There are many things to consider when either developing or reviewing a paid time off (PTO) plan. However before doing so, employers need to understand what PTO is and how it impacts their business and employees. So, what is a PTO plan? The simple definition is that it is a flexible arrangement that gives employees a set number of days off per year to be used at the employee’s discretion. It combines the traditional vacation, sick time, personal days, sometimes holidays, bereavement leave, or any other selected paid time off plan into one bank. Adding holidays to a PTO plan makes sense for 24-hour operations and work environments that have diverse religious cultures. However, adding bereavement leave provides employees with the time who may not have a need to take time off due to a qualifying family member’s death. Some employers define PTO plans as a defined contribution approach to time off where the employer provides employees with a bundle of time and the employee decides how to use it.
PTO plans are “pro-employee” and give the appearance that the company is more appealing as it empowers the employee to decide when they are going to use their allotted time. Currently, employers are not required by federal law to provide any form of paid time off. However, in some states and locales employers are required to provide employees with a certain amount of sick time, e.g. California and New York City. Employers in these areas may still have PTO banks, but must earmark certain days for sick time. Because more states and locales are requiring that employers provide sick time, the use of PTO banks may be leveling off. However, employers recognize the value of attracting and retaining employees in order to remain competitive, so will probably continue to implement them with a certain amount of time allotted as sick time.
The “key” to a well-designed PTO plan is to communicate and manage the expectations of what is and isn’t an acceptable way to use the PTO, and then enforce those expectations. An engaged manager is the best defense against PTO abuse as abuse is often a bigger problem embedded in an employee’s performance, behaviors and work habits. When moving from traditional vacation and sick leave policies to a PTO plan, make sure to align accrual rates or earned rates in the new PTO plan and make all balances transfer, so that it is “compensation neutral”. Again, the “key” to its success is in communicating this process to employees in an effective and efficient manner.
When designing a new or reviewing a current PTO plan employers are forced to decide how much leave they will provide and how that leave with be structured. In addition, there are other items that employers should consider:
- How many hours per year of service will be allotted to the employee?
- PTO plans are usually aligned with the number of hours that a traditional vacation, sick time, personal days, holidays, bereavement leave, or whatever paid time off policies are combined together.
- If utilizing a calendar year employers may have to proactively assist some employees with utilizing their time. If they don’t, there may be no employees in the office at the end of the calendar year.
- If utilizing an anniversary year, it may be more advantageous to the employer as employees paid time off is spread out over the course of a year?
- Will the employee accrue PTO per pay period or monthly?
- Is the time earned in a prior year for the following year or is the employee entitled to the time at the beginning of their anniversary year or calendar year?
Number of PTO Hours Taken
- Some employers require that an employee with more than two weeks of PTO available take at least five consecutive days at one time.
- Other employers require that employees take the time in half day increments.
- Bottom line is that employees may request the use of their time in minutes and the employer should comply, if asked to do so.
Carryover/“Use it or Lose It”/Sell Out
- Are you going to cap the number of hours that may be carried over from one year to the next?
- Is the policy a “use it or lose it” policy by the end of the anniversary or calendar year?
- Are you going to allow employees to sell back their unused time at the end of their anniversary or calendar year and when will that time be paid out?
- Will you allow employees to donate unused time to another employee in the event of a long-term illness, family issue, etc.?
- How many times per year will the employee be able to donate?
- How many times per year will the employee be able to receive?
- Is there a cap on the total number of hours that an employee will be able to receive?
- What are you going to do with the donated amount of time that a receiving employee does not use?
As with any HR-related benefit there are pros for both the employer and the employee. Some of those pros include:
- Easy administration for the employer as there is no tracking of days off, e.g. vacation, sick time, personal days, etc.
- Employees like getting paid for not working which is a great benefit.
- Employees celebrate a diverse variety of holidays, so they are able to schedule time off around their individual holiday calendar, if holidays are included in the policy.
- PTO plans reward the healthy or conscientious employees who never take a sick or personal day, and provide a deterrent to those who habitually manage to use every single hour of sick time accrued or earned.
- PTO plans reduce absenteeism. Example: An employee earns five days of vacation and one sick day per month (12 days per year). The same employee tends to call-in sick more frequently as they are limited to only five vacation days per year, yet have 12 sick days.
- Employees like the flexibility of use as there are no restrictions for why they are using PTO.
- Employees view PTO plans as being more equally balanced among all employees, as everyone has access to time off based on service, so it is objective.
- An employee’s raise increases the dollar value of PTO and it is tax-free until used.
However, while there are pro’s there are also reasons why employers and employees don’t like PTO plans. Those cons may include:
- PTO plans do not require an employee to specify the reason for taking the time off, which while a pro to employees may be a con for some employers.
- Employees may view all PTO as vacation and they don’t reserve enough time for sick days or employees may come to work when they are sick/ill because they don’t want to waste a vacation day.
- An employee uses all PTO time early instead of saving time, thus the employer has to provide both the allotted PTO under the company’s plan as well as additional unpaid time off due to an illness or injury that may occur later in the year.
- Employers with PTO plans may be required in accordance with state employment laws to pay out all accrued, but unused PTO, or earned PTO, at the employee’s termination where under a traditional vacation and sick policies the employer is not required to pay out sick time.
- Employees dislike “use it or lose it” policies.
- When employees are allowed to sell back unused hours, it becomes a huge cash cost for the employer and also a potential exposure in the event of a termination of employment,
- The employer’s liability increases with an employee’s pay increases.
Employers who have PTO plans should keep it as a benefit and make sure that employees truly understand both the spirit and their responsibility for reporting PTO, then back it up with the processes and procedures to make it simple. Making employees take time off to recharge increases productivity and ensures that others may adapt and fill-in for each other when needed, which ultimately increases the value of your organization and adds to bottom line revenues.
For additional information on PTO plans, please contact us at www.newfocushr.com.
Written by: Kristen Deutsch, M.B.A., CCP