How To Create A Paid Time Off Policy

As your company expands and you add new employees, you may find yourself offering paid time off as a benefit to the people who work for you. Setting up a PTO plan isn’t hard, but it does include many moving pieces that you need to consider. Let’s explore how to set up a paid time off policy so you can offer a comprehensive benefits package for your business.

 

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Legal Requirements Benefits Of Offering PTO Different Types Of PTO
Standard Holidays Employers Offer Accrual vs. Allotment Use It Or Lose It vs. Carryforward
PTO Tracking Methods  How Top Companies Do PTO Where To Start

 

According to the United States Department of Labor, the Fair Labor Standards Act (FLSA) does not require companies to pay employees for time not worked -- like vacation or sick time. However, the department does provide suggested guidelines for offering vacation time and sick leave, along with how you can track its accrual.

It’s also important to understand the payout laws for unused time. When an employee doesn’t use their vacation time, you may be required to pay them for the hours they worked. This is why some employers strongly encourage employees to completely use up their PTO by the end of the year.

Hourly Employees

Full-time, hourly employees should receive paid time off for the work they do. Part-time hourly employee, however, do not need to receive the same benefits that full-time employees have. These benefits include options like healthcare, retirement savings, and time off. Some employers offer paid time off to their employees as part of their recruitment efforts.

Additionally, some employers will also let hourly employees work back the time if they are not eligible for paid time off -- as long as the extra hours don’t change their part-time status or fall into overtime requirements.   

Salaried Employees

Salaried employees also receive paid time off. Oftentimes, employees get approval from their direct report before taking time off, and there is no adjustment to their pay schedule.

Employers may deduct pay for unaccounted personal leave if it is not covered by the company. However, this is only applicable for whole day pay. If an employee works for an hour or two and then leaves, the employer is required to pay them for the whole day. 

Federally, PTO laws apply to both Exempt and NonExempt employees. However, various states have specific rulings in regard to handling exempt employee paid time off. Knowing the laws in your state can help you manage exempt employees.

Union Employees

Companies who hire union employees are required to follow the union guidelines for paid time off. While you cannot offer less PTO than the union guidelines recommend, you can offer more. 

PTO Increments

Employees are not required to take PTO in eight or four-hour increments. Many companies ask this for easier tracking for whether an employee took a whole or half-day off. However, employees can file for PTO using any increment of time they want. This enables employees to leave two hours early without getting docked a whole day of pay. 

PTO By State

Federal and state guidelines can differ in what is required of your company. Some states have stricter PTO expectations for their employers. Use this handy guide by A-Plus Benefits to understand Vacation Pay Laws by State to check the regulations for your state and start researching local policies.

The Benefits of Offering PTO

unused paid time off

Just because you legally don’t have to offer a set number of PTO days doesn’t mean you shouldn’t. There are multiple benefits to employers when their employees have vacation time -- and use it. For example: 

  • 52% of Americans had unused vacation days at the end of 2017.
  • The average number of days taken each year from 16.8 to 17.2 in 2017, which delivered $30.7 billion to the US Economy. Employee time off generated 217,200 direct and indirect jobs while generating $8.9 billion in additional income for Americans.
  • Vacation time reduces fatigue. Response rates increased 40% for employees who recently returned from vacation.
  • Vacation usage also makes employees more engaged, and engaged employees are 28% more productive on average.
  • 40% of job turnover is because of stress. Vacation can reduce stress and lower your corporate turnover rates.

As you can see, simply creating a paid time off policy and encouraging your employees to use it can increase productivity, reduce turnover, and benefit the American economy as a whole. In this way, setting up a PTO policy is patriotic.

The Different Types of PTO

Once you understand the legal requirements for your employees in your state or municipality, the next step is to pick the types of paid time off you want to offer. There are dozens of paid time off options you can provide to your employees, each with their 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: paid time for employees who fall ill.
  • Holidays: national days where the office would be closed and most employees would have time off. Some companies offer a few floating holidays where employees can apply a day that is not a company-recognized holiday.  
  • Bereavement time: sometimes called sympathy time, this refers to days for employees to mourn close relatives who have passed and prepare funeral arrangements.
  • Jury duty: some states mandate PTO for jury duty, while others recommend it.
  • Maternity and paternity leave: some companies only offer a few weeks for maternity leave when a woman has a baby, while other companies offer several months for both parents. Adoption leave is also available in some cases. 

Other types of paid time off include pet leave (for adopting or mourning a pet), survivors leave (for assault or sexual violence), emergency childcare leave, and personal days. Some companies also offer community service time off, and give their employees a set number of hours each year to volunteer with a non-profit and provide community service to the community.

The types of paid time off you offer will depend on your company culture, budget, and benefits. For example, some companies have “unlimited time off” policies where employees can take the days they need as long as they reach their goals and hit their deadlines. This is used to recruit workers when the company otherwise couldn’t offer a competitive salary.

Considering 80% of workers say they prefer additional benefits over pay increases, the concept of unlimited time off has become popular to recruit in competitive markets.

Ultimately, the types of PTO you offer and how employees accrue it is up to the CEO.

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 certainly exceptions (like emergency rooms and retail locations), most employees expect holidays like Independence Day and Christmas Day off.

Below is the list of major national holidays for 2019 that some employees have off. Employers like schools and banks tend to close during these times. Most companies typically pick about seven holidays to give to employees, and then offer floating holidays to their staff. You can also find a list of common business holidays here.

Date Holiday
Tuesday, January 1 New Year’s Day
Monday, January 21 *Birthday of Martin Luther King, Jr.
Monday, February 18 *Washington’s Birthday
Monday, May 27 Memorial Day
Thursday, July 4 Independence Day
Monday, September 2 Labor Day
Monday, October 14 *Columbus Day
Monday, November 11 *Veterans Day
Thursday, November 28 Thanksgiving Day
Wednesday, December 25 Christmas Day

* These holidays are Federal holidays are not commonly observed by businesses.

Within the On The Clock software, we have space for three custom holidays. Your company can add dates (like Election Day) and make sure your employees are paid during this time even if they are not in the office. You can also bulk-add PTO if you decide to close the office because of a natural disaster like a hurricane or snow storm.

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 these two methods and the pros and cons of each.

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 saved vacation time that they earned.

Cons:

  • Newer employees can’t take longer periods off (for the holidays or for a family event) shortly after they start working, which can hurt recruitment.
  • Some employees may have a harder time understanding the accrual process and tracking the time they have.

Time Off Through Allotment

With flat-rate PTO, otherwise known as allotment PTO, an employee gains 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:

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

Cons:

  • Employees can spend vacation days that they haven’t earned yet, using them all at the start of the calendar year
  • Some states are required to pay out accrued paid time off, and calculating what an employee is owed is a challenge for employees.

There is no set answer for which method is best. Learn what works for your employees and your HR processes before implementing it across the company.

Use It Or Lose It vs Carry Forward Time Off

The next step toward developing your PTO plan is to decide whether or not employees can roll over their paid time off or if you want a “use it or lose it,” method.

Carry Forward PTO

Like the rollover minutes on your phone, this policy allows employees to roll over their vacation time to the next fiscal year or benchmark from where they started. With this method, employees don’t feel pressured to use their PTO when they don’t want to. However, an employee can save up years of PTO and then use it all at once, keeping them out of the office for weeks.

Some employers create caveats in the PTO policies. They only allow employees to use their PTO for a maximum of two consecutive weeks, or they pay out PTO if an employees hits a certain number of hours without using it. Some employers restrict the amount of time employers can roll over into the new year. This allows employees to roll time over without abusing the system.

Use It Or Lose It PTO

Like the name sounds, employees who don’t use their PTO lose it at the end of the year and the time will be paid out in the next paycheck. The goal of this is to encourage employees to use their time off to refresh and relax instead of hoarding it for years.

Companies that evoke a “use it or lose it,” policy are often more effective at making employees use their time off. The Society for Human Resources Management found that 64% of employees had between 0-2 unused vacation days if they were going to lose that accrued time. Meanwhile, 58% of employees had between 3-8 unused days if they knew they would roll over -- only 26% had two days or less. If you want your employees using their PTO, make sure it’s a limited resource. 

How to Track Your Employee Paid Time Off

One of the main reasons employers choose to offer flat rate PTO is because it’s easy to track. There are multiple ways employers can track employee time off -- depending on their comfort level and company size. These include: 

  • Manual paper and pen: time off is tracked in a ledger or record book by the CEO or head of human resources.
  • Excel spreadsheets and Google Sheets: this is slightly more technological but just as manual. Employers keep employee records in a Google Doc and can share the sheet with managers and directors within the company.
  • Company intranet: employers manage PTO through the same system that contains employee personal documents, corporate messaging, and other important information.
  • Software time-tracking systems: employees use a time-tracking tool through a third-party service that is dedicated exclusively to time of management, or through a catch-all system for employee management.  

As an example of a software tool, OnTheClock has a PTO section where you can track the rate of accrual, holidays off, and time used for each employee. You can also bulk add PTO rates for employees when they are hired.

Four PTO Examples From Top Companies

 how top companies offer time off

You don’t have to start from scratch with your PTO policy. Look at how your competitors recruit employees and why they are successful. Here are four companies that have unique PTO policies that you can mimic to create your paid time off 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 their PTO policy publicly on their website for an example of what employees look for in their time off. Employees start with three weeks 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 initially made headlines for initially offering unlimited paid time off each year. Employees could take off as much time as they wanted as long as they still got their work done. The company actually rescinded this policy after it found that employees took less time off than before. Without knowing how much time they had or could use, employees worked more and didn’t want to seem like they were slacking off. Kickstarter now offers a generous 25-day vacation policy for their team members instead.

IKEA Offers PTO to Full and Part-Time Employees

Glassdoor also reports that both full and part-time IKEA employees can accrue paid time off as soon as they start working for the company. Furthermore, vacation can be taken in one-hour increments. If you’re looking to develop an employee handbook, IKEA has a public example of its benefits that you can use for improve your recruitment efforts. You will want to go into more detail for your internal efforts, but this is a good place to start. 

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. More than $16 billion people call in sick on Super Bowl Monday, costing roughly $1 billion in lost productivity. Kraft Heinz has realized that their team members don’t actually get anything done, which is why they let salaried employees have the time off instead. Employees can talk about the commercials and nurse hangovers off the company dime.

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 Your 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 your PTO policy and roll it out to your team. 

  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, and then decide how you want to build upon it. 
  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, or at least is reasonably close. This will help your recruitment efforts.
  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 non-profit? Consider closing for Election Day. Identify any unique add-ons to your plan.
  4. Meet with your accounting team. Make sure the amount of time you want to offer employees matches what you can offer in your books. Look how much your PTO policy will cost and adjust it to stay in the red.
  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 into the policy. Will the policy go into effect on January 1st with a flat-rate allocation? Make sure existing employees receive their fair time off and their accruement doesn’t differ from new hires.
  7. Put the policy in writing. Writing out your policy will help you identify potential questions and loopholes that your team will ask about. Plus, employees can reference the guidelines whenever they have questions. 
  8. Set up training sessions to introduce the system. This creates a space for employees to ask questions and bring up policy concerns.
  9. Onboard employees to new any technology or PTO management tools. If you’re finally ready to give up the Google Sheets and paper punch cards, teach your team how to use On The Clock or any PTO system you decide to work with.
  10. Review the effectiveness of your PTO over the course of the year. Track how employees use their paid time off, how it benefits the company, and what changes you want to make to improve the process.

Learn More About On The Clock

OnTheClock offers a comprehensive system for companies of all sizes. We work with companies with three employees and 3,000. By scaling on an as-needed basis, you have all of our services at your fingertips only pay per employee for each person you add. Check out our free PTO Calculator tool to test different PTO options and see what our system is like.

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