Guide to Paid Time Off (PTO)


Paid Time Off (PTO) is usually a policy that companies institute to allow their employees to be paid for time that’s taken for vacations, illnesses, holidays, personal days, and other times when the employee may not be present at work. Sometimes these days are accrued throughout the year or the employer can set aside an amount of time that may be based on the number of days of seniority an employee has with the company.

Time-off benefits can be a very valuable part of any employee benefits package. While employers aren’t legally required by federal law to give employees days off for federal or state holidays, it’s a smart way to retain them, while providing job satisfaction. Employers can specify which holidays employees can take off. It’s the same for vacation: There’s no federal requirement, but smart employers grant paid vacation and sick days.

Protecting Both the Worker and Employer

With PTO in place, employees have the right to use the time flexibly at their discretion to support work-life balance. This has helped to thwart employees asking permission from their manager to be absent from work.

Studies in previous years show that between 1976 and 2000, the average American worker took more than 20 days off a year. Fast forward 15 years, and you’ll find that number has decreased to 16 days off annually. Overall, this has a negative impact on worker performance.

Because your employees are unique, some value travel, while others enjoy quality family time. Some want to sit at home with a book, while others want more time to train for a marathon. Plus, events often arise that are unplanned, such as a sick child, a car that breaks down, or a last-minute emergency dental appointment.

Prior to COVID-19, our 9-to-5 work schedule was not always conducive to the demands that tug on our lives. For this reason, as an employer, you should consider implementing PTO to allow your employees time to take care of themselves without fearing financial punishment.

Essentially, PTO allows employees to accrue time-off based on hours worked. For a certain number of hours worked, an employee earns a specified amount of PTO that’s credited to the employee’s “bank,” typically after a pay period. If an employee takes one day off, that’s considered eight hours of PTO.

PTO often replaces a company’s vacation and sick day policies. Instead of offering separate buckets of time-off for different reasons, you offer PTO as an “all-in-one” opportunity for employees to take time off as needed. It’s not really important whether they take the day off because they’re actually sick or because they simply need to recharge in front of Netflix. Irrespective, they’re taking time off that they’ve earned and are using it at their own discretion.

It’s easy to see the administrative and leadership benefits of PTO, because you avoid the hassles of tracking why an employee is out and logging the missed day into one system over another. Plus, it empowers managers to demonstrate trust in their employees.

According to the Society for Human Resource Management (SHRM), recently, 87% of companies recently offered PTO plans, with 91% offering paid vacation plans based on how long their employees have worked at the organization. For PTO plans, the average days awarded per year are based on the employee’s length of service, ranging from 13 to 26 days.

In the instance of a small business, employees who take time off can be a tricky situation. For example, as the owner, if you only have two employees and one takes a vacation, this means that you’ve temporarily lost one-third of your workforce. That’s why it’s critical to plan and coordinate when you offer your employees vacation benefits.

While we all know the importance of striking a solid work/life balance, we don’t always know how to implement formal company policies to give employees legitimate permission to take time off. And, without company approval, many employees leave free vacation days on the table.

Not offering employees time off can have an impact your company’s bottom line. In fact, employees who use vacation days are more likely to receive a promotion or raise, because time off allows them to recharge and maintain peak productivity levels, which is undoubtedly good for your company’s long-term growth.

Creating a PTO Policy

To ensure your company’s optimal success, below are guidelines that can help to create a culture where your employees will feel secure taking the time they need to maintain a healthy work-life balance. Keep in mind that while all business are different, don’t be discouraged. Creating a policy that works for your business is doable.

First, you’ll need to be familiar with and understand the legal aspects on a federal and state level. Then, you may want to evaluate your PTO policy based on the status of your employees, whether they are hourly, salaried, or union workers. It’s worth noting that employees who have the option of taking time off and receiving payment for it tend to be happier and more appreciative than those who don’t.

Steps to guide you when developing your PTO policy:

  • Learn the legal regulations for your state.
  • Compare your PTO policy with your competitors.
  • Set aside special dates and the types of coverage you want.
  • Meet with your accounting team.
  • Determine if you want team members to accrue and roll over their PTO or just use the time by the end of the year.
  • Determine how your employees will be grandfathered into the policy.
  • Have your employees request PTO at least two days in advance, unless the employee is sick.
  • Put the policy in writing.
  • Set up training sessions to introduce the new system.
  • Onboard employees to any new technology or PTO management tools.
  • Review the effectiveness of your PTO over the course of the year, then revise accordingly.

Be sure to present your PTO policy in easy-to-understand language so that every employee will be familiar with all the terms and conditions. If this poses a problem, you can always contract a professional writer or content editor to help you develop the policy.

Benefits of Combining Time-off Days

There are advantages to blending together vacation and other time-off days:

  • Employees perceive this as a benefit, provided it’s communicated well. It can be posed as an improvement compared with tracking separate accruals, because it can serve as an incentive for employees to take less sick time and have access to more vacation time.
  • Employees are less tempted to make excuses when they want to use a sick day but aren’t ill enough to see a doctor.
  • Often, it’s easier to administer this system up front, because there’s no question about which accrual the leave comes from. It can be simpler to administer, which can result in cost savings and consistency when tracking leave time.
  • It can help to reduce employee burnout, provided employees are encouraged to use their days.
  • Merging time off can help employees feel more empowered, because there’s no need to justify requesting time off. They simply take days, as needed, and are free to allot vacation, sick, and personal days to them, as necessary.

For every pro, there’s a drawback to consider…

  • Some employees may feel slighted if sick days weren’t previously monitored closely under a system of separate categories. They may feel penalized by having sick days count against their days off.
  • This system could mean higher financial liability when terminating employees. By separating accruals for vacation and sick days, employers are usually required to pay out only accrued vacation days, not unused sick days. In this way, the whole accrued bank must be paid out.
  • Employees tend to view the bank as vacation days and, therefore, may take more time off. However, while extra days taken as a vacation can benefit employees and employers alike, they also can mean more time that needs to be covered by coworkers. Employers may have to modify work practices to accommodate this.
  • Employees may be reluctant to take sick days if they see this lessening their vacation time, meaning they’re more likely to work while feeling ill.

If your company decides to separate vacation and sick time, then the amount of vacation time that employees are given is really up to you. Most employers link the length of time that an employee has worked for them to the amount of vacation afforded them. Ten vacation days might be offered after one year of service and be increased accordingly by one vacation day for every year of subsequent service. In the instance of milestones of service, such as five and 10 years, employees may earn an additional week of vacation.

Because small businesses are hit harder when employees take vacation time due to having less staff, vacations need to be planned strategically. If employees want to take all their vacation days at once, this requires more planning than merely taking a few days off here and there. What if employees want to take a vacation during a busy period (tax season or the winter holidays)? You’ll need to institute a policy/system that directs how to handle two employees wanting to take the same week off.

Too, the law doesn’t require employers to pay sick leave benefits and personal time off. But unpaid sick leave can get sticky. It may be legally required if a business is subject to either federal or state family and medical leave laws. You may be required to provide certain time-off benefits to your employees. While some of these can be offered at the employer’s discretion, several are mandated by federal and/or state laws, including time off to vote, jury duty leave, family and medical leave, pregnancy leave, and military leave.

Unlimited PTO

Unlimited PTO works the same as regular PTO, except you don’t assign a certain number of allotted days to your employees. Instead, you trust them to take necessary time off, as long as they get their work done.

This type of results-driven workplace culture is becoming increasingly popular, particularly in the startup and technology industries.

Offering unlimited PTO might seem like a crazy idea. You might think, “Wouldn’t this result in an empty office, with a bunch of employees permanently lounging poolside on a beach?” In reality, employees with unlimited PTO typically don’t take any more days off than employees with an assigned amount of PTO. In fact, a marketing automation company found that, after they implemented unlimited paid vacation, their employees took fewer days off.

Unlimited PTO can help you attract and retain today’s younger generation’s top talent. Additionally, this impressive benefit can incentivize employees to work harder and care about your company more. While you might be wary that some employees are taking advantage of the time off, you can mitigate those issues by enforcing regular performance reviews, ensuring that each employee continues to meet their deadlines.

Brian Halligan, CEO and founder of HubSpot, an inbound marketing and sales software company based in Cambridge, Massachusetts, points out three important elements to implementing a hands-off approach to employee vacation time:

  1. The state-of-the-art vacation plan these days is a relic of an era when people worked 9 to 5 in an office. Today, with COVID-19 and technology tools, such as the internet and mobile devices, employees work where they’re comfortable (often at home) and the hours they’re comfortable with (frequently in the middle of the night).
  2. He always found it strange when an employee would hand him a PTO form for a weekday, but never a credit form for the time they worked on a Saturday or Sunday. Since weekend days worked aren’t tracked for credit, the weekday time off just didn’t seem fair.
  3. Halligan says they hire very smart people who are very focused on contributing to the growth of his company and trust that they will use “common sense” with regards to taking an appropriate amount of time off.

How to Take PTO

This may likely sound ridiculous to people from select European cultures, but for Americans, it’s an all-too-familiar problem. There are a few reasons many Americans end up leaving paid vacation days on the table, including a sense of obligation to work hard all the time, and a sense of guilt when their day isn’t “productive.”

It’s time that all employees globally understand the benefits of time off. For example, working fewer hours correlates with higher levels of productivity in the form of increased GDP (gross domestic product). Additionally, an employee’s workplace happiness can help improve team morale.

If you offer your employees PTO and they’re anxious about taking it, consider the following steps.

  • Have them plan their time-off well in advance. Have employees consider when they might need it most. For example, after spending a month attending conferences, traveling, or attending all-day meetings, perhaps they’ll need time to recharge. Or, perhaps they’ll need a few days to relax in the sun in mid-January.
  • Have employees give their manager notice as far-in-advance as possible. We know they’re responsible adults, but make sure they check what needs to be completed before they leave.
  • Have them email their immediate team, letting them know they’ll be out-of-office well in advance, if possible. Make sure you let them know what you need in adequate time, so employees can get those projects done prior to leaving.
  • Remind them to set an automatic out-of-office reply to emails, and have them include an employee or manager’s email as an alternative if an emergency comes up. Also, make sure they set their company messaging system, to “away.”
  • Have employees consider blocking time on their calendars as “Busy,” so colleagues can’t book them for meetings. This will help them cross tasks off their to-do list.
  • Trust your team. Know they can handle the workload when you’re gone and vice versa when they’re out of the office.
  • Know that these strategies only work if your employees plan to take PTO in advance.
  • PTO is designed to reduce any guilt your employees might feel. With PTO in place, they’ll be better as a result.

Calculating PTO

Depending on the company or organization, PTO can be calculated in a variety of different ways. Some companies may have a set amount of days identified in their employee handbook that allows you a specific number of days off per year. An example would be if an employee landed a job and the employer’s policy was 10 days of PTO for the first year, 15 days the second, and 20 days the third year.

Some employees may have to accrue their PTO as they work throughout the year. An example is a full-time employee who works 40 hours per week. For every 40 hours worked, that employee may accrue 1 hour of PTO. If the employee saved up all their PTO during the year, they would have approximately 52 hours in a year to use. Assuming this employee works the average 8-hour shift, then this would break down to 6.5 days of total PTO during the year.

Also keep in mind if you, the employer, allow employee PTO to roll over to the next year or do you follow the “use it or lose it” rule. If all the time must be used within the same year, the employee would lose whatever time they had to use towards vacations, sick days, holidays, personal days, etc. if not used by the end of the year. Also note that sick, vacation, and personal days may be treated differently with some establishments.

NOTE: PTO is generally not included when calculating overtime. It matters how each employer and company sets up their rules related to PTO. Simple math can be used if a specific amount of time is accrued based on a specific number of hours worked. Also, employees can always keep track of their PTO by subtracting the days that they’ve have taken off from their allotted days. Based on this, if an employee has accrued 1 hour for every 40-hour workweek, the math below would be used to calculate their total PTO:

  • 1 hour x 52 weeks (1 hour per 40 hour week based on 52 weeks in a year)
  • This brings the total to 52 hours of PTO
  • To see how many days instead of hours the employee qualifies for PTO, simply take 52 (weeks) and divide by the amount of hours worked per day. Example: 52/8 = 6.5 days

Need Help Keeping It All Straight?

It can be challenging keeping track of which employee is off work and how much time each has used; plus, the vacation schedule for your business year can get complicated. ASAP Payroll Service can calculate PTO through its payroll system. We have ways to set it up, based on your company’s policy, if an employee gets a standard 2 weeks for the year or if they accrue over time. Let us know if we can help you devise a system customized to your needs. Contact us at 317 887-2727 or by fax at 317 887-2741.

5 Surefire Ways (ASAP PAYROLL)

Endless Benefits of HR Software

Human resource administration is a critical and complex dimension of any successful business. A large survey conducted by consultancy Sierra-Cedar indicates business executives are “25% more likely

Read More »

Looking for Personal Service, Customized Solutions at a Competitive Price?