Having a modernized paid time off (PTO) policy is important for employees and businesses. You want your employees to have the time they need if they’re sick or have a necessary appointment. 

You also want your employees to be able to take vacations. Research shows that when employees have the opportunity to travel and take time off, it improves their physical and mental health, productivity, and overall attitude toward work. 

When your employees return from their travels, whether it’s a family trip to Branson or a trip to an exotic location around the world, they’re more likely to feel like they can think more creatively, problem solve more effectively and collaborate with a fresh perspective. 

When you don’t offer your employees PTO or you don’t have a well-structured program for implementation, it’s problematic. It can increase the likelihood of employee burnout and stress. Not offering PTO or having employees who don’t fully utilize it can cause your employees to lose interest and disengage from their work. There can be adverse effects, including increased tardiness and absenteeism, reductions in productivity and declines in innovation. 

Below, we go into some things any business or HR team should know about modernized PTO. 

An Overview of PTO

First, PTO stands for paid time off. This is a term that you might use to cover vacation time, sick leave, and personal leave. 

Businesses might opt to track time off based on the categories above, or they can decide to combine all of these types of leave. In that case, employees can use their time as they want, without making a distinction. 

The idea of generalized PTO policies has become increasingly popular while separating and categorizing time off is considered a traditional approach falling out of favor. 

With PTO policies, rather than allocating a set number of days employees can take off for vacation or sick leave, there’s one blanket PTO policy for each employee. Many times, there’s a PTO bank in which employers will combine the total number of days. 

Some policies let employees accrue PTO hours every pay period, or they might get it in a lump sum at a designated time in the year. How long an employee has been with the company might determine the accrual amount. 

With PTO policies, employees have more flexibility. Otherwise, if an employer has a traditional model with time-off separations, employees might accrue sick time they don’t end up needing that they’d instead use in other ways, including for vacation. With PTO policies, employees can decide how to use their time off. There’s also more privacy if employees don’t have to say why they’re requesting time off. 

The benefit of employees, in particular with PTO right now, is that it can represent a non-salary benefit you can offer candidates during a time when employers are having a tough time getting employees. The idea of a flexible PTO bank can be a selling point for your employer brand and something that sets you apart from other employers, even if you can’t afford to offer a higher salary. 

Should You Use a PTO System?

If you’re considering switching to a PTO system, there are many upsides and some downsides you have to be aware of to make an accurate assessment. For example, PTO policies might encourage employees to come to work sick, and that’s something you never want but particularly not in the COVID era. 

When an employee is under a PTO system, they might want to save more vacation time. With dedicated sick time, they’re more likely to stay home when they aren’t feeling well. 

Also, PTO employees could use their time up too early in the year and then not have enough if they were to get sick later on. 

In some states, there’s a mandate to pay time off when an employee is terminated. Under traditional systems, you would pay out for vacation time but not for sick leave. 

Choosing a PTO Approach for Your Business 

There are different approaches to PTO that get more specific even than what’s mentioned above. You want to make sure you reduce the HR administrative burden but simultaneously ensure your employees feel valued. You also have to make sure you’re in line with any laws or regulations. 

To determine what’s going to work best for your business and your employees, think about the following particular considerations:

  • Are you going with traditional leave or PTO? If you’ve made it this far in the conversation, you may be leaning toward PTO. However, if you care how your employees use their time off for any reason, you should stick with a traditional model. Otherwise, if you use a PTO model, you don’t have visibility into how time off is being utilized. 
  • If you’re okay with pooled PTO, then you decide whether you’re going to use a lump sum or an accrual model. Will your employees, for example, gain access to their entire PTO bank when they’re hired, or will they accrue it through the course of their year with your company?
  • Will you let employees roll over their unused balances, or will you have a “use it or lose it” policy? You have to make sure you’re compliant with your state laws, regardless of which you choose. You might encourage employees to take their time off and avoid big payouts, which means you could lean toward use-it-or-lose-it. However, if you’re in a state like California, paid time off is earned wages, so it’s illegal to have these policies. 
  • Payouts, when employees leave, are a significant consideration when you’re deciding on and then designing a policy. Since PTO can technically all be used as vacation time, it’s creating a gray area. Under most state laws, as an employer you have to compensate employees when they have any unused PTO time and leave the company, regardless of whether they’re going voluntarily or involuntarily. 
  • How will you track PTO? You want to reduce the workload on HR, and one downside of PTO, in general, is that if it’s not well planned and implemented, it’s burdensome on HR. It’s a good idea to plan to invest in a tracking system with reporting capabilities and automation. You want your supervisors and HR team to be able to manage PTO no matter where they are and in real-time. 

Accrual

As we mentioned above, you’ll have to think about how your employees will earn PTO and when they’ll be able to use it. Some employers prefer that employees accrue their PTO as they work. Others will grant time on a specific date, such as the start of the year. 

Standard accrual rates include:

  • Yearly: The upside of a yearly accrual rate is that it’s easy to calculate, but employees might not prefer this option. They have to wait a year before they can get time off. If you’re using PTO as a way to attract qualified talent, it’s also going to be harder to sell them on this benefit if they have to wait a year versus getting it as a new hire. 
  • Hourly or daily: These accrual methods tend to be most appropriate if you have part-time employees or hourly employees. The method reflects how many hours the employees put in. 
  • Pay per period: SHRM reports this is most common. With this method, employees begin accruing PTO on their hire date, but they have to wait a year to access it all. 

General Best Practices

A few more tips include the following:

  • If you’re creating or revamping your policies for time off, make sure that you include all the details and logistics in your employee handbook. Outline your policy in a way that’s easy for everyone to understand. Avoid jargon. 
  • You’ll probably want to require managerial approval to make sure you’re taking care of any possible issues with employee coverage. How will managerial approval then be decided?
  • Think about things like deadlines for when an employee can call out sick. 
  • You may find that for your company, the best PTO policy is one that varies depending on the type of employee. For example, full- and part-time employees may be subject to different types of PTO. 
  • You want to encourage employees not to waste their PTO, but you also have to avoid having them not use it at all. 

If you’re thinking about a PTO policy, there are a lot of things to weigh. While it is a modernized approach to time off, it’s not inherently a good fit for all companies. You have to think about not just the benefits of a PTO policy but what it might look like for your organization in particular. 

If you are going to make a switch, you need to carefully plan it out and strategize ahead of time and make sure you’re compliant with state laws and you’re taking care of any potential hurdles before they can occur. 

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