PTO stands for “paid time off,” and it’s basically any time when employees get paid even though they’re not working. A paid time off policy can come in a few different flavors, including:

  • Sick days
  • Personal days
  • Mental health days
  • Volunteer time

The question is, how do you design a PTO policy for your small business with an available amount of time that lets your team collect and use those hard-earned vacation days off when and where they need it for work-life balance? Here are the most important things you need to know about an employee’s PTO as a business owner.

First off, do I need to offer PTO?

Many employers offer PTO because they know how essential it is to the well-being of their team. In fact, 62 percent of workers place a high priority on paid time off, according to the Pew Research Center.

That being said, there aren’t any federal laws that tell companies they need to hand out paid days or a specific number of hours for sick time, but there are a ton of state laws you’ll want to brush up on.

For instance, in New York, employers are required to provide up to 40 to 56 hours (depending on the number of employees) of sick leave from January 1st through December 31st every year. With every 30 hours worked, an employee accrues at least one hour of sick leave, which must be paid, except in instances when a small business has four or fewer employees and its net income is $1 million or less in the previous tax year.

Okay, I’m game. How do I design a PTO policy?

Start by reflecting on what matters to your company. Do you want to give your team a lot of autonomy? Do you want people to feel like true owners? Your answers should be grounded in what makes sense for the type of business you run.

Before you start setting up your own PTO plan, here are the main things to think about:

  • What does my state say? Some states, like California, have mandatory sick time policies you must comply with. Also, reporting requirements differ by state, so it’s important to check with yours to make sure you stay compliant.
  • Who is eligible?  
    • Part-time or full-time employees, or both?
  • How much time off should I give?  
    • Unlimited? Two weeks of flexible vacation and sick time?
  • How should my team be able to accrue PTO hours or earn time off?  
    • Do employees earn personal time based on how much they work, or is it a fixed amount? How long do new hires have to wait as part of my leave policy?
  • How should PTO be used?
  • What happens with any unused days at the end of the year?  
    • Do unused days roll over to the next year or get paid out if an employee is let go?

Who gets PTO?

Some companies provide PTO to both full- and part-time employees, while others only serve it up to full-timers. It really depends on the kind of company culture you’re trying to create, and the amount of PTO you provide as part of your employee benefits package can let that vision shine through, while assisting the recruitment and retention of top talent.

How much time off should employees get?

Once you decide who can get PTO, the next thing you need to figure out is the amount you want to dole out. But remember, that amount should apply to everyone across the board.

Some companies go the unlimited vacation route, which opens up a whole new world of possibilities (and approaches) to get familiar with.

According to the US Bureau of Labor Statistics’ December 2022 estimates, the average private industry worker in 2022 received 11 days of vacation after the first year of service. For those who worked for five years, they received 15 days of vacation. However, many companies go above that average to show their teams they don’t want them to burnout and really care about their lives outside of work.

How can employees earn that time off?

Next, figure out how your team should be able to accrue, or earn, their time off. With different types of PTO policies, you can either:

  • Grant your team a lump sum of days, regardless of how long they’ve been at the company, or
  • You can set up a PTO accrual policy. This is when employees have to accumulate days based on their tenure at the business.

If an employee hasn’t earned a set number or enough vacation days to take time off, some companies also allow folks to borrow against their plans, as in before they have accrued the time off. This is known as a negative PTO balance.

If you go the unlimited PTO route, your team doesn’t technically have to earn any days, but you should still write out your expectations (like how employees should communicate their plans), so no one is left scrambling in the eleventh hour.

To determine the accrual rate if you have an accrual policy, you’ll take the maximum amount of time an employee can accrue PTO in a year and divide that by the total amount worked in a year. If an employer can earn a certain number of days off, convert that number of days into hours, so the formula could look like this:

Max PTO hours / total hours worked each year = PTO earned for every hour of work

For example, that calculation would look like this for an employee who can earn up to 15 vacation days a year:

(15 days x 8 hours) / (40 hours x 52 weeks) = 0.0577 for every hour of PTO

What happens with unused vacation days?

It’s extremely important to encourage your team to use their number of PTO days, yet nearly half of workers don’t redeem all of their time off. But what happens when employees don’t use PTO? As an employer, it’s up to you. Here’s an overview of the options you have:

  • Capping days. This is when a company puts a cap, or limit, on the number of days people can earn. Live in California? The state says that the cap must be reasonable. If yours is 1.5 times the total you can earn in a year, then if you give out 20 days a year, your cap would be 30 days. Be sure to check with your state to see if they have any guidance on this aspect.
  • Carry over days. This is when you can let any unused vacation days dip into the following year as a rollover.
  • Paying employees out for unused days. If an employee doesn’t use all of their vacation days, many companies pay out the amount they earned when they leave the company. Depending on where your company is located, you may have to provide a PTO payout and within a certain pay period, so definitely check in with your state’s labor office. (In California, “use-it-or-lose-it” PTO policies are illegal.)

For example, let’s say someone earns $400 a day and has eight days left of unused PTO. In that situation, they would get a check for $3,200 when they leave.

Once you nail down the plan design, make sure everything—from eligibility requirements to the way you can earn days—are clearly mapped out in your employee handbook. That way, your team will feel confident knowing exactly what their options are.

How to track PTO

Tracking PTO is important, even if you have an unlimited PTO policy. Disputes related to wage or performance may arise where a record of time off would be needed to reconcile matters. While some may use calendars, spreadsheets, or templates for manual recordkeeping, tracking time time off whether you have hourly or salaried employees or whether you offer a fixed or unlimited amount of vacation is efficient and can keep you compliant when you’re using a service like Gusto that automates these tasks with time tools, including calculating wages.

What are other types of leave besides vacation?

A PTO policy for vacation would be separate from these other types of leave for which you either may be subject to government regulation and/or may have set your own standards as part of your overall benefits package:

  • Jury duty leave: For doing your civic duty as a US citizen and appearing for federal, state, or local jury service after receiving a summons.
  • Parental leave: For taking care of a child, whether through birth, adoption, or foster care.
  • Family leave: For caring for a qualifying family member (e.g., child, spouse, parent) who has a health condition.
  • Medical leave: For caring for your own serious health condition that makes it impossible for you to work for an extended period of time.
  • Bereavement leave: For grieving the loss of loved ones and to attend funeral services.

Federal jury duty is protected by the Jury System Improvement Act of 1978, and there could be laws in your area that protect state or local jury service. However, regarding payment while an employee is a juror, the legalities vary based on where you are, so check your jurisdiction.

With parental, family, and medical leave, an employer must follow the rules set by the Family and Medical Leave Act (FMLA) if that business has 50 or more employees in 20 or more workweeks in either the current calendar year or the previous calendar year. If an employer has fewer than 50 employees, then state laws for family leave and medical leave could still apply.

Even if an employer fits the criteria for a company that must be FMLA compliant, not every employee at that business may be covered by FMLA. Employees who haven’t worked at least 1,250 hours for an employer during a 12-month period at a location with 50 or more employees working within 75 miles of that location are not eligible for FMLA, which provides up to 12 weeks of unpaid leave a year with job protection.

When it comes to bereavement leave, New Jersey, Massachusetts, and Vermont have active legislation, according to the nonprofit Evermore. But only five states have actually enacted or expanded laws for providing a minimum number of days off to grieve the loss of family members with either unpaid time or paid absences:

Overall, your leave policies should match your company’s culture and values, and be consistent with any core pillars you develop. Part of your company’s best practices may include offering paid leave or a longer leave than what state or federal law requires. Even if not legally required, you may still allow PTO to accrue while someone is on leave or vacation.

PTO policies such as these signal to prospective hires and your current staff that you care about people and their physical, mental, and emotional well-being. As additional upsides, they could potentially even reduce attrition and absenteeism in the long run.

Want more info on how to design a PTO policy? This human resources expert can walk you through the process.

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