Paid Time Off (PTO) Policies – All You Need to Know
Last Updated on November 23, 2022 by VantagePoint
Companies often offer time off from work as a benefit of working for them. “Paid time off “is a company policy that generally covers vacation and sick time in a single allotment of time off for employees instead of having different allotments for different types of leave.
Whether an employee is sick, needs time to go to personal appointments, or wants to take a vacation, the policy for paid time off will dictate how PTO is used.
How the Pandemic Impacted PTO
In 2020, many employers had another pandemic-related issue to resolve: how to handle employees’ unused vacation balances or competing requests to take time off before Dec. 31.
According to the Society for Human Resource Management, employees who typically take time off to travel during the holidays have opted to stay home as the coronavirus crisis continued.
Other employees who skipped their summer vacations have scrambled to use their accrued paid time off (PTO) before they lose the time at the end of the year or reach their accrual cap.
Employers with “use-it-or-lose-it” vacation policies that eliminate vacation balances at the end of the year may consider allowing employees to cash out or rollover their unused time into the next year. But if employees have accrued significantly more vacation days than normal, it may cause disruption as employees use these additional days.
Legal issues can vary dramatically from state to state, too. Employers need to consider how state laws treat time that is rolled over or cashed out and also review their own handbooks and vacation policies on the topic.
What is Paid Time Off (PTO)?
PTO is often used by companies that want to minimize the number of company policies and procedures that they have in place.
In theory, companies start a PTO policy where they combine the annual vacation time and sick leave so employees can use their time off as needed instead of tracking minor details.
The benefit of this approach is that managers spend less time managing time off for PTO, meaning there’s less administrative burden on the manager.
On the other hand, employees often feel like PTO is synonymous with vacation time. As such, they use paid time off when they want to enjoy their time off and come to work sick.
Employees tend to use their full PTO allotment, even in states where accrued time off is part of their wages and must be paid upon departure.
What is the Difference Between Paid Time Off and Vacation Policies?
The biggest difference between paid time off and vacation policies depends on the language of the company’s paid time off policy. A traditional time-off policy will have different buckets of time off for employees to use.
For example, an employee may get 10 vacation days and 5 sick days over the year. Typically, the vacation time will roll over year-to-year (subject to policy maximums) but sick time will not.
A PTO policy rolls all paid time off policies into one bucket. For example, an employee may be given a bank of 15 days to use how they see fit. This would have to cover any sick time they need to use during the year. The policy would apply to all days earned under the PTO policy.
The 2018 paid time off and vacation survey revealed that vacation day usage increased, with a greater impact on the country’s economy, job growth, and personal incomes than most people realize. This survey hasn’t taken into account paid family leave, personal or sick days, as well as other forms of paid time off.
Is it mandatory to offer paid time off?
No state in the US requires employers to provide vacation time to employees. However, there are states and local governments that require employers to provide paid sick time.
Employers should check with their HR team or use the services of a company that can help them manage their vacation policy to determine the requirements in the areas in which they have employees.
When you have employees in multiple locations, you may have to make decisions about your internal policy for paid time off. Because there are localities with differing requirements, employers may need to decide if they want to have a one-size-fits-all approach to PTO or if they want to tailor policies based on state requirements for sick leave.
According to a Glassdoor survey, paid time off, parental leave, and vacation was considered much more important for employees than pay raises. Despite this fact, the US remains behind much of the rest of the world in offering and using this employee benefit.
How is Paid Time Off Calculated?
How a company calculates paid time off may depend on how they track and pay people for the time worked. Often, hourly employees earn or accrue time off based on the hours worked. For example, the company may have a policy where employees earn 1 hour for every 30 hours worked.
Salaried employees are often given a certain number of days or weeks of vacation time over the year. For example, the offer letter may state that the employee will get 10 vacation days per year.
However, the policy itself may stipulate that the time is accrued over the year. In this example, the employee would earn 0.83 days every month towards the 10-day total. If the employee left halfway through the year, they would only earn 5 of the 10 days.
Flexible PTO vs Unlimited PTO
A newer trend in employer offerings is what’s known as unlimited PTO. Employers like to market their unlimited PTO policies to candidates and there is less administrative work for managers.
Companies also do not have to worry about the financial obligations of earned time off, which is considered compensation in some states. Since there is no accrual, there is no requirement to pay out the balance at the end of employment.
However, there is also evidence that employees take fewer vacations when the company has an unlimited PTO policy. Companies also run the risk that there is an uneven application of the policy among employees.
If you are considering an unlimited PTO policy, you should design the program with a professional who can help guide you with the policy, communication, and administrative aspects (for those states or localities which have paid sick leave).
How to Choose the Best PTO Policy
The best policy for paid time off is a policy that fits in with the value that you offer to employees and helps the company meet goals. There is no single best policy for all companies.
However, decision-makers should be aware of the implications of the chosen policy because it will impact attracting candidates, retention, and the bottom line.
In several states, once an employee “earns” vacation, it is a part of their compensation and they cannot forfeit it. That means if the employee leaves the company, the PTO balance must be paid out to the employee (based on what the employee actually earned).
In other states, company policy may dictate what happens with unused PTO when an employee leaves the organization. The median number of days of paid vacation given to employees after one year of service is 10, according to the Bureau of Labor Statistics.
Candidates do consider work-life balance when thinking about their next job opportunity, but “work-life balance” may have different meanings depending on who you speak with, in the organization.
Paid time off for small businesses is an important policy consideration because it impacts the company’s ability to attract and retain employees. The exact policy a company chooses should support its goals and values as a company.
If you need help in figuring out what is the best paid time off (PTO) policy for your business, get in touch with one of our experienced benefits consultants that can guide all your HR questions and help you build the most appropriate policy, that will fit your company’s culture and will help retain talent.
Call us. We are here to help.
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