What is Paid Time Off? How to Design a PTO Policy

Oftentimes, tracking paid time off is a clunky process, and your paid time off spreadsheet may cause more issues than it really solves.

To avoid this potential headache, why not move to a paid time off system? 

Creating the right paid time off policy starts with an understanding of the local laws. You want a straightforward process for tracking paid time off that communicates with the various systems that run your company.

In the United States, paid time off, also known as PTO, is an employee benefit you can provide to boost retention and recruit highly-qualified talent. Instead of tracking your employees’ individual reasons for missing work (vacation, sick, personal, and so on), you allot a lump sum of time that employees can use when they are planning to miss days of work. 

This time can be accrued based on how much time an employee works per pay period, or it can be given upfront annually. If you’re not sure how to approach this aspect of creating a paid time off policy, it can be helpful to poll similar companies in your industry for their take.

If you’re considering transitioning your small business to a paid time off system, it’s a good idea to examine the pros and cons of moving forward with this new process. Then, if you decide to move forward, you’ll want to learn how to develop a paid time off policy that works for your company.

What Are The Benefits of a PTO Policy?

Offering paid time off is not only beneficial to your employees’ work-life balance — it’s also good for your company. After taking vacation time, employees return to work rested and ready to rock and roll. PTO policies boosts morale and creativity.

Providing Flexibility

Paid time off gives your employees the flexibility to spend their PTO on what matters most to them. If they want to use it to watch their kid’s soccer tournament, take care of their sick grandmother, or go on a vacation to the Caribbean — all you really need to know is when they won’t be at work.

Additionally, a paid time off policy is a clear benefit for the modern workforce. Your employees will always be interested in creating a work-life balance and improving flexibility. PTO can help you recruit and retain top talent.

Cutting Down Absenteeism

Employees not coming to work is a big deal. No call, no shows are the worst. But even when an employee lets you know 12-24 hours ahead of time they’re not coming in, it can throw a wrench into the system.

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According to the U.S. Bureau of Labor Statistics, the absence rate of employees in the U.S. in 2019 was 2.8%. The results show that 1.9% of that was allegedly for illness or injury and .9% was for “other reasons.”

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Of course, it’s not the bureau’s job to figure out if those employees had valid reasons for missing work or if they were simply sick. No matter what, those employees not showing up impacted the companies they work for and their coworkers.

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One of the most significant benefits of a PTO system is that it cuts down on the number of sick days your team takes. With a PTO policy, people are less likely to call in sick when they want a fishing day with their buddies because they have a structured way to ask for time off.

Making Your Life Easier

Last, but certainly not least, a PTO plan makes your life easier. Instead of keeping track of vacation days, sick days, and personal days, your HR department can just keep track of what days each employee takes off and how many.

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And, that’s the real crux of the matter.

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A PTO system means employees have no reason to deceive you about why they can’t come to work, and you don’t have to waste time and energy policing them.

What Are the Downsides of PTO?

No system is perfect. As such, there are certainly downsides to a paid time off policy. 

One of the most significant issues is the spread of illness. If employees plan to use their PTO  for a long holiday, they might avoid using it when they’re actually sick. If they don’t feel like they can take additional days off to recover without risking pay or their job, this could result in a fully infected workplace (and, as a result, lots of lost productivity).

On the other hand, if employees use all their paid time off early in the year, they lose their safety net if something goes wrong. However, a rollover policy can help to encourage employees to be in the habit of keeping a couple of PTO days up their sleeves in case of an emergency. 

The last “issue” with offering paid time off is that employees tend to take more days off as a result. 

This makes sense: if employees rarely get sick (or can’t afford to take off when they do), then they don’t miss work for sick days. However, this isn’t really a pitfall for your business. 

As mentioned, there are plenty of workplace benefits that result from employees taking time off in terms of their mental health, your workforce’s collective health, and your company’s long term productivity. Therefore, taking more time off, as long as it tracks with what has been allocated, is a good thing.

And, thankfully, many risks can be mitigated by a well-crafted, well-communicated PTO policy.

Creating a Paid Time Off Policy

No matter what you do, don’t roll out a half-baked paid time off policy. Employees might be understandably wary of any changes to their sick time and vacation time. Don’t spook them further with paid time off guidelines that you continuously adjust over time.

At minimum, your company policy should address the following:

• How many days in advance should time off be requested.
• Who qualifies for PTO (note the difference between exempt and non-exempt employees)
• How much PTO is allocated.
• How paid time off is accrued.
• How time off can be used.
• Procedures for time off.
• How time off will be tracked.
• Whether PTO will be rolled over or paid out at the end of the year.
• How is PTO paid out if an employee is terminated.
• How time accumulated in the old system will be factored in (if your new policy is a replacement).
• How the policy complies with state and local requirements.

Once you have your paid time off policies in order, you still need to be prepared to answer a slew of additional questions.

Here are some things to consider for your PTO FAQ:

Do I get paid for PTO? 

Yes. It’s in the name.

Can I use my PTO whenever I want? 

Yes and no. In general, an employee should provide adequate notice (based on your established PTO policies) about needing time off, unless it’s unavoidable. 

Can I use my PTO for half-days? 

You’ll have to decide what your policy will be regarding half-days, such as if employees want to leave early for an appointment.

What happens to my PTO if I’m fired or quit? 

This comes down to state laws and local regulations. In California, paid time off is considered a form of accrued wages that your employees have already earned — so they must be paid.

How many days is 40 hours of PTO? 

Convert paid time off into the actual number of days away from work to help employees visualize what they have in their PTO bank. Remind them that 40 hours of paid time off (one week of work) means they can plan a nine day vacation because of the weekends on both sides. 

Final Thoughts: What is Paid Time Off?

When it’s time to roll out your PTO policy, be prepared with a detailed answer for when employees ask: what is paid time off?

With enough forethought put into designing your PTO policy, you’ll be able to quickly explain not only what PTO is but why it benefits your employees, management, and the company as a whole.

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