What is PTO?

By Indeed Editorial Team

February 23, 2021

Offering PTO (paid time off) rather than separate vacation and sick time is an important decision that can impact employee morale, hiring and retention. It can also help to reduce unscheduled absences, which can help improve workplace productivity. Understanding the key benefits and disadvantages of PTO can help you determine whether PTO is right for your company.

In this article, we discuss what PTO is and the different types of PTO as well as the key advantages and disadvantages.

Related: Human Resource Management and Their Role in Your Job Search

What is PTO?

PTO refers to paid time off for vacation, sick time and personal days that are given by an employee for employees to use as they need or desire. PTO policies usually fall into one of two categories:

  • Traditional: With this type of policy, the amount of PTO that is available may increase the more time an employee spends with an organization and the balance is tracked by a manager or administrator

  • Unlimited: With this type of PTO, time off is given at the discretion of the employer, who then approves requests if the employee is in good standing and if there is nothing that would be impacted by their absence

Research shows that employees actually use less vacation time each year when they are given unlimited time to use as they like. While some employers see this as a benefit, others believe that time off is important for the mental and physical health of employees. It's for this reason that some implement a traditional, limited PTO policy.

Every state has its own laws regarding PTO time and employers have to remain in compliance with their state's guidelines. While there are no federal laws that provide guidelines for PTO, some states have guidelines pertaining to:

  • Whether PTO is considered an earned wage

  • Whether the employer can implement a "use it or lose it" policy

  • Whether wages for unused PTO time must be paid out upon separation from employment

  • Whether the employer can set the rules for vacation and PTO

While PTO and vacation time are often used interchangeably, there is a difference. PTO refers to all the time that an employee spends away from work, including not only vacation but also sick time or personal days. Vacation time is a subset of PTO. In other words, vacation time is PTO but PTO may not always be used for vacation purposes.

Related: Base Salary and Your Benefits Package

Advantages of PTO

There are a number of advantages for employers offering PTO:

  • Raises morale

  • Improves employee retention

  • Encourages a better work-life balance

  • Provides a competitive advantage

  • Reduces unscheduled absences

  • Makes it easier to track absences

Raises morale

Employees who take periodic time away from work have been proven to have better performance throughout the year. The time away allows them to rest and recharge, coming back ready to perform at their best.

Improves employee retention

Employers who offer paid time off as part of their benefits package help employees feel appreciated and empowered. This can, in turn, encourage them to stay with a company for a longer period of time.

Encourages a better work-life balance

When employees feel that they have a work-life balance, it can help reduce their overall stress and make them feel more personally fulfilled. This directly translates to their performance at work and can help employees not only perform better but also be more productive.

Provides a competitive advantage

Offering a competitive benefits package that includes PTO is more attractive than companies that distinguish between vacation and sick pay, which can increase the likelihood of attracting top talent to your company.

Reduces unscheduled absences

When employees are given sick time independently of vacation days, an employer never knows when they will be missing a member of their team. When sick days are included as part of the PTO, employers are more likely to have advanced notice where they can plan more effectively for absences.

Makes it easier to track absences

Offering a bulk number of PTO days is often much easier to track than when employers choose to separate the time employees spend away from work into vacation and sick time.

Disadvantages of PTO

There are some disadvantages that you should be aware of when moving to PTO:

  • Resistance to using PTO as sick time

  • Difficulty transitioning from previous methods

  • Risk of using all of the time

  • Increase in volume of requests

  • Financial implications

Resistance to using PTO as sick time

Employees are often resistant to the idea of using their PTO days—time they may want to reserve for vacation—for sick days. Instead, they may choose to come to work when they are sick.

Difficulty transitioning from previous methods

If your company previously tracked vacation time and sick days separately, deciding how previously accrued time will fit into a new PTO policy can be challenging.

Risk of using all of the time

There is a risk, with PTO, that employees can use up all of their time off before the year is over, leaving them with no days to spare if there is a family illness or emergency. Companies need to know how to manage employees who use all of their PTO early in the year and don't have time remaining if something unforeseen arises.

Increase in volume of requests

Employees tend to take off more days when there is a PTO policy, which can impact the company's scheduling needs.

Financial implications

Some states require that certain types of time off are paid out when an employee leaves their place of employment. If the sick time and vacation days are bundled, it can increase the payout that is required to employees.

Related: Guide To Severance Pay

How to keep track of PTO

There are a number of different methods you can use for tracking PTO. They include:

1. Using spreadsheets

This method relies on manual entry but can be extremely effective if you don't have a large number of employees. You can create a template for your spreadsheet and have lines at the top for the pay period start and end dates. You can then have column headings like "starting balance," "used" and "ending balance."

2. Time-tracking software

There is standalone time-tracking software available that allows you to monitor employee PTO and generate customized reports. Employees can use these systems to submit requests for time off, which their managers can then review for approval.

3. Payroll and HR software

Company payroll and HR software often have the functionality to track PTO time for employees. This method is effective if you want to administer HR functions in-house instead of outsourcing. With this type of software, PTO time is usually updated after closing payroll for each pay period. You often also have the option to generate custom reports for employees or managers.

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