How to Create a PTO Policy

Dec 22, 2021

Paid time off (PTO) is one of the most common and popular benefits employers offer to their employees. But in order to implement this benefit with the least amount of administrative and interpersonal hassles, a business needs a strong PTO policy along with an HR technology to track employees’ use of PTO and ensure accuracy of records.

The purpose of a PTO policy is to establish ground rules and transparency while promoting objectivity and consistency in the application of those rules. In businesses with multiple locations, leaders may have to decide whether to create a company-wide PTO policy applicable to all offices or to have policies applicable only to specific offices, based on state or local mandatory paid sick leave requirements.

In all situations, though, a company should document its PTO policy in writing within its employee handbook. The policy should include the following information:

  • The number of PTO days employees (or certain categories of employees) get annually
  • The maximum amount of PTO that can be taken at once
  • The procedure for requesting and approving time off
  • How much notice employees must give managers to use PTO
  • How unused PTO is handled when an employee leaves the company
  • Any other special rules or parameters the company wants to put in place for using PTO

To follow up on that last point, the PTO policy should address certain concerns that have become increasingly important of late.

Combine PTO with sick leave — or keep the two separate?

Many employers have traditionally given employees a set number of PTO days and sick days lumped together, to be used for either vacation or sick time. But that’s starting to change, with the number of U.S. employers that combine PTO with sick leave trending downward: only 41 percent did so in 2021, compared to 44 percent in 2020.1

Many states now require companies to provide employees with a certain number of hours of paid sick leave — separate from PTO — each year. (Companies should check with the laws of the individual states in which they operate to determine whether these laws might apply to them.) Furthermore, many companies want to be able to track the difference between PTO and sick time to better assess how employees use this benefit. Also, separating the two types of leave tends to be more popular with employees, who usually prefer not to have to use up valuable vacation time when they’re sick.

Standard PTO — or unlimited PTO?

A standard PTO policy gives employees have a finite number of PTO days to use throughout each calendar year. Although it can make employees feel more restricted, standard PTO plans offer important advantages to employers:

  • More control over the costs associated with PTO (e.g., lost productivity)
  • Easier scheduling
  • More peace of mind that business needs will be covered

An unlimited PTO policy lets employees take off as many days as they want (usually with no questions asked) as long as they get their work done and their time away from the office accommodates the business’s needs. For employers, unlimited PTO plans can be great recruitment and retention tools; for employees, they can lead to increased job satisfaction and a sense that the company cares about their well-being.

Because employee abuse of unlimited PTO can jeopardize business operations and productivity, companies that offer unlimited PTO should consider imposing certain restrictions on its use:

  • Definitions of the types of leave that are approved under the policy and those that are not approved (for example, long-term absences associated with medical or disability leave)
  • A separate sick leave policy
  • Clear parameters for how much PTO an employee can take at once

Unlimited PTO isn’t recommended for nonexempt hourly employees, because companies need to be able to track the time those employees actually work. This option makes sense only for exempt, salaried employees. It’s worth noting that there’s seemingly a resurgence of support for standard PTO plans: in 2021, 51 percent of employers offered standard PTO plans, up from 49 percent in 2020.2

Flat PTO — or tiered PTO?

On average, most U.S. employers offer 10 to 14 days of PTO to their new employees.3 Some companies give all of their employees — regardless of tenure — the same flat number of PTO days. This option certainly involves less tracking and administrative effort. In smaller companies, employees may even desire equal treatment across the board. (However, employees’ desire to be rewarded for tenure tends to increase as companies and staff sizes grow.)

In companies that want to reward employees for their loyalty and duration of service, one option is to increase PTO on a tiered system: the longer an employee stays with the company, the more PTO they’re eligible for each year or each time they pass a set milestone. Not only can a tiered PTO system reinforce to long-term employees that the company values them, but it can also serve as a great recruitment and retention tool.

Front-loaded PTO — or accrued PTO?

A front-loaded PTO policy grants employees all of their allotted PTO for that calendar year on January 1, to use as soon as they want or at any point throughout the year. Employees tend to favor front-loaded PTO for its lack of restrictions. However, employers run the risk that an employee will use up all their vacation time in the first few months of the year and then quit.

In an accrued PTO policy, employees earn an increased amount of PTO per pay period or at other designated increments. This option requires more tracking and administrative effort. However, it also gives employers more control over PTO costs, planning, and scheduling throughout the year.

Companies that choose the accrual method must consider whether it will include negative accrual, which allows employees to use PTO before it’s earned. For example, an employee who wants to take a vacation in February that requires more vacation time than they have in their PTO bank could use a negative accrual policy to apply both earned and unearned PTO toward the trip. If they leave the company before earning the PTO they used early, the company could (depending on relevant state laws) “charge” them for those days by deducting the cost of the unearned PTO from their final paycheck.

Negative accrual can also counteract end-of-year absenteeism. Without negative accruals, employees wouldn’t be able to take larger blocks of time (e.g., five days or longer) until the second half of the year. This means that several employees could be out of the office at overlapping times, which could create staffing challenges.

One possible compromise between the two systems is to frontload an allotted amount of PTO time at the beginning of the year, and then require employees to accrue additional time beyond that.

Rollover PTO — or “use it or lose it” PTO?

In companies with a “use it or lose it” PTO policy, employees must use all of their allotted PTO before the end of each calendar year to avoid losing it. (Note that some states prohibit this type of PTO policy.) For employees, the downside is that they can feel that they’re losing out on an earned benefit or that they are forced to use PTO when they’d rather save it and use it at a more personally advantageous time. At the same time, although “use it or lose it” PTO policies enable easier, cleaner tracking of PTO for employers, they can spur a sharp increase in end-of-year absenteeism and can impair employee relations.

A rollover PTO policy allows employees to carry over unused PTO into the next calendar year. Because this PTO “bank” can become quite large, companies should set limits on the amount of PTO that can be carried over into the next year, as well as the amount of rollover PTO that can be used at once. Companies should also set an expiration date on rollover PTO and establish a cap on the amount of available PTO (to prohibit employees from accruing more PTO until they use what they’ve carried over).

Additional considerations

When figuring out the structure and implementation of its paid PTO policy, a company should keep in mind the following questions:

  • Will the company mandate that employees use a minimum amount of PTO each year?
  • How will the company address the use of PTO during the certain times of the year when many employees want to take time off (e.g., major holidays, peak travel seasons)?
  • To support diverse cultural and religious traditions and to give employees greater flexibility in using their PTO, will the company allow them to take floating holidays?

Of course, a PTO policy should address all the basics, such eligibility, amounts, procedures, notice periods, and major restrictions. But a comprehensive policy should also include answers to the more pressing and timely issues outlined above. In addition to the general pros and cons, a company’s PTO policy must also be evaluated in the context of its workplace culture, what its competitors are doing, what its employees prefer, and the needs of the business.

Written by: Roger Carbajal

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