How to Create a Paid Time Off Policy (With Sample)

Paid time off (PTO) plays an instrumental role in the productivity and profitability of a business. Though it’s considered common practice, many businesses aren’t required to offer paid time off in their employee benefits package. This article discusses the numerous benefits of implementing a PTO policy and the best strategies to create one that works.
 
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What does PTO mean for employees and businesses?

When it comes to paid time off, employers have to think about what’s best for their company and employees. A good time off policy is understandable and accessible to everyone. It lets workers know exactly what they’re entitled to and how they can properly utilize the time-off request system.
 

You may also consider integrating an unpaid time off policy that accommodates employees who would rather save up their PTO for a special purpose or those who may not have the tenure to get time off should an emergency occur.
 

What is PTO?

With PTO, hourly or salaried employees get paid partially or fully for a set amount of time they spend outside of work on vacation, taking personal time or for sick days. Some employers offer a specific amount of PTO for each category, while others provide a total lump sum of time that employees can use when they’re sick or need a vacation, without any questions asked.
 

Paid time off is meant to cover many reasons why an employee may want a break from work except for obligatory situations, such as becoming a parent, bereavement or jury duty. These situations are covered under separate policies. 
 

The benefit of a PTO policy for businesses is that it makes administration easier. Employees no longer need to categorize their requests, and because it’s based on what’s earned, employees may feel it’s fairer.
 

How does PTO work?

Some employees may be used to receiving a set number of days for vacation, sick leave and other personal needs when they get hired. With a PTO policy, each employee periodically accrues a certain number of hours that are held in a PTO bank. They can use these accrued hours for vacation or when they need personal time or to handle personal appointments. The number of hours accrued during each pay period may increase with the employee’s tenure. A new hire may only be able to accrue an hour per pay period, whereas someone with five years accrues three hours.
 

PTO policy averages

When creating compensation plans, remember that PTO benefits are what many candidates look at. To get some idea of how to make your offer more attractive, consider what the 2017 Customized Benchmarking Report from the Society for Human Resource Management (SHRM) has to say about policy averages across all industries:
 

  • 57% of employers offered their full-time employees PTO leave, and 29% provided it to part-time workers.
  • 77% let employees roll over their unused PTO, and if an employee voluntarily leaves the company, 85% of employers pay out the unused PTO.
  • 37% of employers use employee pay periods as accrual times, while 24% do it by calendar year.
  • New employees usually have to wait about four weeks before they can start accruing PTO and can’t take PTO until they are two months into their new job.
  • Employers generally advance new hires an average of six days PTO, and after one year of work, they can take 15 days.

Benefits of offering a paid time off policy

The overall benefits of a company PTO policy affect more than just the employer and the employee. Yes, employees want the time off to spend on other pursuits, including enjoying family, friends and hobbies. They also need the time to maintain a healthy work-life balance, which improves their mental and physical health. Heart disease and stroke are serious diseases and correlate with working longer hours. Poor health and stress play significant parts in increased depression and anxiety. Taking time off disrupts this cycle and can lead to improved life satisfaction. 
 

While it may seem like putting in those long hours benefits employers, employees who work long hours may have increased absenteeism due to unexpected illnesses and injuries. Due to this unfortunate phenomenon, employers lose over $225 billion per year. Paid time off mitigates this loss.
 

Finally, when employees take time off, they tend to spend money. In 2017, the rate of unused vacation days lessened slightly from 2016, resulting in an almost $31 billion economic boost and the addition of about 217,000 jobs. 
 

Types of time off policies and procedures

When you’re creating a time off policy for your business, there are three basic types of policies to consider. Each has its own benefits and downsides, so it’s important to think about which would be the best fit for your business’s unique needs as well as your employees’ happiness:
 

  1. Bank: The bank model lets employees pool all of their paid time off into a single source from which they can draw whenever they like. Under this policy, employees aren’t typically obligated to offer a reason for their desired paid time off. The only common rule is that the employer receives two weeks’ notice if the employee is seeking to take off several days in a row.
  2. Accrued days: If you’re looking for a PTO policy that allows employees to earn it, the accrued days model does just that. Employees earn time off depending on how much they work. For example, they could accrue four hours of PTO for every 40 hours worked, meaning they can get one day off every two weeks. Of course, they’re free to work as much as they like and allow their accrued days to add up. Some employers also allow their employees to take PTO in advance without accrued days if they agree to halt the accrued days until the used PTO is replaced.
  3. Open: An open PTO policy is one in which employees are free to accumulate as much PTO as they want. Without a cap on the amount of PTO employees can save, they could potentially work for years, then take a whole month off at once. Because of this, employers often put some limits on how their open PTO accumulation can be taken, including how much advance notice must be given and how many consecutive days off employees can take. 

What to consider when creating a time off policy

Each business has different demands, strategies and earnings. To determine which policy would work best for your business, consider how you plan to handle holidays, which come regardless of your policy. You have to decide which ones employees can take off without using their personal PTO and whether they can combine paid time off with floating holidays. It would be beneficial to have a program that automatically tracks employee time off.
 

Additionally, your policy has to include instructions for a few unique situations. Imagine if a new hire needed to take a day off after working just two weeks. If they are earning half a day of PTO accrued for every week worked, would you allow that, or would you implement a probationary period first? Additionally, will PTO renew every year, or will it carry over? If it doesn’t carry over, you have the option of simply paying out the allocated PTO to the employee.
 

An unpaid time off policy is typically much easier to manage. Put simply, unpaid time off is when employees take a day off and aren’t paid for it. This is most commonly used when the requirements for using PTO aren’t met or an employee failed to give enough notice before taking the day off. It’s sometimes used as a punitive measure, but that’s relatively uncommon because it produces limited results regarding productivity as opposed to PTO.
 

Paid time off policy sample

To best understand what a time off policy may look like, you can explore this sample policy:
 

PTO guidelines

General Atomics’ full-time employees, or those working more than 35 hours a week, can accrue one hour of paid time off for every 10 hours worked. That roughly translates to a day off work every two weeks.
 

The paid time off hours saved up must be used by the end of the calendar year through the company’s time off request template. While hours won’t transfer to the next year, the remaining unused PTO hours will be paid out to employees as part of their bonuses. Should an employee need to take PTO at the beginning of the year, they can use accrued time yet to be earned provided they agree to stop accruing time until the debt is paid.
 

Advance notice

Additionally, employees must notify management of their plans to take time off at least one hour before their next shift, though it’s preferred that employees give a day’s notice when possible. Should multiple days in a row be taken off, the employee must provide notice no less than two weeks in advance of the first day off.
 

Paid holidays

General Atomics operates every business day throughout the year, but employees are free to take the following holidays off without taking from their PTO:
 

  • New Year’s Day
  • Martin Luther King Jr. Day
  • Memorial Day
  • Juneteenth
  • Independence Day
  • Labor Day
  • Thanksgiving
  • Christmas Eve
  • Christmas
  • New Year’s Eve

On June 17, 2021, Juneteenth, or the commemoration of June 19, 1865, became the newest federal holiday to be added to the PTO roster for all organizations.
 

Should employees decide to work on any of the aforementioned holidays, they will receive overtime pay for the hours worked, which is approximately 1.5 times their normal rate.
 

PTO exceptions

Religious holidays, jury duty, military leave, disability and bereavement are covered under separate policies and do not take from your PTO.
 

Family Medical Leave Act

Circumstances covered by the Family Medical Leave Act, such as the birth or adoption of a child or caring for a sick relative, do not take from your PTO.
 

PTO accrual rates sample

To get an idea of how PTO can accrue over time for an employee, here’s a handy chart measuring years of service and how much PTO is earned based on hours worked at a company where employees are paid weekly. Remember, many companies allow employees to accrue more PTO hours per pay period the longer they’ve worked there.
 

Years of service PTO accrual rate per 40 hours worked Annual PTO accrual
Less than one year 2 hours 104 hours
1-4 years 2.25 hours 117 hours
5-10 years 3 hours 156 hours
More than 10 years 4 hours 208 hours

 

Frequently asked questions about PTO

 

What does negative PTO mean?

Negative PTO means that the employee takes time off before accruing it. This usually happens when the employer loans the employee the necessary paid leave time. The employee can pay back this loan by accruing the necessary time until the loan is covered, or the employer can deduct the time through a voluntary wage deduction until the equivalent amount is paid back.
 

Is PTO required?

There’s no federal mandate about PTO, so employers aren’t required to offer it. However, some employers do have a PTO policy in place, and some states do address how PTO is observed by law. For example, some states don’t permit companies to implement a “use it or lose it” PTO policy, while others do allow it under certain conditions.
 

Can a company deny PTO?

Companies can deny PTO if that is in their policy. However, the state in which they operate may have a different take on the situation. For employees who have been denied PTO, it’s a good idea to contact the state government agency to understand what steps they need to take.
 

Can employees use PTO after giving two weeks’ notice?

Company policy, along with state laws, dictate how PTO is handled during a voluntary separation. In many cases, the wage equivalent is added to the final paycheck if the PTO is treated as a wage. It’s a good idea to contact the appropriate state government agency to understand how your accrued PTO will be handled upon separation.
 

Can employees donate PTO to another employee?

Leave donation programs are a great way to improve morale and increase productivity. Leave donation programs are separate from PTO policies, so your ability to donate depends on your company’s policy.
 

What is the difference between vacation and PTO?

The main difference between the two is that while vacation time is strictly for employees to take a break, PTO is paid time off for any purpose, including vacation and sick leave. Vacation leave is a type of PTO, but PTO doesn’t just refer to vacation.

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