A paid time off (PTO) accrual cap puts a limit on how much PTO an employee can accrue during a certain period. For example, a PTO accrual cap of 80 hours means that after an employee has 80 hours of unused PTO banked, they cannot accrue additional PTO until they take time off.
PTO accrual caps can be different for different employees based on seniority or position. In addition, your company can have different accrual caps for different timeframes. For example, an employee may be able to accrue at most 60 hours of PTO in a single calendar year—and 100 hours maximum at any point.
Why Should Your Company Have PTO Accrual Caps?
PTO accrual caps may seem at first glance like they’re taking away from employees’ PTO benefits. However, leave-accrual caps can actually serve as a helpful nudge to employees to incentivize them to take time off. Most employees would rather use some PTO than miss out on accruing additional PTO hours.
This is important for employees’ experience. Plus, employees who utilize their PTO come back to work refreshed and more productive.
Another reason companies should implement PTO accrual caps is to protect themselves against having to make large cash payouts to departing employees.
In many states, PTO is considered part of an employee’s wages. If an employee quits, they must be paid for any hours of accrued PTO that they have. If long-time employees are allowed to accrue hundreds of hours of PTO, your company could be forced to make an unexpected and large payout when those employees leave.
Considerations for PTO
Before deciding how to implement PTO accrual caps, it’s important to consider how PTO at your company should work more broadly. That means deciding what’s included in “PTO” and whether different employees should accrue PTO at different rates.
Separating sick time and vacation time
Many companies offer both sick time and vacation time, and it may make sense to treat them separately. That’s because many states have different requirements around sick time and vacation time.
For example, some states require that sick time is accrued at a minimum rate, but unused sick time does not need to be paid out when an employee leaves a company. Many of those same states don’t have accrual requirements for vacation time but do require that unused vacation time is paid out.
If your company treats sick time and vacation time as a single type of PTO, you could be required to meet minimum accrual requirements for both types of time off and to pay out all PTO—including unused sick time—when an employee leaves. So, separating sick time and vacation time is often more cost-effective for companies even if it requires more administrative effort.
Applying different PTO policies to different employees
Some companies choose to apply the same PTO policies to all employees. Others use PTO as a form of compensation for veteran employees or to attract more highly skilled talent.
In the latter case, different employees may accrue PTO at different rates. Employees who accrue PTO faster generally should have higher PTO accrual caps. Otherwise, they may run into issues using their PTO before hitting their accrual caps.
Your business may also find that it’s helpful to offer different accrual rates for hourly employees and salaried employees.
Common Approaches to PTO Accrual Caps
There are a few different ways that companies can choose to approach PTO accrual caps. If your company offers different levels of PTO to different employees, you can also implement different accrual cap approaches for different employees.
Annual-accrual caps with no carryover
Many companies choose to implement annual-accrual caps with no option for employees to roll over unused PTO from one year to the next. This is a “use-it-or-lose-it” policy.
Eliminating carryovers strongly incentivizes employees to use all of their accrued PTO each year.
However, this policy can create some issues. If employees are unable to use all of their PTO—for example, because a large project made it more difficult for them to step away from work—then they may feel cheated out of the PTO hours that they earned.
In addition, this type of policy can inadvertently result in many employees taking large amounts of PTO around the end of the year. If many employees take PTO at the same time, it can leave your company short-staffed.
Total-accrual caps with annual carryover
An alternative to the “use-it-or-lose-it” policy is to allow employees to carry over unused PTO from one year to the next. As an example of how this works, employees may earn up to 60 hours of PTO per year, roll over up to 40 hours per year, and can bank up to 80 hours of PTO in total.
The relationship between annual accrual, rollover allotments, and total-accrual caps can be complex. As a result, it may have a higher administrative cost.
On the other hand, this system gives employees more flexibility to manage their time off. It also reduces the degree to which many employees will try to take PTO around the end of the year.
Companies also have the option to give employees PTO that expires after a certain amount of time. For example, your company may require that employees use PTO within 2 years of when it was accrued.
Expiring PTO can be combined with accrual caps or annual carryover limits. It can be difficult for employees to keep track of when their PTO is expiring, so many companies choose not to use this approach.
Another option is for companies to offer unlimited PTO. In this case, employees don’t accrue PTO at all. Instead, an employee can take as much PTO as they want, provided that it is approved by their manager and doesn’t impact their productivity.
There are advantages and disadvantages to offering unlimited PTO. The biggest drawback is that many employees don’t take enough PTO and risk burnout under unlimited PTO programs. Companies that are interested in this option should carefully consider how to encourage employees to take time off.
How to Choose the Right PTO Accrual-Cap Policy for Your Company
There’s no one-size-fits-all solution when it comes to choosing the best PTO accrual-cap policy. Here are some factors to consider when choosing the right policy for your company.
Check local legal requirements
First and foremost, your company must comply with all local, state, and federal requirements around PTO. If your PTO includes sick time, your policies must also comply with the requirements for sick pay.
Requirements can get complicated for companies that operate in multiple states or multiple countries. Think carefully about whether it makes sense to have a single PTO accrual-cap policy for all of your employees or to use different policies in different jurisdictions.
Consider your company culture
Your PTO accrual policy can have a big impact on your corporate culture. Companies with a “use-it-or-lose-it” accrual policy inherently encourage employees to take time off throughout the year—or all at once at the end of the year. On the other hand, companies that offer more flexible accrual cap policies may have some employees who take PTO frequently and others who save up for big, multi-week vacations.
Treat PTO accrual as part of compensation
Your company’s PTO policy—including your accrual-cap policy—is an important part of your company’s compensation strategy. A PTO accrual policy that’s generous to employees can help you retain veteran employees and attract top talent when recruiting. You can also negotiate around accrual policies when hiring new employees or offering a promotion to a current employee.
Be realistic about administration
No matter what PTO accrual-cap policy your company chooses, you’re going to have to administer that policy. That means tracking how quickly employees accrue PTO, how much they have at any time, how much has been rolled over from a prior year, and when PTO hours are expiring.
The more complex your company’s PTO accrual-cap policy, the more time and money it will take to administer the policy. Reduced cost is a major advantage of sticking with a relatively simple PTO accrual-cap policy.
A PTO accrual cap defines the maximum amount of PTO that an employee can earn or bank over a certain time period.
Companies can implement PTO accrual caps to encourage employees to take time off and to protect themselves from having to pay out large amounts of unused PTO. It’s important to carefully consider how you implement a PTO accrual cap to ensure you comply with all legal requirements while also offering the best possible PTO policy for your employees.
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