Career Coach, Professional Resume Writer, Freelance Writer
The world of work has undergone some major transformation in recent years. From remote and flexible work to increased emphasis on employee benefits and wellbeing, companies nowadays have to be very intentional about their HR policies and how they approach talent acquisition.
Paid Time Off (PTO) is a key instrument which can not only spur productivity and engagement among your existing employees, but it can also serve as a great tool for attracting top talent. In fact, a 2019 study by MetLife found that 72% of employees find unlimited PTO to be the top emerging benefit in the workplace.
That said, there are several ways you can go about drafting and implementing your PTO policy. Which route you choose will highly depend on your business, the industry you operate in and the makeup of your workforce. Here we explore what is a good (fair) PTO policy and what are some of the concerns you should be aware of. We also share examples of a good PTO policy to get you started.
What is a PTO Policy?
PTO is the time an employee is entitled to take off from work and get compensated for it. This can include holidays, sick leave and even birthdays. A PTO policy is an HR tool which defines:
- the rules around how PTO is calculated
- the process for taking time off
- what happens in case an employee doesn’t use all of their time off
The Types of PTO Policies
Bank PTO, also known as Allotment PTO, gives all employees a specific number of days off at the beginning of the year. This is usually done on January 1st, on the work-anniversary of the employee or at the beginning of the fiscal year for the business. This model is a bit simpler to manage. There’s no need for complicated calculations trying to figure out how much time each employee has based on seniority or the amount of time worked.
Some companies allow employees to carry over their PTO in the following year if they haven’t used up their allocation. This approach, however, can lead to employees accumulating too many days off in a single year. So, some companies either don’t allow rollovers, or they limit this to a specific amount of days.
Something to consider here is how to handle any leftover PTO when an employee leaves your company. While you may or may not be legally required to pay employees for unused PTO (it depends on the state in which you operate), many businesses opt for payment to show good will and protect their brand as an employer. There’s also the risk that an employee uses up all of their allotted time, but they leave before the end of the full year for that allotment.
Accrued PTO is the more traditional model used by companies. Here, an employee can accrue time off based on two things.
- The amount of time they’ve worked
- The number of years they’ve been with the company
For example, say a new employee can accrue three hours of time off for every 40 hours they’ve worked. This can give them about 156 hours or 19.5 days time off within a year. There also exists tiers. In this situation, the longer an employee stays with you, the more time they can accrue per 40 hours.
While this is a great model for incentivizing people to stay with you, it can also cause a logistical nightmare. Calculations can become really difficult when deciding how much time each employee is entitled to. Additionally, depending on your policy or the state you operate in, you may be liable for paying out any remaining days employees haven’t used before leaving.
An open PTO, also known as an Unlimited PTO, is a relatively new approach. It simply means that employees don’t have a limit as to how many days they can take off. This was popularized by the tech startup community in an attempt to attract top talent. It is slowly, but surely, gaining traction elsewhere.
However, the name is somewhat misleading as an employee can’t be off for an indefinite amount of time. Instead, this approach puts the onus on the employee to decide how many days they need off. That said, the manager has a discretionary right to either approve or reject these requests, depending on performance or how many days that employee has already taken off.
The Benefits of PTO Policies
There are many upsides to having a clear PTO policy.
It Builds Trust with Existing Employees
A PTO policy is a great way to build trust with your employees. The policy shows that you treat your employees with respect and that you trust they’d take the time off when they need it. Likewise, employees won’t feel shy or uncomfortable to ask for time off or feel like they have to call in “sick” if they want to extend their holiday.
Employers also gain more control over unpredicted absenteeism which is pretty common with companies that don’t offer a PTO.
It Attracts More Talent
Attracting talent has never been harder. A study by McKinsey has found that a pay raise won’t cut it anymore. Instead, employees are looking for other perks and benefits that improve flexibility and work-life balance. A good PTO policy can respond directly to this need by showing prospective employees exactly how much time they can get off if they work for you.
It Helps Your HR Function
If you have to separately track vacation days, sick leave, and personal days, then this system could easily (and quickly) be overwhelmed. Instead, lumping all days into a single PTO policy makes everything simpler. It also makes employees feel more comfortable with taking time off.
Concerns with a PTO Policy
Regardless of how well drafted your PTO policy is, there are also some risks associated with it.
Confusing PTO with Vacation Time
There’s a risk that employees treat all of their PTO as vacation time. Then, show up at work sick. They could then potentially infect other employees and reduce the overall productivity and health of your teams.
This can be a risk even for employees who are working from home. If they have no paid time off left, they may work while sick and produce worse output.
If an employee leaves, you’re usually not required to compensate them for any unused sick leave or personal days. However, PTO lumps all these days together. Therefore, you may end up having to pay your existing employee for unused PTO.
Fewer Days Off
A survey by SHRM has found that, on average, employees get 18 days off under a traditional PTO policy. This is less than what companies with a traditional leave packages typically offer. The same survey found that two-thirds of employees use all of their allocated PTO. This could potentially indicate that the majority of the workforce would fare better with longer PTO to help prevent burnout and increase productivity.
What is a Good PTO Policy?
A PTO policy should protect and serve both you and your employees. When deciding on what policy to implement, think about your workforce, your industry and the type of corporate culture you’d like to create.
Leave Nothing to Chance
It’s absolutely key that your policy is clear and easily accessible for all employees. You don’t want to leave things open-ended, and expose yourself to liability or create disgruntled employees later on. Here, define the specific terms under which employees can take time off. Define what the request process looks like, and show how employees can manage and track their time off.
Create It to According to Your Corporate Culture
Say, for instance, you have an issue with people not taking enough time off. You can follow the example of PwC and give away a bonus to anyone who takes off a certain number of days per year.
Or, say you work in retail and you have a high staff turnover. Giving allocated PTO might not suit you if you risk employees using all their PTO and leaving. So, you have to be very careful about the approach you decide to take. However, it should be a reflection of your company culture and the values you want to portray.
What about Unused PTO?
Employees crave an employer that understands them and respects them. You can get really creative with your PTO and give employees other perks, such as:
- transferring the value of unused PTO into pension contributions
- letting their PTO roll over into the next year
- turning their unused PTO into salary
Rather than adopting the “use it, or lose it” mentality, think about how employees can make the most of their PTO without hurting your business.
What to Include in a PTO Policy?
Here are some of the things that should go into your PTO policy.
Type of Leave
Here, make sure that your employees are aware that all types of leave are rolled into a single PTO. For example, if your company observes certain federal holidays, such as Christmas or Memorial Day, then you need to be clear about whether these are paid or unpaid holidays. Likewise, it would be wise to set policies regarding other personal, religious, and ethnic holidays. You may even have a case where someone is willing to work on a federal holiday, but would like to have time off for a personal occasion.
Other things that can count towards’ an employee PTO are
- medical appointments
- jury duty
Allocation of Days
One of the most important things your employees would care about is how many days they are allocated and how it’s calculated. Depending on the type of PTO you’ve decided to go for, you can explain the accrual process for new employees as well as for those who’ve been in service for a longer period of time.
Including the start date helps explain when an employee becomes eligible for PTO. Some businesses require employees to work a probationary period before they can qualify. Additionally, a good PTO policy will include when an employee becomes eligible for accrual days.
Another important element of your PTO is to clearly define how employees can make use of their PTO. This is key as it will avoid much of the confusion that can come with an unstructured request process. In the long run, it also helps reduce unscheduled absenteeism because employees are better equipped to use their PTO.
No matter how good of an employer you are, it’s inevitable that some of your employees would eventually leave. A fair PTO policy includes information on what happens once an employee is terminated or hands over their notice. This can include compensation for any unused or overused PTO (in case an employee used more PTO than they were entitled to before they quit).
Examples of Good PTO Policies
All employees are to put in a request for leave at least a week before the start date. If you’re requesting more than five days of leave please first consult with your manager to ensure smooth transition of business activities and then log your request through the company’s HR system.
If you’re feeling unwell and suspect you would need to take time off, please inform your manager as soon as possible. Once you’ve discussed your absence, please log it through our dedicated software.
All employees are encouraged to make use of their paid time off in the year in which the leave was allocated. However, in case there’s any PTO remaining at the end of the year, employees are entitled to roll it over into the following year. They’d need to use this additional PTO by June 1st of that year, otherwise it would be deducted from their allowance.
No employee is entitled to more than 29 days of PTO per year in total.
Each employee accrues two hours of paid time off for every 40 hours worked or eight hours of leave every month. If an employee has been with the company for longer than three years, then they will accrue three hours of PTO for 40 hours worked. For employees with the company for longer than 5 years, the accrual rate increases to three and a half hours for every 40 hours worked.
If you’re unsure of how many days in total you’re entitled to please talk to the HR manager.
We all live in a busy world where burnout is a common occurrence. If you want to build a strong and productive workforce that stays with you for the long run, a fair and clear PTO policy is a good place to start. That said, help your employees make use of it by fostering a culture of trust, transparency and inclusivity.