How To Create A Paid Time Off Policy

As your company expands, you may begin to offer paid time off (PTO) as a benefit. Setting up a PTO plan isn’t hard, but it does include many moving pieces that need to be considered. This page offers a plethora of resources to help you set up a PTO policy for your organization.

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Legal PTO Requirements Based on Employee Type

The Fair Labor Standards Act (FLSA) doesn’t require companies to pay employees for time not worked. However, there are guidelines for offering vacation time and sick leave.

It’s also important to understand the payout laws for unused time related to employee leave. When an employee doesn’t use his or her vacation time, the employer may have to pay them. This is why some employers encourage employees to completely use up their PTO by the end of the year.

Hourly Employees

Full-time hourly employees receive PTO as a benefit for the work they do. Part-time employees aren't always eligible for the same benefits as full-time employees. However, some employers offer PTO to all employees as part of their recruitment efforts.

Salaried Employees

Salaried employees also receive PTO. Often, employees get approval from their direct report before taking this time. There's no adjustment to their pay schedules. Employers may deduct pay for unaccounted personal leave if it’s not covered by the company.

Union Employees

Companies that hire union employees have to follow the union guidelines for PTO. While you can’t offer less PTO than the union guidelines recommend, you can offer more.

PTO Increments

Using increments enables employees to take time off without getting docked a whole day of pay. For example, your PTO policy might allow employees to count their time off in one-hour increments, so they can take a couple of hours off without taking a full day. Many employees prefer this because it’s more flexible.

PTO By State

Federal and state guidelines can differ. Some states have stricter PTO expectations for their employers. Pay close attention to your regulations.

The Benefits to Offering PTO

Just because you don’t have to offer a set number of PTO days doesn’t mean you shouldn’t. There are many benefits to employers when their employees have vacation time -- and use it. Destinations Analysts found that 79% of full-time employees agree that taking vacations is important to job satisfaction and well-being.

The question is: What’s the best way to offer this to your organization?

The Different Types of PTO

Once you understand the legal requirements, the next step is to pick the types of personal time off you want to offer. There are dozens of PTO options you can provide to your employees, each with its own criteria for use and duration. The most common PTO options are:

• Vacation time: Recreational time away from the office for fun or other activities.
• Sick time: A sick leave policy allows PTO for employees who fall ill.
• Holidays: National days where the office would close and most employees receive time off. Some companies offer a few floating holidays where employees can apply days that are not company-recognized holidays.  
• Bereavement time: Days for employees to mourn close relatives who have passed away.
• Jury duty: Some states mandate PTO for jury duty, while others recommend it.
• Maternity and paternity leave: Some companies only offer a few weeks of maternity leave when a woman has a baby. Other companies offer several months for both parents. Adoption leave is also available in some cases. 

The types of PTO you offer will depend on your company culture, budget, and benefits. For example, some companies offer unlimited time off as long as employees reach their goals and hit their deadlines. 

Standard Holidays Employers Offer

Along with flexible PTO, companies should expect to offer time off for a handful of national holidays each year. While there are exceptions, most employees expect holidays like Independence Day and Christmas Day off.

Below is a list of major national holidays for 2023 that some employees have off. Most companies pick about seven holidays to give to employees and offer floating holidays to their staff. You can also find a list of common business holidays here.

* These Federal holidays are not commonly observed by businesses.

OnTheClock accommodates four custom PTO types. A company can add dates (like Election Day) and pay employees during this time. You can also bulk-add PTO if everyone is off that day.

Accrual vs. Allotment in PTO

Employers also get to choose how employees earn their PTO. The two most common methods are the accrual method and the flat rate (allotment) method. Let’s explore the pros and cons of each approach.

Time Off Through Accrual 

Accrual-based PTO is one of the most common methods of awarding time off to employees. Employees earn a set amount of time off for each hour worked during the pay period. These hours add up to a set number of days each year, but the hours only become available as the year progresses.

Pros:

• Employees earn their time off throughout the year, creating a fair exchange of services for vacation time.
• Newer employees can work to build up their vacation time, while more senior employees can use the saved vacation time they earned.

Cons:

• Newer employees can’t take long periods off shortly after they start working. This can hurt recruitment.
• Some employees may have a harder time understanding the accrual process and tracking the time they have.

Time Off Through Allotment

This method gives employees access to their full PTO benefits all at once. Typically, employers will give employees their time off as soon as they hit a specific milestone, like the 90-day mark or at the start of the year.

Pros:

• PTO is easy for employees to track if everyone’s vacation resets at the start of the year.
• Employees are able to use their vacation immediately, which helps if they have upcoming milestones or holidays.

Cons:

• Employees can spend vacation days they haven’t earned yet, using them all at the start of the calendar year
• Some states require you to pay out accrued paid time off, and calculating this is a challenge for employees.

There’s no correct answer for which method is best. Learn what works for your employees and HR processes before implementing PTO across the company.

Use it Or Lose it Vs. Carry it Forward Time Off

The next step toward developing a PTO plan is to decide whether or not employees can roll over their PTO or if they’ll “use it or lose it.”

Carry Forward PTO

This policy allows employees to roll over their vacation time to the next fiscal year or benchmark. This way, employees don’t feel pressure to use their PTO. However, this can create a problem where an employee can save up years of PTO and then use it all at once. Some employers create caveats in the PTO policies to prevent this.

Use It Or Lose It PTO

Under this arrangement, employees who don’t use their PTO lose it at the end of the year. Then, the time gets paid out in the next paycheck. The goal of this is to encourage employees to use their time off to refresh and relax.

How to Track Employees' PTO

There are a variety of ways employers can track employees' time off. Explore these options to see what will work for you.

• Manual paper and pen: Time off gets tracked in a ledger or record book by the CEO or head of human resources.
• Excel spreadsheets and Google Sheets: Employers can easily share the sheet with managers and directors within the company.
• Company intranet: Employers manage PTO through the same system that contains employees' personal documents, corporate messaging, and other important information.
• Software time-tracking systems: Employees use a third-party service dedicated exclusively to time management.

With OnTheClock, you get a PTO section where you can track the rate of accrual, holidays off, and time used for each employee. 

The Rise of the Unlimited PTO Policy

There are many companies that now offer unlimited paid time off to employees. However, this does require a high amount of trust in your workforce. It may not be a fit for smaller organizations.

Four PTO Examples from Leading Companies

When crafting a PTO policy, a business does not have to start from scratch. Looking at how successful companies shape their PTO policies can help you recruit top talent. Here are four companies that have unique PTO policies that you can adapt to create your PTO plan.

Glassdoor Names Amgen Inc. Top Company for PTO

Amgen Inc. is a technology company based in Thousand Oaks, California, and is known for its generous PTO policy. You can see the company's PTO policy publicly on the company's website for an example of what employees look for in their time off. Employees start with three weeks of vacation and receive 17 paid holidays per year. Glassdoor gave Amgen it’s highest rating for its PTO policy that mimics those found in European companies.

Kickstarter Offers 25 Vacation Days Per Year

Kickstarter made headlines for initially offering unlimited PTO. The company now offers a generous 25-day vacation policy for its team members instead.

IKEA Offers PTO to Full- and Part-Time Employees

Both full- and part-time IKEA employees can accrue PTO as soon as they start working for the company. If you’re looking to develop policies, IKEA has a public example of its employee benefits on its careers page that you can use to improve your own efforts.

Kraft Heinz Gives Employees Super Bowl Monday Off

If you’re not very productive the day after the Super Bowl, then you’re not alone. Millions of employees call in sick on that Monday. Kraft Heinz realized its team members don’t actually get anything done on Super Bowl Monday. That’s why they let salaried employees have the day off starting in 2017.

These examples can help you understand why some companies make the policies they do, and the effects they have on their employees.

10 Steps To Develop a PTO Policy

There are a lot of factors that go into developing a PTO policy, and it can be overwhelming trying to figure out where to start. Follow these 10 steps to develop and implement your PTO policy.

1. Learn the legal regulations for your state. Check any requirements you need to fill for your union, full-time, and part-time employees. Follow the bare minimum needs to create your PTO policy. Then, decide if you want to offer more.
2. Compare your PTO policy with your competitors'. See what the top employers in your area offer and make sure your plan can compete with them.
3. Set aside special dates and types of coverage you want. Do you run a pet-focused company? Consider offering pet bereavement or adoption leave. Do you run a civic nonprofit? Consider closing for Election Day. 
4. Meet with your accounting team. Make sure the amount of time you want to give employees matches what you can afford to offer. Look how much your PTO policy will cost and adjust it to stay in the black.
5. Determine if you want team members to accrue and roll over PTO. Use the examples and definitions above to decide what kinds of PTO you want, and how employees will earn their time off.
6. Decide how employees will be grandfathered in. Make sure existing employees receive time off fairly and accruement doesn’t differ from new hires.
7. Put the policy in writing. This will help you identify potential questions and loopholes. Plus, employees can reference the guidelines with ease.
8. Set up training sessions. This creates a space for employees to ask questions and bring up policy concerns.
9. Train employees on new technology or PTO management tools. For your PTO policy to be effective, employees need to know how to report this time.
10. Review your PTO policy over the course of the year. Track how employees use their PTO, how it benefits the company, and what changes you want to make to improve the process.

Learn More About On The Clock

Whether you have two employees or 2,000, OnTheClock offers a comprehensive time tracking system that’s perfect for your needs. By scaling on an as-needed basis, you get all our services at your fingertips – and you only pay for each employee you add. Try OnTheClock now.