How to Create a PTO (Paid Time Off) Program For Your Business

Before you hire a new employee, you should already have a paid time off policy in place. This policy plays a huge part in attracting new hires, boosting engagement and productivity, and is embedded in the company culture. Now, you aren’t required to offer paid time off however, more than 60% of small business employees have access to PTO (paid time off) for vacations, holidays, and sickness – but depending on what state you’re in, the rules and policies may vary. 

It’s no secret that PTO can be hard to map out which is why we answer your most burning questions about PTO. In this blog, we dive into what PTO is, the advantages and disadvantages, the varying rules per state, and how to create a PTO program that works best for your company and your employees.

What is PTO?

Paid time off or personal time off (PTO) combines sick days, vacation days, and personal days for employees to use as they want, need, or desire. Whenever an employee needs or wants to take time off, the PTO policy allows them to use a number of time as paid hours and it’s up to the employee to use this time as they want. From picking their kids up, letting a repairman in, going to see a doctor, and so on. How the employee uses this time is not the business of the employer. 

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What’s the Difference Between PTO and Vacation?

Most commonly when an employee takes time off work, they do so with a vacation. Now, a vacation is paid time off that is taken without condition, meaning that wages are owed because of state laws or employer policy, and also the employee has discretion on when the vacation is taken and for what reason. 

PTO, on the other hand, is any time that an employee is paid while they are not working. Basically, it’s any paid leave. PTO is much broader than a vacation as a vacation is basically an example of a PTO but PTO is not exactly a vacation. A non-vacation PTO includes maternity leave, jury duty, sick leave, or holiday pay. 

Is an Employer Required to Offer PTO as an Employee Benefit?

Not at all. At the federal level, employers are not required to offer PTO to their employees. Baring that in mind, your state, county, and the city may have fixed requirements on vacation and sick time. Note that these laws are constantly changing so be sure to check your state’s Department of Labor website and your county and city websites to keep up to date on the rules which may apply to your business.

The Employee and Employer are Protected 

Before PTO, your employees may have lied about how they were using their time off. For example, they took their kids to the doctor or needed to let a repairman in all day, but they claimed it as a sick day. With PTO, your employees have more flexibility to create a healthy work-life balance and don’t feel pressured to make up stories, instead, they can be honest about their time. 

Managers must ensure they have clear guidelines in place when it comes to their PTO policy. Include this in your employee handbook so your team can refer to the PTO policy as needed. The guidelines will make the process clear, for example, PTO must be requested two days before unless the employee is seriously ill.

Before implementing your PTO policy, ensure your employees understand why this is the new policy, and explain the thought process behind it so they won’t resist the new policy. This level of transparency helps ensure smooth adoption. 

Can I Offer Different PTO Policies to Different Employees?

Yes, employers are allowed to offer different paid time off policies to different employees. However, the reason CANNOT be because of discrimination (race, sex, religion, etc.) Additionally, remember that each state has its own limitations and may not allow for certain paid time off policies so be sure to check what is and isn’t allowed.

Below are the most common scenarios for needing or wanting to offer different paid time off policies to different employees:

• Tenure: PTO may be different for employees who have worked longer at the company. For example, a new hire may only receive 14 days of PTO for the first year. Whereas an employee who has been with the company for over three years is given 21 days of PTO. 
• Promotions: More senior employees, or employees who were recently promoted, may be allocated more days of PTO.
• Full-time vs. part-time employees: When it comes to employing full-time or part-time employees, the number of PTO may vary. For example, a full-time employee may start with 14 days whereas a part-time employee starts with 10 for the year.

What are the State Laws on PTO and Vacation Time?

When it comes to vacation, there are numerous state laws. For example, they cover: 

• Earned wages: Some states consider accrued vacation time as earned wages and require the employer to pay this out when an employee is let go. 
• Use it or lose it: Some states allow a vacation policy to have an “expiration date”.
• A combination of the two.

The states don’t require an employer to off paid vacation time to their employees, however, most do regulate PTO. Most states have a paid time off policy that only applies to earned vacation time. 

Even if your state requires an accrued vacation payout or not, you are required to address it in your company policies. This means you can choose the policy that best suits you and your employees when it comes to paying for accrued time. 

What are the PTO Laws Per State?

California

Employers are not allowed to implement a use-it-or-lose-it policy, however, they can include a cap on accruals. Employers are required to pay employees who were let go for accrued vacation in their final pay. In California, vacation pay is a form of wages that an employer may choose to offer to employees.

California’s accrued time law applies to vacation time or vacation time that is combined with sick time under a PTO policy.

For more information, check out California’s state website.

Colorado

In Colorado, employers must pay their employees for accrued vacation time when they are let go. Vacation pay is considered a form of wages in Colorado. Also, this law only applies to vacation time and not sick time.

For more information, review Colorado’s state website. 

Illinois

Employers are not allowed the use-it-or-lose-it policy in Illinois. However, it is regulated. Employers are allowed to require their employees to use vacation time by a certain date, but only if the employee is given a reasonable amount of time.

In addition, Illinois law does require employers to offer PTO payout to employees who were let go.

For more information, visit Illinois’ website.

Indiana

In Indiana, employers are required to pay their employees for accrued vacation time when the employee is let go. However, the vacation policy is left up to the employers to decide and employers may specify conditions for employees to meet to receive vacation accrual pay.

For more information, visit Indiana’s state website. 

Louisiana

Louisiana doesn’t allow employers to pay employees for accrued time off. Instead, it requires employers who provide paid vacation to pay out accrued time when an employee is let go. 

Maryland

In Maryland, employers are not required to pay employees for accrued time off. However, employers are required to pay employees for vacation time that is unused if the employer doesn’t have a forfeiture policy that states otherwise.

For more information, check out Maryland’s state website.

Massachusetts

In Massachusetts, employers are not able to force their employees to forfeit earned time, they are able to set use-it-or-lose-it policies. Employers can determine an expiration date on accrued vacation, however, it must be reasonable. Additionally, employers can cap the amount of vacation time employees accrue or earn.

Employers in Massachusetts must also provide accrued vacation pay to employees who let go of the company. 

For more information, review Massachusetts’ policies. 

Montana

In Montana, employers who provide paid vacation time to their employees cannot also have use-it-or-lose-it policies. However, they can cap the limit of how much an employee can accrue. Additionally, employers must pay employees for any accrued vacation time when they are let go from the company. 

For more information, head to Montana’s state website.

Nebraska

Nebraska employers cannot establish a use-it-or-lose-it policy. Employees who are let go must be paid for earned and unused vacation time.

For more information, visit Nebraska’s website.

New York

In New York, employers are not required to pay employees for accrued time off. However, employers are required to pay employees for accrued vacation when they are let go from the company, unless they have a policy that states otherwise.

For more information, review New York’s website.

North Carolina

In North Carolina, employers are not required to pay employees for accrued time off. Additionally, employers are required to pay employees for accrued vacation when the employee is let go from the company if the company policy doesn’t address what happens to it.

For more information, check out North Carolina’s state website.

North Dakota

North Dakota law does state that employees are entitled to unused vacation pay when they are let go from the company, however there are some exceptions.

Employers with employees who voluntarily leave the company can withhold accrued vacation pay if:

• The employer-provided the employee with written notice about the conditions of the PTO payout.
• The employee worked for the employer for less than one year.
• The employee gave the employer fewer than five days’ notice.

For more information, review North Dakota’s state website.

Oregon

In Oregon, employers are required to include accrued vacation time in their employee’s final wages if the policy is open to interpretation.

For more information, review Oregon’s state website. 

Wisconsin

Employers in Wisconsin can determine if they will or will not provide accrued vacation pay when an employee is let go from the company. However, employers who do not have a written forfeit policy are usually responsible for paying the employee’s unpaid vacation.

For more information, check out Wisconsin’s state website.

Wyoming

In Wyoming, employers are not required to pay employees for accrued time off. Employers must also pay employees who were let go for accrued vacation time if they do not have a written forfeiture policy that was acknowledged by the employee.

For more information, head to Wyoming’s state website.

Benefits of Offering a PTO Policy

When it comes to offering a paid time off policy, employees, and employers both benefit.

PTO Benefits for Employees: 

• Employees are able to use PTO to their discretion and aren’t bombarded with oversight which builds trust and happiness. 
• Employees are able to schedule their PTO in advance which helps managers ensure their shift is covered ahead of time. 
• Employees can use PTO when it’s needed most, like caring for their sick kid, seeing their own doctor, or just being at home to relax.

PTO Benefits for Employers:

• Employers aren’t put in an uncomfortable position of “policing” their employees when it comes to reporting how they used their paid time off.
• Employers are able to have more control over unscheduled absences which helps lower costs and ensures satisfied customers. 
• Employers can handle employee attendance with those who are abusing the system or have issues showing up. Instead of having strict rules, they can address single issues. For example, some apps with geo-tracking use Breadcrumbs technology. This basically collects random location points during an employee’s shift, making sure that managers have a decent understanding of the worker’s location while clocked in – preventing time theft in the process.

Read More About The Top Employee Time Tracking Apps

Disadvantages of Offering Paid Time Off Policies

Both employees and employers also experience PTO disadvantages. 

PTO Disadvantages for Employees:

• Employees consider PTO as a benefit and will actually use all the time off, whereas in the past, they wouldn’t have used the time for personal days, sick days, and vacation. 
• Employees may consider PTO time as vacation time and will come to work even when they are sick. According to a Glassdoor survey, the average American only takes half of their vacation time, and when they do take paid time off, 61% say they work. 

PTO Disadvantages for Employers:

• Employers who offer paid time off policies will offer their employees fewer overall days than before. This also means new hires accumulate PTO more slowly.

Now, research shows that when employees do take time off, they are far more productive because they had plenty of time to recharge. Don’t just offer PTO and vacation time, encourage your employees to take time off! After all, a more productive rested and happy employee is better for the bottom line. Some companies even offer employee incentives to take the time needed.

Top-rated Companies Include These Policies in Their PTO Policies

Averages of a PTO Policy

The Society for Human Resource Management (SHRM) conducted a survey in 2016 about the paid time off policy as various companies and here’s what they found, 

“The majority of organizations offered PTO plans (87%) and paid vacation plans (91%) to employees based on their length of service at the organization. For PTO plans, the average leave days awarded per year based on employee’s length of service ranged from 13 to 26 days and eight to 22 days for paid vacation plans.”

According to the WorldatWork Association, employers offered the following average number of PTO days to their employees:

• Less than one year of service: 16 days
• 1-2 years of service: 18 days
• 3-4 years of service: 19 days
• 5-6 years of service: 22 days
• 7-8 years of service: 23 days
• 9-10 years of service: 24 days
• 11-15 years of service: 26 days
• 16-19 years of service: 27 days
• 20+ years of service: 28 days

Now the Bureau of Labor Statistics reported that the average worker in the United States received 10 days of paid time off annually after finishing their first year. However, this time didn’t include sick days and holidays. The number of PTO does go up and down, depending on industry and region, however, 10 is the national average. 

The longer an employee stays with a company, the more PTO days they accrue. Additionally, most companies do allow employees to accrue additional time but they place a cap on how many days can be earned during employment. 

Which Industries Give the Most Vacation Days in the US?

Employees who want the most vacation time off every year should work in the non-profit/foundation sector – the average here is 17.5 paid vacation days per year. Whereas, government and military employees rank second at 17.3 days. The lowest ranking job sector is marketing and public relations as very few receive even a single day off each year. 

Create Your Own PTO Policy

With all the information above in mind, it can appear overwhelming to create your own paid time off policy. However, fret not! We created a free template that you can download so the process is easy-peasy. (We do recommend you have your legal counsel review the PTO policy to ensure that it fits your state laws’ requirements and company culture.)

DOWNLOAD OUR FREE PTO TEMPLATE TO GET STARTED

(Plus, with our all-in-one business and employee management app, you can easily implement your PTO program seamlessly with QuickBooks…all you need to handle is ensuring your employees clock in and out, and we’ll do the rest!)

The Bottom Line On A Paid Time Off Policy

Implementing a PTO policy at your company is a must going forward. Your employees will expect it, especially as more Millennials and Generation Z workers join the workforce. Plus, as we mentioned, a paid time off policy helps boost engagement, attracts the top talents to join your company, and helps your bottom line. It’s a no-brainer really! Use all of the information highlighted above to craft the perfect paid time off policy for your business and your employees. Happy crafting!

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