Paid time off, or PTO, is a benefit where employees are paid for time when they are not working. Sometimes called personal time off, PTO is usually measured in hours and can be categorized in many ways, such as paid sick leave, vacation time, or emergency time off.
Depending on the type of paid time off and your state, you may have a legal obligation to provide the employee with PTO. However, offering paid time off as a benefit—even when you have no legal responsibility to do—so supports your employees in finding a good work-life balance.
Different Types of PTO
Companies are free to decide what types of paid time off they want to offer. The most common types are vacation time, paid sick leave, or emergency time off. Less common types of PTO may include jury duty and bereavement leave.
The most common type of PTO is vacation leave. This is usually booked in advance and can be used for whatever employees would like, including taking a trip or taking some time to disconnect. Workers in the United States are not legally entitled to take paid vacation days. However, most workplaces allow for two weeks of paid vacation time per year.
Paid sick leave
Paid sick leave allows employees to stay home when they are sick, benefiting everyone as germs are not spread around the office. Some businesses offer paid sick leave separately from other PTO, although you do not have to.
Emergency time off
Some companies offer emergency time off if an employee has a family or personal emergency. This might include a sick family member, a broken kitchen appliance, or any other emergency. If you choose to offer this, you should specify an upper limit to the number of emergency days to ensure the days are used for genuine emergencies.
You should be aware that if an employee has worked a minimum of 1,250 hours for you over the last 12 months, they will be entitled to paid leave under the Family and Medical Leave Act (FMLA) to care for a chronically ill family member. This should be considered separately from emergency time off.
Bereavement leave allows employees to spend time with and care for their loved ones after a bereavement. If you have an employee taking paid time off for a bereavement, you should ask your HR department to send them a condolence card or flowers to let them know you’re thinking of them.
Employers usually set criteria for which employees can take bereavement leave. For example, some companies only allow employees to take bereavement leave following the death of a close family member.
However, some companies allow employees to take bereavement leave for the loss of distant family members, friends, and pets. You can decide whether this is appropriate for your business.
Employees over 18 years old may be called periodically to jury duty. Legally, they will need time off to attend, and depending on your state, you may have to offer them PTO to perform this service.
Different PTO Policies
Once you have decided what types of PTO you want to provide your employees, you should choose how to set out your policy. There are three common types of PTO policies, which each come with advantages and disadvantages. Read on to learn about the different types of PTO.
Accrual is the most common paid time off policy. Employees accumulate their PTO allowance as the vacation year passes. The vacation year can either be in line with the calendar year or the financial year—it’s up to your business. Be sure to clarify how to categorize the vacation year in your PTO policy.
In the first quarter of the vacation year, employees can take 25% of their PTO allowance. In the second quarter, employees can take 50% of their allowance, then 75% by the third quarter, and the maximum of 100% of their allocation by the end of the year.
This policy can benefit employers as it prevents employees from taking too much annual leave in one go, and allows employers to space absenteeism out throughout the year. It is also beneficial to employees as they can take sufficient breaks throughout the year while managing their paid time off effectively, staying within their holiday allowance.
Should an employee choose to leave the business, an accrual policy means they will not owe large balances of PTO back to the company should they leave part way through the year, as they will only be able to take what they are entitled to.
If an accrual policy is not in place and the employee leaves their job having exceeded their PTO allowance, they will often have to pay the company back for the excess hours taken. This is usually recouped from their final pay, however, if the balance is larger than the employee’s final pay check your HR department should set up a repayment plan with the employee to allow the employee to pay back this amount in instalments.
This isn’t a legal requirement, but without a repayment plan the employee may not be able to afford their rent and bills for the month. Connecteam’s integrated payroll system and PTO reporting can help you calculate whether an employee working their notice period has exceeded their PTO allowance.
Let’s break down what an accrual policy might look like in practice. In this example, the vacation year will run from April to April, in line with the financial year. In this scenario, your employee works 40 hours per week and has two weeks of paid time off to take by the end of the vacation year. Your employee is eligible for a total of 80 hours of PTO.
80 x 0.25 = 20, therefore your employee can take 20 hours of PTO within the first quarter of the vacation year. Learn more about how to calculate employee’s PTO allowance.
Your employee would be eligible for another 20 hours of paid time off in quarter two. If your employee did not use their PTO from quarter one, they could take up to 40 hours in quarter two. Following on from this, if employees do not take any of their PTO throughout the first three quarters of the vacation year, they would be able to take 100% of their allowance in quarter four or carry their whole allowance over to the following vacation year.
Some businesses allow employees to ‘carry over’ any accrued paid time off they did not use in the previous vacation year to the new vacation year. This would mean that they have one year’s ‘banked’ PTO from the previous year, and that they would then begin accruing the second year’s PTO as usual.
For example, if your workplace offers two weeks of annual leave and the employee does not take any paid time off in the first vacation year, they would ‘bank’ those two weeks, and would be able to take up to a maximum of four weeks PTO in the second vacation year.
However, to allow for sufficient rest and recuperation for your employees, you should encourage them to take their PTO within the designated vacation year.
This policy can benefit employees by enabling them to work intensely in the first year and take longer, more relaxing vacations in the second year. It can also benefit employers, as allowing employees to undergo an intense work period in their first year and enjoy their extended PTO the year after can benefit start-ups or businesses expecting a period of growth followed by a financial plateau.
However, in some ways, this policy may not benefit the employer; for example, if the employee chooses to leave the business with two years of unused PTO, the employer will be liable for a large payout.
With a Banked PTO policy, the company grants employees a certain amount of paid time off at the beginning of the year, for example, 50% at the start of the year, and allows them to accrue the remaining 50% as the year progresses.
This benefits employees by allowing them to immediately use a bank of PTO days. This will create a sense of trust between employers and employees. However, this policy can cause issues for employers as you are contractually obligated to pay any accrued PTO should an employee leave the business at the beginning of the year.
Let’s look at how this policy might look in practice. As mentioned above, in this example, your vacation year runs from April to April, and your employee works 40 hours per week. This time, the employee is eligible for two weeks of paid time off through a Banked PTO policy.
At the start of the vacation year, your employee will automatically have access to 50% of their PTO, meaning they can take up to 40 hours of PTO immediately, should they choose to. Their remaining paid time off will then accrue with each quarter as the year progresses.
Remaining 40 hours x 0.25 = 10 hours. Learn more about calculating your employee’s PTO allowance.
Your employee will have access to a maximum of 50 hours in quarter one. If this is not used until quarter two, your employee will accrue another 10 hours, giving them access to 60 hours of PTO. As with an accrual policy, if employees do not take any of their PTO throughout the vacation year, they can take up to 100% of their allowance in quarter four or carry their allowance over to the following vacation year.
With unlimited PTO, employees can take as much PTO as they like whenever they like throughout the year. This policy allows employees to balance their personal and work lives and will attract talented employees to your organization.
However, “unlimited” PTO usually does not actually mean unlimited. If you choose to adopt this policy, there is usually an upper limit to the amount of paid time off employees can take to ensure they have sufficient time in the business to perform their roles.
You may also find with “unlimited” PTO that employees are worried about taking too much PTO, concerned that this might make them look lazy, resulting in them not taking any holiday. If you adopt this policy, set outlines for the minimum and maximum amount of paid time off you expect employees to take.
Writing Your PTO Policy
Once you have decided which approach would best suit your business, you should write a robust PTO policy to work alongside your absence policy. Read on to learn what steps you should take to write a fair and thorough PTO policy.
Step 1: Talk to your employees.
Discuss with employees the current PTO policy and how it impacts them. Ask them what they want to see and what would support them in their work-life balance. Keep the conversation light and productive, and ask lots of open-ended questions like “How does the current PTO policy work in practice?” and “What type of PTO do you use most often?”.
You can either schedule face-to-face meetings to hold these talks, or converse casually through Connecteam’s in app chat function. All your conversations will be backed up to the cloud should you need to refer to them at a later date.
Step 2: Outline your parameters
Once you have understood which types of paid time off are important to your employees and how much PTO they take, you can begin crafting your policy. You should set firm parameters of employee expectations, including setting an upper limit, e.g., no more than two days of emergency leave per year.
You may also consider setting criteria for certain types of PTO; for example, you may request to see a funeral service book or online obituary if an employee wishes to take bereavement leave. However, most employers trust their employees and accept their word as enough. Having robust limits to your PTO policy will help employees feel more secure in taking paid time off and deter anyone who might abuse the system.
Step 3: Discuss the change with managers
Applying a new PTO policy may raise questions among employees and managers. You should organize a meeting between your team leaders and your HR department to discuss the practical application of the PTO policy and their understanding of the policy.
It is important to discuss any changes to the policy with your line managers to make sure they are comfortable discussing the policy with employees, and to make sure they can answer the employee’s questions about the policy. Having well-prepared managers will strengthen workplace relationships as employees feel safer with a knowledgeable manager.
Step 4: Keep a record of PTO used
The final step in rolling out a new PTO policy is ensuring that managers are accurately tracking the PTO of their employees. This can be done manually through a logbook or an excel spreadsheet, or tracked using PTO management software where employees can use a self-service portal to process paid time off requests and managers can pull reports on PTO usage. Whichever method you use, managers must keep up with the process to ensure no employees are abusing the system.
Connecteam’s HR management software will provide you with checklists, forms, and reporting functions that allow you to easily manage your employee’s PTO requests from wherever you are. Find out more about Connecteam’s PTO management software.
Advantages of Offering PTO
While writing a new paid time off policy may seem like a lot of work, balancing supporting employees and business productivity will ultimately benefit your company. Here are some benefits of offering PTO:
- Reduced turnover: Forbes cites employee burnout as the primary reason for employee turnover in the modern workforce, with up to 50% of employees leaving their jobs for this reason. Improving your employee’s work-life balance by offering a strong PTO package will help them avoid burnout and improve employee retention.
- Better work-life balance: Offering paid time off to your employees allows them to be there for important things in their personal life, e.g., family events, vacations, or to recover from illness. This will help your employees find a good work-life balance and will increase engagement when they’re actually at work.
- Reduces unplanned absenteeism: Over 60% of employers stated that offering PTO decreases unplanned absenteeism by 10% or more. Providing paid time off will allow you to plan for your employees’ absences, minimizing costs and allowing you to allocate your time to more important matters.
- Attract talented employees: Employees judge paid time off as the second most important benefit in the workplace, the most important being health insurance. A generous PTO package will attract and retain the most talented employees and contribute to the success of your business.
- Builds a strong company culture: Offering paid time off to your employees will create a culture of trust. Employees can balance their personal lives with work and feel empowered. Offering PTO will be beneficial as employees will likely repay your trust and investment by staying engaged with your business and working hard, ultimately increasing your bottom line.
Disadvantages of Offering PTO
While the benefits of offering PTO outweigh the drawbacks, it is important to consider the disadvantages:
- PTO payouts: Depending on your PTO policy, you may have to pay out employees for any unused paid time off when they leave your company. While this may not be very much usually, should a long-standing employee choose to leave, they may have accrued a lot of PTO. Paying this amount in one lump sum may be expensive for the business, especially if you operate a small business or startup where cashflow can be an issue.
- Scheduling issues: Challenges can arise when employees try to book the same PTO dates as one another. You should include in your policy how such scheduling issues will be resolved, for example, operating on a first-come, first-served basis.
- Abuse of policies: If the parameters of PTO are ambiguous and limits are not placed on different types of PTO, you may find that some employees abuse the policy. Write a policy that supports employees while preventing them from taking advantage.
While you are usually not legally obligated to provide paid time off to your employees, this small investment can help attract talented employees and support colleagues in achieving a good work-life balance. As a result, employees will feel more engaged in the workplace and more loyal to a company that promotes their well-being.
You should write a robust paid time off policy with minimum and maximum expectations for taking PTO, and set caps or criteria for specific PTO types to ensure employees do not abuse the system while still feeling supported in finding a strong work-life balance.