Paid time off policy

Employee engagement and sense of value are directly related. As such, employers who show they appreciate their employees may be able to improve workforce morale. PTO policies are highly effective in this regard. They demonstrate an employer’s commitment to improving not only employee happiness, but also mental and physical wellness. Ultimately, a well-drafted PTO policy can help retain employees and attract prospective candidates.

What is a PTO policy?

A paid time off policy explains the circumstances under which employees may be excused from work and still receive pay. It may include such details as eligibility, accrual processes, maximum days available, procedures for requesting PTO, restrictions, etc.

Policies also sometimes distinguish between different types of PTO categories. Common examples include:

• Vacation days are usually reserved for vacations only and may require advanced notice.
• Personal days typically encompass any time off that isn’t for illness or vacation.
• Sick days may be used when an employee is ill and cannot come into work.
• Floating holidays allow employees to observe certain holidays at their discretion.
• Bereavement time may be used for grieving, arranging funerals or attending services.

Types of PTO policies

PTO policies may differ in terms of how time off is earned and utilized. For example, some employers distinguish between different types of PTO, like vacation time and sick days, while others bundle all time off into PTO banks.

PTO banks

PTO banks negate the need for employees to specify a category when requesting time off. Whether an absence is due to illness, personal time or vacation, the time comes from the same pool of PTO hours. This approach gives employees greater flexibility and can help make tracking PTO easier for employers.

Accrued PTO

A PTO accrual policy requires employees to earn their PTO by working a certain number of hours each pay period. For instance, if an employer grants 100 hours of PTO annually and pays employees biweekly, the accrual rate is approximately four hours of PTO per pay period.

Upfront PTO

With an upfront or front-loaded PTO policy, employees have all their PTO available immediately at the start of the year or hire date. Tracking is simpler compared to accrued PTO because ongoing calculations are not necessary. However, upfront PTO can prove costly if state laws require employers to pay out unused PTO when employees leave the company.

Tiered PTO

A tiered structure grants PTO differently based on job title, department or tenure. For instance, employees who work with a company for five or more years might earn more PTO or accrue time faster than new hires.

Unlimited PTO

As the name implies, unlimited PTO does not cap the amount of time off employees may take. The primary concern with this approach is overlapping PTO. To avoid staff shortages, employers may consider defining when employees can reasonably use their time off.

How to create a PTO policy

Employers who want to roll out a PTO plan must first ensure that time off benefits are compatible with their company’s environment and culture, and comply with state and local laws. It is essential to work with legal counsel during this process.

Once they’ve determined the type of PTO that will work best for their business, employer must focus on plan mechanics. It may help to answer the following questions:

• Which employees (part-time, full-time or both) are eligible for PTO?
• What is the maximum amount of PTO permitted?
• Is PTO allotted or accrued?
• If PTO is earned, what is the accrual rate?
• How can employees request time off?
• Can employees donate their PTO?
• Is unused PTO carried over at the end of the year?
• Is unused PTO paid out when employees leave the organization?
• How will the PTO program be administered and coordinated with payroll?
• How often will the program be reviewed and by whom?
• Do any state or local laws require PTO policies to comply with legally-required time off?

PTO policy best practices

Designing a paid time off policy that works for both employers and employees is not an easy process. Many steps require careful consideration and compliance knowledge. By following best practices, however, employers may be able to side step pitfalls and deliver superior PTO benefits.

Encourage employees to use PTO

Employers should treat PTO as a benefit that helps employees recharge and stay productive rather than a speed bump to their operations. If employees feel discouraged from using their PTO, they may become disgruntled.

Track employee PTO days

Many PTO policies involve calculations for accrued time off or have limits on when it may be used by employees. Both of these provisions necessitate tracking to help prevent policy abuse.

Clearly communicate the paid time off policy

Drafting a PTO policy that’s understandable and accessible is just as important as its components. If the guidelines are clearly written, employees will have fewer questions and a better understanding how their PTO may be used.

Ensure adequate staffing

When employees have to take on extra assignments or work longer hours because their coworkers are on PTO, they may become resentful or feel they are being mistreated. Employers may have to limit PTO during busy seasons or provide extra support for employees who are picking up the slack.

Reevaluate the policy

Evolving business needs might eventually conflict with existing PTO policies. State and local laws may also change. To keep pace with new requirements, employers should review their policies regularly and revise them as needed.

PTO policies and legal compliance

Designing the perfect PTO policy is a task made even more challenging by the regulatory landscape. There are various state and local laws governing PTO, including paid family medical leave, acceptable reasons for permitting leave, minimum accrual rates, pay requirements and more. In addition, some states require employees to be compensated for unused PTO at the end of the year or when their employment ends. For these reasons, employers should consult legal counsel when creating or revising a PTO policy.

Frequently asked questions about paid time off policies

This guide is intended to be used as a starting point in analyzing paid time off policies and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax guidance or other professional services. Please consult with your legal counsel.