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Updated Oct 20, 2023

PTO Policies: Which Is Best for Your Business? 

Consider the type of PTO policy you want and how much time off to provide your employees.

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Written By: Ada RannelsContributing Writer
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It’s often hard for a small business to compete with large organizations that can offer prospective employees bigger salaries. However, one way small businesses can lure top employees is with attractive paid time off (PTO) policies. While no federal laws mandate set amounts of PTO, time off has become one of the most attractive incentives to offer employees in recent years. Small businesses can use generous PTO policies to reduce employee turnover and improve recruiting efforts. Here’s how to create a PTO policy that works for your employees and your business.

What is paid time off (PTO)?

PTO is exactly what it sounds like: time an employee can take for themselves while still getting paid as if they were working. This can include time for vacation, personal days, sick leave, bereavement, jury duty and volunteer work.

Small and midsize businesses can offer a traditional, flexible or unlimited PTO policy. Choosing the right one for your business can be difficult, but the most important thing to ensure is that you will have sufficient coverage throughout the year.

Key TakeawayKey takeaway
PTO is the time an employer provides to employees for vacations and sick days, allowing them to be paid normally for the days they can't spend at work.

What are examples of PTO policies?

There are several ways you can structure your PTO policies. Each provides employees with some paid time off, but the number of days and how they can be used differ.

Traditional PTO

Traditional PTO means a policy that groups employees’ days off into categories such as vacation, sick leave and personal days. As mentioned above, there are many ways you can categorize your PTO for your employees, such as offering time off for volunteering or work-life balance days. The way you categorize PTO could help attract certain job candidates.

Traditional PTO also provides incentives for employees who already work at your company, as they can earn more PTO the longer they work for you. This encourages employees to stay where they are and can boost longevity.

The downside to traditional PTO is that employees might feel limited in their options and misreport their time off to keep their balances from being depleted. This can breed mistrust between employees and the company. You could also run into unscheduled absences when an employee runs out of PTO, which will disrupt workflow.

Flexible PTO

As opposed to traditional PTO, which allocates the number of sick, vacation or personal days an employee can take off, flexible PTO allows employees to choose how they use all of their time off.

This can be an attractive option to employees who are parents and need to take a day off for a school function or sporting event. It can also be helpful to people who want to celebrate holidays that are not on the federal holiday calendar. This type of PTO can appeal to all employees who want the flexibility to take time off for personal activities and events.

However, this flexibility can make it difficult to determine if you will have enough staff coverage for certain days if PTO requests are not made in advance. Many companies require employees to give advance notice of PTO to their managers in order to avoid being short-staffed unexpectedly.

Unlimited PTO

Another type of PTO policy is unlimited PTO. It allows employees to take as much time off as they want, as long as they have their manager’s approval. Unlimited PTO is growing in popularity and can help your company stand out from the crowd when attracting job candidates. It also helps ease employee concerns about running out of PTO. 

This policy can be difficult to implement, though, particularly with hourly employees. If management doesn’t set a good example and encourage the proper use of time off, unlimited PTO can actually make employees fearful of taking time off. Try to communicate a ballpark expectation of time off per year between employees and managers. Unlimited PTO expectations may also vary from team to team based on their individual workflows and supervisors’ needs.

PTO is the time an employer provides to employees for vacations and sick days, allowing them to be paid normally for the days they can’t spend at work.

Did You Know?Did you know
There are three main types of PTO policies – traditional, flexible and unlimited – each with its own benefits and drawbacks.

What should you consider before developing your PTO policy?

There are many ways to ensure you have enough coverage with your PTO policies, as long as you implement a detailed policy that states what is expected of the employee in order for them to use and maintain their PTO. Here are some important things to consider.

1. Require manager approval.

Managerial approval will help ensure you can manage your employee coverage. A manager may note in advance who will be missing and what coverage will be needed, or they can deny the request if it’s not possible to fill the staffing gap that day. The approval process is a way to monitor any of the above PTO policies. The most important thing to remember once you approve a PTO request is never to rescind it. This could result in an unexcused absence, and if you decide to fire the employee for that you could face a wrongful termination lawsuit.

2. Require a deadline for calling in sick.

This policy is not needed for every business, but if you have a restaurant, hotel or retail store where you could easily become short-staffed for a shift, establish a deadline on calling in sick. This deadline should be reasonable, but it should also allow you enough time to find a replacement for the day if needed. 

3. Determine a PTO policy for different employee types.

Depending on the size of your company and your budget, you may offer PTO to full-time and/or part-time employees. Full-time employees generally receive more benefits than part-time employees, and this can include PTO. One way to gain an edge over other companies is to offer PTO benefits to part-time employees as well. [Related: Hiring Full-Time vs. Part-Time Employees]

4. Decide how much time off to provide each year.

A big consideration is how much PTO to award employees each year (if you aren’t planning an unlimited PTO policy). Remember, the more time you give off, the more appealing your company will be to potential new hires. Be careful not to offer so much time off that it impacts overall productivity or results in staff shortages.

5. Decide whether or not employees can accrue time.

Once you decide how much time off to give employees, determine if you will provide it in one lump sum at the start of the year or if employees need to accrue their PTO. The accrual approach means employees earn their PTO over time based on how much they work. For example, an employee may accrue four hours of PTO each pay period; if your employees are paid twice monthly, they would earn one full day off for every four weeks they work. The exact accrual rate depends on how much time you plan to give employees each year.

6. Decide whether or not employees can roll over time at the end of the year.

You may choose a use-it-or-lose-it policy or a flexible one that rolls some or all accrued days over to the next year. A use-it-or-lose-it policy means employees must use all of their allotted PTO each year. Some employers, on the other hand, allow their staff to add unused days to the next year’s balance. 

For example, if you offer three weeks of time off and an employee only uses two weeks, one week would roll over to the following year, meaning that employee would then have four weeks of time off to potentially use that year. To ensure employees don’t build up an unreasonable amount of time, many employers cap how many days can be rolled over each year.

7. Give thought to implementation.

Think carefully about how you will implement your PTO policy, particularly if it’s a shift from what you have been doing. Any shift has the potential to impact employees in both positive and negative ways. Anticipate that those impacts may be and determine how you will minimize any potential negative impact. Clearly communicate any changes in policy to employees before the transition takes place. Also, consider soliciting feedback through employee surveys before altering existing policies to ensure your changes achieve the desired results.

8. Continually evaluate your PTO program.

Ongoing evaluation of your PTO program will help you stay attuned to trends in usage, employee sentiment and any manager concerns. Are employees using the time off they have available? Are managers having challenges in staffing appropriately? Is customer service declining, or have you received complaints from customers about access to employees? All of these considerations should be part of your periodic reassessment of your current PTO policies.

Key TakeawayKey takeaway
When creating a PTO policy, consider how much time you want employees to have off, whether or not they will accrue time, whether or not the time they earn can roll over to the following year, how the approval process will work, and how you will continually monitor and improve the program.

Why should you have a PTO policy?

A PTO policy, which should be included in your employee handbook, shows your employees that you value them. Savvy employers realize this and design their benefit plans accordingly. In fact, Mercer’s Survey on Health and Benefit Strategies for 2023 indicates that more than two-thirds of employers plan to enhance their benefits in 2023 to improve attraction and retention, according to SHRM

Are you legally obligated to offer PTO?

While no federal laws mandate any amount of PTO, many states and cities have specific paid time off laws you need to follow if you have business locations there. An increase in remote work complicates this because requirements may apply to where employees work, rather than where companies are physically located. Review all applicable state and city laws pertaining to PTO before you come up with your policy.

How to encourage your employees to not waste PTO

The trend among the current workforce, particularly Millennials and Gen Zers, is work-life balance. It is in your best interest to keep your employees happy and encourage them to take the time they need in order to feel productive

Additionally, creating an environment where employees feel appreciated and comfortable taking time off is important, because unused PTO can result in a higher payout for an employee if they leave the company or are terminated. If employees feel as if they can’t take time off, they are likely to find a company with better working conditions. Business owners and managers should remind employees to use their PTO and set an example by taking time off when they need to.

Have an actual PTO policy in place to ensure your practices are fair to everyone and to encourage workers to take time off and not waste the time they have earned.

Can you switch your PTO policy at any time?

This depends on the state and city you operate in. Some states have laws that ensure you don’t take away any of employees’ earned time off when changing policies. In addition to potential laws, think about the following questions before changing your policy.

Will you be taking away PTO from your employees?

If so, you must make sure not to take away vacation mandated by state or city laws. Once you have a policy in place, do not decrease the given amount of PTO, as this can result in higher turnover and low employee morale.

If you are trying to change your policy due to budget constraints, it is best to find other areas where you can cut back before you consider decreasing any employee benefits. If cutting back can’t be helped, speak with your employees about this cut and explain why it’s happening. Do not take away time off that employees have already accrued if you can help it.

Do you have anything in employee contracts that prevents you from making this change?

When hiring new employees, many businesses have them sign an employment contract. This contract usually specifies the company’s employee benefits and PTO policy. It is important to look over these contracts before making any changes to PTO, in case they contradict the new policy.

If you are increasing or changing the PTO policy completely, do you have the budget to keep this change going?

Increasing your policy can boost employee morale. Just make sure your budget can maintain the change for the long term. It is easier to give benefits to employees than to take them away. A short-term increase in benefits could ultimately lead to lower employee morale than if you had kept the policy the same.

When creating or changing a PTO policy, it is important to fully communicate the policy or changes with your employees. While you want to keep your employees happy, you need to clearly define the procedures and rules so that there are no issues with staff coverage for your business.

Key TakeawayKey takeaway
Depending on where your business is located, you can switch your PTO policy, but make sure you aren't taking away time off that your employees have already earned. You should also consider what a PTO policy change will mean for your bottom line.

Being strategic with your PTO choices

PTO policies can be a great way to attract and retain employees. But, as we’ve seen, there are a number of important considerations when creating, communicating and managing these policies.

Think strategically about what makes the most sense for your unique business situation – the type of business you’re in, the type of work your employees do, the challenges you may have in recruiting employees, and feedback from employees themselves.

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Written By: Ada RannelsContributing Writer
Ada Rannels is a Los Angeles-based writer. She is an NYU alum with a background in writing for marketing and HR. In her spare time, she likes to cuddle with her dog, Hunny Potato.
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