and your company or industry culture to know what style of policy will work best.
If you're unsure, send an anonymous survey to employees to help you understand how they view the time-off culture in your organization and what they would like to see in a policy, and adjust it based on your employees' responses.
3. Offer incentives or benefits.
An oft-criticized PTO policy is "use it or lose it," where any accrued vacation time is lost if an employee does not use it by the end of the year. On the one hand, accrual encourages employees to use their time off, but it can be demoralizing if employees feel they cannot or should not take advantage of their PTO hours.
Whalen suggests building benefits into your PTO policy. "With flexible PTO benefits, employees have the ability to transfer the value of any unused PTO to other priorities and needs, such as funding a 401(k), emergency expenses, paying down student loan debt or funding a real vacation."
4. Consider offering opportunities for personal time off.
Google offers its employees up to three months of unpaid sabbatical, while Adobe offers a paid sabbatical to its employees once every five years. If you are not a tech giant or your employees don't need sabbaticals, you may consider offering PTO for doing volunteer work, which has the dual benefit of increasing your company's philanthropic efforts while fulfilling and valuing your employees' time. Company volunteer days have also proven to be an effective team-building exercise.
Example of a PTO policy
The following is a sample of a PTO policy for your business. Keep in mind that some federal laws can change your PTO rules. For instance, according to Paychex, during the COVID-19 pandemic, legislation was passed to enable employees to use paid time off in lieu of paid sick time under the Emergency Paid Sick Leave Act:
Any PTO (paid time off) will start accruing after a 60-day preliminary period after hiring. To be eligible for the PTO, the employee must work full time and have a minimum of 32 earned hours weekly. Part-time employees who work less than 32 hours are not eligible for PTO through [company name]. PTO is not accrued during any pay periods of unpaid leave, disability leave, and workers' compensation leave.
PTO can be taken in increments starting at two-hour blocks. PTO can be used for any purpose. All PTO requests should be submitted directly to your supervisor. PTO requests can be denied based on staffing needs. Advance notice is preferred for PTO requests, but [company name] understands that unscheduled PTO is needed from time to time. In non-emergent cases, please notify a supervisor of your PTO request at least 24 hours in advance. If more than three days of PTO are used without prior scheduling, a medical note may be requested by your supervisor. If excessive unscheduled PTO is being used by the employee, disciplinary action may be taken by [company name]. Prior to any termination, two warnings will be provided in writing to the employee.
PTO is paid at your normal base rate and is not subject to any overtime rate. Accrual is based on the amount of time you have worked for [company name]. Employees who have worked at [company name] for less than five years earn four hours of PTO for every two weeks of full-time work. Annual accrual will equal 13 days per year. Employees who have worked for [company name] for more than five years earn eight hours for every two weeks of full-time work. Annual accrual will amount to 26 days per year.
Payment of all PTO upon termination is subject to [state] law. After [state-required time period], you will receive payment for all PTO hours that you did not use prior to termination, resignation, or retirement. Cash-outs of PTO are also permitted for current employees with a maximum of 40 hours of PTO available annually.
The preceding can apply to most businesses. However, small companies might want more flexible PTO rules. For instance, the small but growing beauty care business Naturalicious does not give each team member a set number of PTO days annually; it allows its employees to take the time they need off as long as the requests are within reason. It also gives each employee paid time off for their birthday. If you're looking for another example, Carnegie Mellon University also has a copy of its PTO policy online.