A paid time off (PTO) policy is necessary for your business once you hire employees. It’s part of your employee benefits plan that governs sick leave, vacation and personal time for you and your workers. It designates a specific amount of time to be treated as paid hours that employees can use at their discretion.
There are multiple types of PTO policies, and you must carefully consider your company culture and your employees’ wants and needs before deciding on the best PTO policy for your business. We’ll explain the various types of PTO policies, PTO policy costs and what makes a PTO policy effective.
What is a PTO policy?
A PTO policy is a set of rules and expectations regarding employees’ paid vacation time, sick days and personal time in a calendar year. There are no federal laws requiring employers to offer PTO. However, most companies offer PTO to help workers achieve a positive work-life balance. Additionally, because employees don’t have to ask their employer for permission to take off work, PTO policies can help create a healthy and trusting work environment.
Some PTO policies can also provide financial benefits for your business. For example, an open PTO policy that allows employees to take as much PTO as they want eliminates the need for the company to pay out unused vacation days if an employee quits or is laid off.
Aside from PTO, other flexible benefits employers may offer include remote and hybrid work arrangements, transit or commuter benefits, and paid parental leave.
Types of PTO policies
There are three basic types of PTO plans to consider for your small business. Carefully weigh your company’s needs and culture before deciding on a policy type.
A PTO bank policy pools all an employee’s PTO into a single source they can draw from as they see fit, whether it’s sick time, vacation time or personal time off. This policy generally does not require the employee to provide a reason to their employer unless they’re taking several days off in a row.
- Bank PTO benefits: Each employee gets the same amount of PTO they can use however they like, creating a sense of trust and responsibility. Employees can also make PTO requests on their first day of work.
- Bank PTO drawbacks: This type of policy may encourage sick employees to come into work to try to save their banked PTO for vacations or personal days.
This policy allows employees to earn time off according to how much they work or their years of service. For example, an employee could accrue four hours of PTO for every 40 hours worked, meaning they would earn one day off every two weeks. Unless capped, PTO days continue to accrue until the employee uses them.
- Accrued PTO benefits: This type of policy can motivate employees to work to earn their PTO and give them a sense of accomplishment when they do.
- Accrued PTO drawbacks: This policy can encourage workers to come in when they’re ill, as they may not want to “waste” their hard-earned PTO days. It can also be demotivating for new employees to start with zero days.
Unlimited PTO, also known as an open policy, operates on a trust basis between the employer and employee. An unlimited PTO policy means there’s no cap on how many PTO days an employee can take, provided their work gets done and the unlimited vacation policy is not abused.
- Unlimited PTO benefits: Employees feel trusted and understand that a positive work-life balance is a priority for the company. Also, as mentioned above, if an employee quits or is laid off, their employer isn’t required to pay out unused vacation days.
- Unlimited PTO drawbacks: In some company structures, this policy could backfire and be taken advantage of. Carefully consider your workplace culture and whether your employees will treat the policy responsibly.
A PTO policy is different from a traditional paid leave policy, where companies give employees a set number of paid sick days and vacation days.
The costs of PTO
In 2022, the U.S. Bureau of Labor Statistics reported that the average hourly wage was $28.88, accounting for 69 percent of employee compensation costs for employers. The remaining 31 percent is attributed to employee benefits, such as health insurance, retirement and paid leave. On average, paid leave accounts for $2.94 of the average cost of an employee per hour.
This may not seem like much, but it accounts for 7.4 percent of a business’s total employee costs, making it the fourth-highest cost behind wages, payroll taxes and insurance. As such, it’s essential to consider what you can afford when deciding which type of PTO policy is right for your business.
If you choose an accrual policy, for example, you can use this method to calculate how much PTO each employee is eligible for by tracking their hours.
PTO policy best practices
A good PTO policy benefits the employer, employees and the company as a whole. When a PTO policy is comprehensive, generous and flexible, employees feel valued and cared for, increasing their loyalty to your company and potentially boosting productivity.
“The best PTO policy offers flexible, diverse and portable benefits to mirror today’s workforce,” said Rob Whalen, CEO and co-founder of PTO Exchange. “It’s a win-win if both the employee and the employer are happy and benefiting from the policy.”
Here are some ways to create a good PTO policy.
1. Create a flexible PTO policy.
Job flexibility has become more crucial than ever, especially for millennials and Gen Zers – who are quickly becoming the largest generations in today’s workforce. Millennials tend to stay longer at jobs that offer more pay flexibility and employee benefits, so ensure your PTO policy meets those expectations.
Flexible and open PTO policies:
- Bundle all PTO types. Flexible and open PTO policies bundle all PTO types, allowing employees to choose the type of leave policies they need.
- Accommodate diverse workforces. Flexible and open PTO policies can help you prioritize diversity and inclusion by allowing employees to take off for meaningful religious and national holidays. They also account for alternative days off, such as a mental health day, doctor’s appointment or medical leave.
- Convey trust. Flexible and open PTO policies convey that you trust your employees and don’t run a controlling work environment.
Other ways to convey trust and empower your staff include encouraging self-improvement, delegating responsibility and listening to their concerns.
2. Make your PTO policy clear and understandable.
Your PTO program must be clearly defined, with no question as to what is and is not permitted. This clarity protects business owners and helps employees feel supported and informed.
Your PTO policy should be clearly written, detailed and accessible to everyone employed at your organization. Ensure your policy covers all employees and that they know how to request or inform management about PTO days they plan to take.
3. Create a PTO policy based on company culture.
An unlimited PTO policy may look great on paper but not work out so well in real life if your business doesn’t encourage time off. You must have a good understanding of your business, employees, and company or industry culture to know what policy style will work best.
If you’re unsure, send an anonymous survey to employees to help you understand how they view your organization’s time-off culture and what they’d like to see in a PTO policy. Adjust your policy based on your employees’ responses.
4. Offer incentives or benefits with your PTO policy.
An oft-criticized PTO policy is “use it or lose it,” where any accrued vacation time is lost if an employee doesn’t use it by the end of the year. While accrual arrangements encourage employees to use their time off, they can be demoralizing when employees feel they can’t or shouldn’t take advantage of their PTO hours.
Instead of a “use it or lose it” policy, consider allowing unused PTO to roll over. As another option, Whalen suggests building benefits into your PTO policy. “With flexible PTO benefits, employees have the ability to transfer the value of any unused PTO to other priorities and needs, such as funding a 401(k), [paying] emergency expenses, paying down student loan debt or funding a real vacation.”
Be wary of unknowingly violating employee rights with your PTO policy. For example, some states consider PTO equivalent to earned wages, making “use it or lose it” policies illegal.
5. Consider offering opportunities for personal time off.
Many companies provide opportunities for using PTO, such as supporting a charity, doing volunteer work or exploring professional development. For example, McDonald’s corporate employees can take up to eight weeks of paid sabbatical leave every 10 years, while Adobe offers a paid sabbatical to its employees once every five years.
If you’re not a huge company or your employees don’t need sabbaticals, consider offering PTO for volunteer work, which has the dual benefit of increasing your company’s philanthropic efforts while fulfilling and valuing your employees’ time. Company volunteer days have also proven to be effective at improving teamwork among employees.
Encourage your team members to use their PTO to help support employee mental health and prevent employee burnout.
Example of a PTO policy
The following is a sample PTO policy for your business:
Any PTO (paid time off) will start accruing after a 60-day preliminary period after hiring. To be eligible for the PTO, the employee must work full-time and have a minimum of 32 earned hours weekly. Part-time employees who work fewer than 32 hours weekly are not eligible for PTO through [company name]. PTO is not accrued during any pay periods of unpaid leave, disability leave and workers’ compensation leave.
PTO can be taken in increments starting at two-hour blocks. PTO can be used for any purpose. All PTO requests should be submitted directly to your supervisor. PTO requests can be denied based on staffing needs. Advance notice is preferred for PTO requests, but [company name] understands that unscheduled PTO is needed from time to time. In non-emergent cases, please notify a supervisor of your PTO request at least 24 hours in advance. If more than three days of PTO are used without prior scheduling, a medical note may be requested by your supervisor. If excessive unscheduled PTO is being used by the employee, disciplinary action may be taken by [company name]. Prior to any termination, two warnings will be provided in writing to the employee.
PTO is paid at your normal base rate and is not subject to any overtime rate. Accrual is based on the amount of time you have worked for [company name]. Employees who have worked at [company name] for less than five years earn four hours of PTO for every two weeks of full-time work. Annual accrual will equal 13 days per year. Employees who have worked for [company name] for more than five years earn eight hours for every two weeks of full-time work. Annual accrual will amount to 26 days per year.
Payment of all PTO upon termination is subject to [state] law. After [state-required time period], you will receive payment for all PTO hours that you did not use prior to termination, resignation or retirement. Cash-outs of PTO are also permitted for current employees, with a maximum of 40 hours of PTO available annually.
This sample PTO policy can apply to most businesses. However, small companies might want more flexible PTO rules. For example, some small companies don’t give each team member a set number of PTO days annually. Instead, they allow employees to take off for the time they need as long as the requests are within reason. Some companies also give each employee paid time off for their birthday. If you’re looking for another example, Carnegie Mellon University also has a copy of its PTO policy online.
Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.