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Paid Time-Off Policies: Best Practices & Benefits

18 Minutes to Read

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    Takeaway

    Paid time off (PTO) is an enticing benefit that helps employees prioritize their well-being. Still, that doesn’t mean any PTO policy will work for your workforce. You need to consider your industry, compliance requirements and what ultimately motivates talent to excel at your company. Read how to build and implement the ideal PTO policy for your people.

    Paid time-off (PTO) policies are a key component of an organization’s benefits package. Organizations can leverage PTO policies to demonstrate their values to their workers; attract, retain and motivate top talent; and provide healthy employee/employer relationships. To construct an effective PTO policy, you must consider:

    • your corporate values
    • your business needs
    • your employee compensation structure
    • your employees’ demographics and priorities
    • compliance regulations applying to your workers
    • financial liability
    • the labor market relevant to your industry

    That is a lot to consider, but we’ve made it easy! Read our complete best-practices guide below to demystify each component and consideration as you work to construct and implement a PTO policy that works for your unique organization.

    What is a PTO policy?

    A PTO policy is a written description of an employer’s paid leave offerings. This policy should cover who is eligible to receive PTO as well as the use and approval criteria for these benefits. These policies have many different components and need to be periodically reviewed and revised to ensure that the policy continues to serve the best interests of the business and the people within it.

    Types of PTO policies

    Here are a few different types of PTO accrual policies you can apply based on organization, industry and company policy.

    PTO accruals

    When PTO accrues, it is most often earned over time versus being awarded in one lump sum. PTO accruals may be based on pay periods, hours worked or specific milestones (e.g., years of service with the company). For example, an employee may earn one hour of PTO for every 30 hours worked. Salaried employees are typically assumed to work 40 hours per week for hourly PTO accrual purposes.

    Organizing PTO based on accruals allows employers to limit how much time off employees can access at any given time. This protects business interests because it prevents employees from getting a large lump sum of time off when they join, then taking all of the time off while drawing a paycheck and subsequently leaving when their leave is used up.

    It also protects the company from having to pay out employees who have not been with the company for a long time or leave right after their policy renews and refills. Notably, accruing PTO slowly over time or requiring a waiting period before PTO may be accrued or used only benefits some employers in certain high-turnover industries. If the talent your company seeks is in high demand and short supply, consider front-loaded PTO or unlimited PTO policies.

    Lump sum

    A lump-sum PTO policy awards employees their entire time-off benefit for the whole year in one big sum. This sort of policy most often refills on an annual basis, either on the employee’s anniversary or on Jan. 1. In plans that renew on the calendar year, new hires are typically given a prorated amount of PTO based on the amount of time they worked for the company in the preceding calendar year.

    For example, if a company gives 20 days of PTO annually and an employee joins the team July 1, they would be given 10 days of PTO upon hire and a subsequent 20 days on Jan. 1st. When a lump sum is awarded on an employee’s start date or at the beginning of the calendar year, it is referred to as a “front-loaded” PTO policy. Employers can also award lump sums of PTO for a job well done. Some employers use additional PTO to reward employees for achievements in safety, attendance or job performance.

    Unlimited PTO

    Unlimited PTO is a policy where employees can take off time according to an honor system. Time off is not restricted, and employees are trusted to take off time that suits their personal needs as long as it doesn’t interfere with their professional goals and responsibilities. For PTO policies to be effective, organizations should create detailed supporting documents so there are no misunderstandings about how and when unlimited time off can be used. While ambiguity can lead to policy abuse, unclear unlimited-PTO policies can also result in less time off being used.

    When employees don’t understand the expectations around PTO use, many err on the side of caution and take too little time off. Leaders failing to take time off openly and model desired work-life balance behaviors also contribute to ineffective unlimited-PTO policies.

    Teams with unlimited PTO may choose to track time taken. Requiring employees to request time off, having managers approve or deny requests, and keeping track of the total time taken allows employers to monitor the use rates to assess program strength and trends.

    Tracking the reason for time-off requests is also important if employers want their policy to only be used for vacations as opposed to covering protected leaves of absence. Due to the administration requirements, many employers prefer to keep paid sick leave, FMLA, ADA and other types of protected leave (paid or unpaid) separate from their unlimited-PTO policy.

    PTO and overtime

    Your organization’s approach to PTO and overtime may differ, but when calculating overtime, the common practice is to only include hours worked for non-exempt employees. Likewise, if PTO is awarded based on hours worked, a 40-hour workweek is assumed to be the standard. However, these are simply guidelines. Your organization may choose to implement a different policy.

    PTO policy best practices

    Clearly communicate your PTO expectations

    There is a saying that goes, “When you think you are communicating too much, you might just be communicating enough!” This is a good rule of thumb when communicating PTO policies and practices. PTO policies should be written in handbooks, posted on intranets, discussed in company meetings and even celebrated when they are used correctly. This is particularly important when managing an unlimited PTO policy. When the rules are more open to interpretation, it is important to communicate how the policy is used and when it is appropriate to take time off.

    Reward and reinforce desired PTO behavior

    Workers following your company’s PTO policy correctly should be acknowledged and celebrated. Companies like Google reward adherence to their time-off request procedure with additional PTO. When their employees request time off well in advance, they get an extra day of PTO. Other companies reward employees for taking enough consecutive days off with a vacation bonus to spend on their vacation.

    Managers should be trained on PTO policies to ensure they fairly and consistently apply the correct request and approval rules to all team members. Companies also support managers by leveraging technology to minimize the possibility of human error and bias. Time and attendance solutions like Paycom’s GONE™ automate approvals based on the rules of your company’s time-off policies.

    Assess PTO program effectiveness

    Track PTO usage and payouts

    Collecting data is the most important part of any analysis, and your PTO process is no exception. Even when an organization has an unlimited-PTO policy, it is important to track the use of the plan to ensure it’s being used correctly and that the company is getting the desired effect. Companies that do not collect data on PTO usage may be experiencing business disruptions due to excessive time off or may find that their employees are not taking enough time to have a comfortable work-life balance, which could lead to burnout.

    If your time-off policy specifies a set number of days, how much of that time is being taken? How much is going unused? How much is being rolled over? How much is being paid out when an employee departs the company?

    Solicit manager and employee feedback

    Information about plan usage is not the only data to consider when evaluating the strength of a PTO plan. Manager and employee satisfaction with PTO plans can be a strong indicator of whether a plan is accomplishing the desired effects.

    Whether feedback is collected annually, monthly, quarterly or even informally during conversations with employees, useful information is out there. Employers who are hoping to create a positive work environment that includes policies supporting their employees should always be collecting feedback and, when feasible, making changes based on the feedback they receive.

    Audit for employment law compliance

    Time-off regulations often change according to different jurisdictions or work locations. In order for an organization to remain compliant, employers should audit their PTO policies regularly. Hiring employees in a new state or new city, new laws and changes in local employee head count can all require employers to update their time-off policies.

    Revise and roll out changes

    It’s not recommended for PTO policies to be set in stone. Policies should be updated when there are new business objectives to support, as workforce demographics shift, when morale or retention needs a lift, or when regulations require changes. Changes should be communicated effectively with a long lead time so employees and managers are able to plan for the changes.

    How to create a well-designed PTO policy benefitting your business

    Learn PTO policy requirements in your state

    PTO requirements differ by work location. Make sure your policies are compliant with all applicable state and local laws wherever you have employees. To remain up to date and compliant, conduct an annual review of your PTO policies and make sure you’re aware of any new regulations relating to paid time off. Paycom has completed a state-by-state review of the most common PTO regulations, which can be found here.

    Determine the total number of days off

    This one may be obvious, but this blog post would be incomplete without touching on how many days off you should provide in your PTO policy. There are many ways to consider the number of days off to offer in your policy. We will discuss two common ways to determine PTO days.

    One method is by referring to the standards within your industry or labor market. You may choose to lead (give more than the average), lag (give less than the average) or match what is considered standard in the market. Depending on your business strategy, each of these options may present distinct benefits or disadvantages.

    For example, if you are an established organization that has no problem attracting new hires and retaining your team members, you may choose to lag the market because you can afford to give less time off while still accomplishing your business goals. Conversely, if your company is not well known or is in an industry that is difficult to hire for, you may choose to lead the market and offer a more generous policy to entice new hires to join your team.

    Another way to choose the amount of PTO you provide involves more in-depth business analysis within your own company to determine how much time you can afford to pay your employees when they’re not productive. From a business perspective, you are paying for something (in this case, their time), but you are not receiving output benefit from that time. How much of this can your business sustain based on your business model and projected revenue? Any PTO policy should be designed with the bottom line in mind.

    For example, a web design firm may charge their clients by the project but pay their employees a fixed salary or hourly rate. Employees who take paid time off, in this case, lose the company revenue for undelivered projects on top of the normal payroll expense. Your organization may be able to calculate how much time off you are able to afford, either organizationwide or by department, and then offer packages accordingly.

    PTO rollover and use-it-or-lose-it policies

    PTO rollover occurs when employees carry over some of their PTO into the following year because they didn’t use those PTO days in the preceding year. Use-it-or-lose-it policies are the opposite of PTO rollover, where employees’ PTO balances are wiped out at the end of the year. Each of these practices has its benefits and drawbacks.

    PTO rollover is great for employees who would like to save time and take a longer vacation after one or more years of adding to their reserve of PTO hours. This also allows employees more flexibility around how they use their time and protects the time they’ve earned from being wiped out. However, employees who aren’t taking advantage of their time off may experience burnout or a poor work-life balance while in the process of saving for a longer period of time off.

    Use-it-or-lose-it policies encourage employees to take their available time off. This also allows employers to plan for leaves more consistently, as employees are not able to save up PTO over the years and take longer vacations. This also protects employers from having to pay out excessive policy accruals when an employee departs the company. On the negative side, employees may feel cheated if they don’t have the chance to take off the time they have been given because it was erased at the end of the year. Additionally, employees who are not able to save time off for one large period of leave may feel that they are missing out on opportunities where extended periods of leave are required.

    PTO policy considerations and key points

    There are many different factors to consider and components you can choose from when designing your PTO policy. The choices you make on the following policy components will depend on your team’s needs, the way your teams are compensated, your business directives and the culture you are building. When designing your PTO policy, consider each of the following components so you can craft a complete, intentional policy.

    It is important to remember that when crafting your policy, you must adhere to the local laws and regulations around pay and PTO.

    Who is eligible for PTO?

    Your policy should clearly outline who is eligible to earn and take PTO. There may be some workers on your team who get PTO, some who can only take unpaid time off and some who do not qualify for PTO.

    You may have multiple policies to address different departments. For example, an unlimited PTO policy for salaried employees may be best for your sales team if they’re paid on a salary basis with a strong commission component as part of their compensation.

    Let’s take a look at this example of a PTO policy: Within your organization, a 20-day PTO policy that accrues in regular intervals by pay period may be the best policy for hourly, in-store retail teams. Crafting two different policies to suit the culture, objectives and scheduling requirements of both teams is appropriate as long as both policies uphold company values and are communicated effectively.

    Once your PTO policies are in place, Paycom’s GONE assists in efficiently implementing them. You can easily assign different policies to different departments, making it easy to enforce policies quickly and fairly with GONE’s automated approvals.

    What types of absences does PTO usually cover?

    When crafting your policy, it is important to decide and communicate what types of PTO are covered. Many types of leave may not be earned or accrued, such as parental leave, an absence related to jury duty and military deployments, and are not discussed in this blog post. However, some common types of PTO to provide in your policy may include:

    • bereavement — time off to mourn the death of a loved one
    • sick time — unexpected leave due to an illness
    • vacation time — planned leave to enjoy a vacation or time off with family/friends
    • holidays — federal or state holidays that you may choose to observe as a company or that employees can take off as a part of their PTO package

    When designing your PTO policy, it is imperative to define what types of leave are covered and the stipulations around taking that time. Without clearly defined boundaries, employees may misunderstand the purpose of each leave and, therefore, use it or plan for it incorrectly.

    When can employees start earning PTO?

    Your PTO program may include a waiting period where employees do not begin accruing PTO until they have reached a certain length of time with the company. This type of stipulation is designed to protect the company against new hires joining the team and immediately taking time off before they are trained or have contributed to the team. Your policy should clearly state all critical dates, including when accrual begins, so that there is no confusion or room for misunderstandings.

    How does PTO accrue?

    PTO may accrue at different rates or intervals depending on the way employees are compensated. If employees work hourly shifts that vary week to week, it might be best for them to earn time off based on hours worked. This way, the time off they accrue corresponds with the number of hours they put into the business. On the other hand, for teams that work consistent hours or those that are paid a salary, it may make more sense for time off to accrue based on regularly occurring intervals or payroll cycles.

    Does PTO roll over?

    Allowing PTO to roll over from one year to the next gives employees the flexibility to take time off or to save it for future purposes. The regulations around PTO rollovers depend on the state where your employees live. Employers may allow employees to roll over all their accrued time or may give them a limit to how much they can roll over from one year to the next.

    Is there a maximum balance for a PTO rollover?

    For policies that allow PTO to roll over from one year to the next, employers may consider implementing a cap on the maximum amount of PTO an employee can save to guard against heavy payout responsibilities or employees taking an unusually extended leave. Under a policy of this type, an employee would lose any additional accruals over the imposed maximum days.

    For example, an employer who gives 10 days of PTO per year and allows employees to roll over unlimited days from one year to the next may put a 20-day limit on the total amount of time an employee can roll over. Employers should be mindful of each work location’s PTO maximum balance requirements, as some states require max balances to be reasonable to prevent use-it-or-lose-it policies.

    How much notice should employees give?

    Some organizations do not have strict regulations around notice periods, and for others, it is imperative to know about absences far in advance for planning or scheduling purposes. Some types of leave may require advanced notice, such as vacations. Others may be taken without much or any notice, such as sick leave. As with most policies, it is advisable to codify these requirements so that expectations are clear and employees understand their options.

    When designing your policy, consider the needs of your business’s scheduling and coverage needs. If expectations and regulations are not specifically written down, norms will be decided by the unspoken aspects of your culture and may not be regulated enough to support the requirements of the business.

    What is the time-off request procedure?

    A clear procedure with step-by-step instructions should be created and documented so employees understand exactly how to request time off, how time off is approved and by whom, the appeals process for a denied request, where their time is tracked and how to plan for future leave based on accrual rates.

    Investing in effective tech systems is paramount to providing smooth functioning for PTO policies. Paycom’s tools, like Time-Off Requests and GONE, simplify the process of using and managing time-off policies and empower employees to make the most of their time.

    When is unused PTO paid out?

    You may be required to pay employees for the PTO they have earned but do not use, or you may choose to voluntarily include unused time-off payouts in your PTO policy. This time should be paid out to employees who resign or are terminated. For employees paid on an hourly basis, the payout is often calculated by multiplying the employee’s hourly rate by the number of unused PTO hours. For salaried employees, the process may involve determining the daily or hourly rate based on their salary and then calculating the payout similarly.

    How does PTO interact with other leave types?

    Can employees take vacation time to extend their parental leave? Can employees take unpaid time off? If sick time and vacation time are given in separate buckets, can they be taken interchangeably? Some circumstances may not happen often, but it is important to consider these scenarios ahead of time so the company can provide a clear, appropriate response.

    Why an effective PTO policy matters

    Crafting effective policies is a cornerstone of effective PTO programs. In this exploration of best practices for PTO policies, we delved into the importance of clarity, accessibility and relevance in policy design. As businesses navigate an ever-changing landscape, adopting a proactive approach to PTO policy creation not only ensures compliance with legal standards but also cultivates a positive and transparent work environment. By involving stakeholders, fostering continuous communication, and regularly reviewing and updating policies, organizations can adapt to emerging challenges and evolving employee needs.

    A robust policy framework serves as a guide, aligning teams, mitigating risks and promoting a culture of accountability and shared values. Through thoughtful policy creation, organizations set the stage for sustained growth, employee satisfaction and long-term success.

    PTO policies: FAQs

    Is PTO required by law?

    PTO is not required by the federal government. Some state laws regulate PTO and other types of leave. It is important to understand state and local legislation as it pertains to your PTO policy.

    Can PTO be used for overtime?

    Companies are not required to count any time other than hours worked toward overtime pay calculations for non-exempt employees. This means that, in most cases, PTO hours are not used for overtime calculation purposes. A company may choose to include PTO in their overtime calculations, but this would be very unusual.

    What is a front-loaded PTO policy?

    Front-loaded PTO is when the total allocation of time off is given to employees in a lump sum that they can take throughout the year. This is a different approach than requiring employees to accrue time off.

    Is the PTO policy the same for salary and part-time employees?

    Some organizations may choose to have multiple types of PTO that are assigned to different departments or positions depending on their needs and the specific conditions of those roles. Whatever the makeup of your organization, the structure of your PTO policy is at your discretion, although it’s important to make sure you adhere to state and local regulations.

    What are the benefits of a PTO policy?

    Giving employees PTO allows them to rest, recharge and be more productive during their working hours. PTO reduces burnout and improves morale.

    DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.