How to Create a PTO Policy: A Guide for Business Owners & Managers

Having time off is a fundamental part of maintaining the productivity and well-being of workers. Research has shown that vacation time enhances energy, reduces stress, and improves performance.

Many workers prioritize work-life balance and flexibility when looking for a job or evaluating whether to stay at a business. To make themselves more attractive to job-seekers and existing employees, many businesses implement a PTO policy, offering uncategorized paid time off to their staff.

But what is PTO? How can you create a PTO policy that makes your staff engaged and happy?

What is PTO?

PTO is the abbreviation for Paid Time Off, a policy under which employees are granted a pool of time off that they can use for any purpose and still get paid.

While a traditional leave plan categorizes leaves into vacation time, sick time, personal leaves, and holidays, PTO is often uncategorized. Employees are freer to ask for time off and business owners can manage leaves easier.

In a PTO policy, most businesses grant each employee a PTO bank at the beginning of employment or a time period. Many businesses let employees accumulate and accrue PTO over time.

PTO policies will differ depending on how each business sets its policies and the local laws.

How does PTO work?

Companies that use a PTO policy often grant each employee a pool of leaves at the beginning of employment, or before/after a certain time period.

Depending on the policy of each company, the number of leaves granted and how employees use PTO differ. Employees can earn PTO based on how long they’ve worked for the company. They can accrue PTO, carry unused PTO from one year to the next, or cash out unused PTO.

Laws in different states vary in how PTO can be accumulated or expired, and how companies must pay for accumulated PTO when employees resign.

PTO policies vs traditional leave policies

Traditional leave policies often grant employees 30 paid days off every year, divided into multiple specific categories: paid vacation, sick time, personal time, and paid holidays. By tracking each type of leaves, employers can identify absenteeism trends and the underlying reasons behind those trends. But this tracking process can be tiresome and complicated.

Most PTO policies grant employees 15-20 days plus company-observed holidays. Leaves aren’t categorized. The longer time employees work for a company, the more time off they can earn.

If the reason why employees take time off doesn’t matter to you, and employees prefer not to give reasons why, PTO is a good choice.

Types of PTO policies

Combined PTO bank

Combined PTO bank means employees are granted a specific number of paid time off at the beginning of employment or a period of time. They can receive extra PTO over time.

Leaves aren’t categorized, meaning employees don’t have to give reasons for why they take time off. They can use their leaves for whatever purposes. They have the freedom to choose what to do with their granted leaves.

PTO accrual/Accrued time off

PTO accrual means employees earn or accumulate paid time off over a period of time. Employees can accrue their PTO hourly, weekly, bi-weekly, monthly, quarterly, annually, or every pay period. For example, a worker can earn 8 hours of vacation for working a full month.

Accrued PTO varies depending on how long an employee has worked at an organization. The longer they’ve worked there, the more PTO they can get each year. Managers or business owners will need to define the exact numbers in their PTO policy.

Unlimited PTO

Unlimited PTO means employees can take as many leaves as they want as long as the manager approves. There’s no fixed number of time off employees can take.

Some companies offer unlimited PTO for vacation or sick days for full-time employees. Employees can take longer time off without worrying about running out of days in their PTO bank.

Unlimited PTO can create challenges for both employers and employees as it’s hard to define how much time off is appropriate to take. Some staff will abuse the policy and take too much time off. Some will follow how other people in the company are doing or feel uncomfortable taking extended time off, meaning they take less time off than needed.

Some states may have laws regarding compensation of unused PTO, which can make payroll more complicated for employers.

If you adopt an unlimited PTO policy, you may want to look at workplace culture to make sure employees don’t feel guilty or hesitant to take time off. Sometimes, work results are more important than how many days your staff show up at work.

Pros and cons of unlimited PTO

Pros:

• Unlimited PTO increases employee morale and happiness, which contributes to better productivity and performance.
• Your business becomes attractive to job seekers and existing employees, which can be helpful in recruitment and retention.
• You don’t have to pay for unused PTO.

Cons:

• Trust is vital when implementing an unlimited PTO policy. And building trust takes lots of hard work.
• Multiple employees can take time off at the same time, making scheduling complicated.
• Employees may either take too much time off or take less time off. They can abuse the policy, or feel uncomfortable taking time off when coworkers show no interest in taking vacation time.
• You can’t use extra vacation time as a perk anymore.

Should companies give unlimited PTO to employees?

• Unlimited PTO suits small teams, businesses and companies, where it’s easier to build trust, transparency, and culture.
• Hourly workers don’t benefit from unlimited PTO at all.

PTO buying & PTO donation

Employees can buy and sell PTO through a cafeteria plan (called “elective” PTO). But “elective” PTO can’t be rolled over to the next year. Employees have to use them up before the year ends.

Some companies allow coworkers to donate leaves to those who have to take a long leave, for instance, someone suffering from an illness or caring for a sick family member.

Types of leave

Although leaves aren’t categorized in PTO policies, in reality, some businesses may need to track types of leaves for compliance or compensation. Below are some common types of leave that businesses track along with their PTO policies.

Family leave

Employees take paid family leave when they need to care for an ill family member, a newborn, or when they participate in a qualifying event due to a family member’s military deployment. Family leave used for caring for a newborn is parental leave. Laws regarding family medical leave vary from state to state.

Bereavement leave

Employees don’t often get paid for bereavement leave, but some companies allow employees to take 2-5 unpaid days off. After that, employees will have to use their PTO bank if they want more time off.

Sabbatical leave

A sabbatical is a period of time in which an employee leaves work and focuses on their personal purposes. This period of time can range from 3 months to 1 year.

Sabbatical leaves are often granted to employees who have worked at the company for a long time. Employees can be paid full salary or a percentage of the salary, and don’t receive any benefits.

Pros of a PTO policy

There are various advantages of having a PTO policy in your business.

Increase engagement and retention

A well-planned PTO policy shows how caring the company is for employees. Staff can feel free to take breaks and recharge, then come back to work feeling refreshed. With adequate time off and freedom, employee engagement and retention are more likely to improve.

Build autonomy and trust

A PTO policy gives employees the freedom to use their time off without unnecessary control and tracking. Employees don’t have to prove anything to get their days off. They don’t have to make excuses that they’re sick to get one more day off after a vacation.

Reduce admin work

PTO reduces admin work because managers, business owners, and HRs don’t have to track each type of leave.

If you have an effective PTO program with clear procedures, the admin burden can even decrease tremendously. Employees can send time-off requests with information about leave time, reason for leave, etc. You can review requests, approve or decline them, and make plans well ahead.

Attract potential candidates

Job seekers today prioritize flexibility and work-life balance when considering what company to work for. A well-considered PTO policy can be a great benefit to attract talents.

Reduce absenteeism

According to a survey by the Alexander Hamilton Institute, 54% of organizations that started a PTO program said unscheduled absences dropped by up to 10%.

There’s just more openness to the fact that people need flexibility, and when they have that flexibility, they are more engaged, more productive and more likely to stay with the organization.

Mikaela Kiner, founder and CEO of Uniquely HR

Cons of a PTO policy

Hoard sick leave

Employees who have high needs for medical leaves often don’t prefer a PTO policy.

Since there’s no differentiation between sick days and vacation time, some employees save days off by coming to work while being sick. They’re certainly unproductive that day and the risk of infection is also high.

Pay more for unused PTO

Some states have laws regarding the compensation of unused vacation time. If you bundle vacation time with sick days or personal days, you may have to pay more.

Not appealing to candidates

Depending on each business, candidates may have less paid time off in their PTO bank than they do with a traditional leave plan. This can make the position you’re trying to fill less attractive.

How to create a PTO policy

Before implementing a PTO program in your business, it’s necessary to survey your staff to see if they want a PTO plan or a traditional leave plan. If they agree with a PTO program, you can follow these steps to create a PTO policy.

1. Decide how much time off employees can take

How much PTO will you provide your employees each year? This number should be enough so employees feel valued and comfortable. If it’s too much, it may affect your business productivity.

Businesses often offer PTO to full-time employees. Some offer PTO to part-time employees to stand out in the job market and attract potential workers.

2. Decide between lump sum and accrual

Lump sum means employees are given all PTO at the beginning of their employment or a period of time. Accrual means employees earn or accumulate PTO over a period of time, based on how much time they work.

If you choose to implement PTO accrual, you’ll need to decide if PTO accrual will be done per pay period, hourly, weekly, monthly, quarterly, every 6 months, or yearly.

3. Decide between rollover, compensation, and “use it or lose it”

When employees don’t use all PTO they’ve granted each year, they can:

• Rollover the unused PTO to the next year. However, to avoid employees building up too much PTO, many employers limit the number of days employees can roll over each year.
• Cash out unused PTO. Some states require companies to compensate for unused PTO.
• Another way to avoid built-up PTO and hefty payouts is a “use it or lose it” policy. Employees have to use up all of their PTO before the year ends. This policy sounds less flexible than rollover or compensation, but it encourages employees to take time off and recharge.

4. Decide how you’ll track and approve PTO

To track PTO, you’ll need a system to manage accrual rates, caps, payouts, limits, etc. Besides, asking these questions when finalizing your PTO policy will be necessary:

• How can workers send in time-off requests and what will the approval process be like?
• How will you handle unused PTO?
• What if an employee uses up all of their PTO?

5. Check if your PTO policy is compliant

To avoid legal trouble, make sure your PTO policy abides by the laws. You’ll need to do some research on laws regarding paid leaves, requirements of tracking leaves, rollover limitations, etc. If you’re not sure, you can consult a professional.

After crafting your PTO policy, you can put it in your company handbook or training materials to make sure it’s accessible to everyone in your company.

Implement your PTO policy with a time-off management software

Crafting and implementing a PTO policy takes time and effort. Take some time to go through the process and see what works for your business.

To implement your PTO policy more effectively, a scheduling app like Camelo can help you manage time-off requests and absenteeism trends easier. Sign up for a free account today.