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PTO Policies: Which Is Best for Your Business?

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monkeybusinessimages / Getty Images
  • PTO policies spell out how much paid time off your employees will get each year, what it can be used for, and how it is earned and approved.
  • Some businesses have different PTO policies for vacation, sick time and jury duty, while others provide a block of time that employees can use for any reason.
  • While there are no federal laws requiring PTO, businesses will have a hard time attracting top employees without a well-thought-out PTO plan.
  • This article is for business owners who are looking to create a PTO policy for their employees and trying to determine what factors they need to consider when doing so. 

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, it has become one of the most attractive incentives to offer employees in recent years.

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.

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

Key takeaway: Paid time off (PTO) is the time an employer provides to employees for things like vacations and sick days, allowing them to be paid normally for the time they can't spend at work.

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

Traditional PTO is when your employees' days off are sectioned into specific categories such as vacation, sick leave and personal days. As mentioned above, there are many ways you can section your PTO for your employees; how you do so may draw in more prospective employees, such as adding in time off for volunteering or jury duty.

Traditional PTO also provides incentives for employees who have tenure at your company, as it can increase the longer they work for you. This encourages employees to stay where they are.

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

Where traditional PTO segments how many days an employee has to use for sick, vacation or personal days, flexible PTO allows employees to choose how they use their lump sum of their time off.

This can be an attractive option to employees who are parents and need to take a day off for something like 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.

A downside to this policy is that determining how to set the annual cap for each employee can be more difficult than with a traditional PTO plan. It can also be difficult to determine if you will have enough staff coverage for certain days if the requests are not entered in advance. One solution to the coverage problem is to establish a procedure on how to use the PTO and penalties for those who don't follow that plan.

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. Though growing in popularity (especially in the tech industry), this policy is still a bit rare, so it is a good way to help your company stand out from the crowd. It also saves your workers the worry of hitting their caps in time off.

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 it, unlimited PTO can actually make employees fearful of taking time off.

Key takeaway: There are three main types of PTO policies – traditional, flexible and unlimited – each with its own benefits and drawbacks.

As an employer, you must carefully consider several things before implementing a PTO policy. There are many ways to ensure you have enough coverage with your PTO policies, as long as you have a detailed policy that states what is expected of the employee in order for them to use and maintain their PTO.

Requiring managerial approval will be helpful to 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. This can be a way to monitor any of the above PTO policies. The most important thing to remember once you approve a PTO request is to never 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.

This policy is not for every business, but if you have a restaurant, hotel or retail store where you can easily become short-staffed for a shift, it would be ideal to have a deadline on calling in sick. This deadline should be reasonable, as some people don't know they are sick until the day of, but also allow you enough time to find a replacement for the day if needed.

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 is also applicable to PTO. One way to gain an edge over other companies is to offer PTO benefits to part-time employees as well.

A big consideration, especially if you aren't planning an unlimited policy, is how much PTO to award employees each year. One week, two weeks, three weeks, a month? Remember, the more time you give off, the more appealing your company is to potential new hires. Of course, you need to be careful not to offer so much time off that it impacts overall productivity.

Once you decide how much time off to give employees, you need to decide whether it will be provided in one lump sum at the start of the year or if it needs to be accrued. 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, so they would earn one full day off for every four weeks. The exact accrual rate depends on how much time you plan to give employees each 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. With a "use it or lose it" policy, employees have to use all of their allotted PTO each year, whereas some employers allow their staff to add those unused days to the next year's balance. For example, if you offer three weeks of time off and an employee only uses two, one week would roll over to the following year, meaning that employee would then have four weeks of time off they could potentially use. To ensure employees don't build up too much time, many employers cap how many days can roll over each year.

Key takeaway: When creating a PTO policy, you should consider how much time you want employees to have off, whether they will accrue time, whether the time they earn can roll over to the following year, and how the approval process will work.

PTO policies can cost companies a lot of money and make it harder to ensure there is enough staff every day. However, it is not as expensive as high employee turnover. Replacing an employee and onboarding a new hire is more expensive than allowing PTO.

A PTO policy, which should be part of your employee handbook, shows your employees that you value them. Research from the American Psychological Association found that employees who feel valued have higher well-being and performance.

While no federal laws mandate any amount of PTO, many states and even cities have specific laws that you need to follow if your business is located there. It is best to review all your state's and city's laws pertaining to PTO before you come up with your policy.

This all depends on how you want to run your company. The trend among the current workforce, particularly millennials, 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.

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 like they can't take time off, they are likely to find a company with a better work atmosphere. Business owners and managers should remind employees to use their PTO and set an example by taking time off when they need it.

Key takeaway: It is important to have an actual policy in place in order to ensure your PTO practices are fair to everyone and to encourage workers to take time off, not waste they time they have earned.

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, there are these factors to think about before changing your policy.

If so, you must first 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 cutting any employee benefits. If it can't be helped, speak with your employees about this cut and explain why it's happening. Do not cut time off that employees have already accrued if you can help it.

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.

Increasing your policy is great for employees' morale, and you will have little to no objection from them. Just make sure your budget can maintain the change for the long term. It is easier to give benefits to employees than to take away, and 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. Make sure you are creating something that will keep them happy and allow you to maintain a short turnaround. While it is important to keep your employees happy, clearly define the procedures and rules so that there are no issues with staff coverage for your business.

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

Ada Rannels

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.