Should you have a PTO accrual cap?
I strongly recommend that you add a cap to your accrual system.
Some folks may deride my stance, saying that limiting PTO also limits the amount of unpaid PTO that goes out when people leave the company. Or that I’m limiting overall PTO.
But that doesn’t matter. Paying some extra PTO is irrelevant in my book. It’s just too small to matter.
Yes, a PTO accrual cap is a limit on an employee benefit. But I believe it helps the entire team, it’s a boundary that nudges us to take care of ourselves. Some of us need that nudge.
What is a PTO accrual cap?
With a PTO accrual system, employees earn PTO hours based on the hours that they work. For a salary job, employees work 40 hours per week and then earn a certain amount of PTO on each payroll. The exact amounts vary but the point is worked hours = earned PTO.
Now what if an employee never takes vacation?
And they work for your company for years, or even decades?
Without a cap, that employee will keep banking PTO.
When you hear stories of someone having 3 months or more of vacation time stacked up, it’s usually from an accrual system that didn’t have a cap. Or a lumpsum PTO system that kept adding new batches of PTO every year.
A cap means that employees have a strong incentive to use their PTO. Either they use some of the PTO that they’ve already earned or they’ll stop earning more PTO.
If you set a cap that’s equivalent to the total PTO that people earn in a year, you’re telling your entire company to use their annual vacation every year.
For me, that’s the whole point of PTO. I don’t care how folks use it or when they use it. I just care that they use it. We all need rest throughout the year.
The PTO Accrual Cap We Use
At Stone Press, we have an accrual PTO system. Employees earn PTO at a rate that gives them 3 weeks off (15 days) per year. And we set a cap of 120 hours. They earn 3 weeks and max out at 3 weeks.
We also have a rollover policy. So the PTO balance carries over from year to year, there’s no reset.
Overall, we have an extremely simple PTO system:
- As you work, you earn PTO. This starts the day you join.
- Use PTO however you like.
- You’ll earn at a rate of 3 weeks per year.
- Once you hit 120 hours of PTO, you’ll stop accruing more. Take some PTO to start accruing again.
Easy to understand and manage. Plus employees have a ton of flexibility on how they use it.
How PTO Accrual Caps Help Your Employees
Every PTO accrual system should have a cap.
Every single one.
After founding my own company and leading departments in several others, I noticed that many employees don’t take enough vacation. A good 20-30% of folks have either maxed their PTO or are close to it at any given moment.
Accrued PTO sits unused.
A cap nudges those folks to use their PTO. Stop banking, take time off, and get some rest.
It also helps your managers protect their team, even brand new managers that don’t quite know what they’re doing yet. If they’re worried about employee burnout, quickly glance through the PTO amounts of their team. For anyone that’s close to their cap, nudge them to take a week off. Simple.
Same thing with HR. When they’re double checking PTO balances across the company, look for folks close to the cap. And if there’s an entire team that’s close to the cap, now it’s time to have a chat with that team’s manager.
All the if-then rules around taking PTO get super simple.
No one has to worry about unspoken standards. And everyone knows when they need to intervene and encourage folks to take more time off.
But wait, why worry about this at all? If an employee doesn’t take enough time off, isn’t that their problem?
You could take that stance, there’s nothing wrong with it.
I take a different approach. After a decade of management, I’ve noticed that the best folks on the team are usually the ones that don’t take enough vacation. They tend to put too much of themselves into their work. Some of them are full-on workaholics. I’ve done this myself.
If the best folks on your team don’t take enough time off, they will burn out. Then they’ll leave.
So that gives you a choice. You can accept that burnout rate and adopt the attitude that people need to set their own boundaries. That’s totally valid. Or you can nudge folks to get the rest they need, lengthening the tenure of the best people on your team. This is what I’ve chosen to do.
That’s why I believe so strongly in PTO caps. They help to protect the best folks from themselves
How to Choose Your Accrual Cap
I recommend that you take the total amount of PTO that folks accrue during the year and make that the cap.
That’s what we do. Employees at Stone Press earn 3 weeks of PTO per year and have a cap of 120 hours (3 weeks off).
I prefer this rule for a few reasons:
- It’s extremely easy to remember. Earn 3 weeks per year, the cap is also 3 weeks.
- The simplicity makes it easy for managers and HR to know when to intervene.
- For new employees that are going hard, they’ll get a PTO check at about 1 year as they hit their cap for the first time. At this point, they’ll be nudged to start setting some good PTO habits and not accidentally burning themselves out in years 2-3.
- It strongly encourages folks to use PTO every year.
- Once folks bank some PTO, they’re encouraged to use PTO every 3-4 months in order to keep accruing. That’s a good rhythm for taking time off in my opinion.
Types of Accrual Caps
There are a few different types of caps:
- Annual caps: Employees have a cap on how much PTO they can earn each year.
- Pay period caps: Employees are limited to the total amount of PTO that they can earn in any specific pay period.
- Balance caps: Once an employee hits a specific balance, they stop accruing additional PTO.
Out of the above, I strongly prefer balance caps. They’re simple to administer, simple to understand, and avoid any “gaming the system” type behavior.
And a balance cap is exactly what we use. Once folks hit 120 hours in accrued PTO, they won’t earn any additional PTO hours on the next payroll.
Even if you have hourly, part-time, full-time, and roles with highly variable work hours, a simple balance cap addresses everything. Haven’t hit the cap? Then you earn X PTO hours per hour worked. At the cap? PTO stops accruing until you take time off.
There are a few situations where a balance cap wouldn’t work and you’d need to come up with a more complicated cap. Some businesses require employees to live on a worksite in a remote area. Like employees for Shell that travel to remote drilling sites. They may work 4 weeks on, 4 weeks off. And there isn’t the possibility to take time off during the 4 week stint anyway. Other seasonal work might need to consider other types of caps too.
But for any company where the majority of employees work a standard 40-ish hour work week, a balance cap gives you everything that you’ll need.
Should a lower amount of PTO carry over from year to year?
Some companies will have a PTO accrual cap AND a lower carry over limit. For example, the PTO cap might be 120 hours but only 40 hours transfers from Dec 31 to Jan 1 each year.
This is an attempt to get people to use even more of their PTO each year.
But I think it’s too complicated. People now have to remember multiple numbers.
I’ve used a standard 120 hour PTO cap with a full carry over across multiple companies for over a decade and I’ve never had an issue.
I also believe that people should be able to plan their year however they want. Some folks dump their PTO into the holidays but some prefer to use PTO during other times of the year. End-of-year carry limits do push people to take more PTO during the holidays. We all forget to use PTO sometimes and an end-of-year cut off means we’ll be forced to use PTO during the holidays even if it’s not what we’d prefer.
I’d rather give folks flexibility and keep the PTO system simple. A full calendar carry over gives me that. And I’ve never experienced a downside.
Should accrual caps increase based on the number of years worked?
You could set the accrual cap for a new employee at 120 hours. Then raise the cap by 10 hours for each year worked. Or something like that.
I personally think this is a terrible idea. First, a sliding cap is confusing. Everyone is at a different amount and no one can remember without looking it up. Second, the benefit is trivial. What really matters is how much paid time off someone can take each year. Higher caps don’t impact the annual time off, they just delay it.
If you really wanted to reward folks based on the number of years worked, I’d adjust the PTO accrual rate instead. That means folks that have worked at your company for 5 years will earn PTO faster than employees that just started. I’m not a fan of these policies either, simplicity goes a long way in my book. I’d much rather just increase PTO for everyone and keep it simple.
Does a PTO cap protect the company from paying out absurd amounts when employees leave?
Technically, yes. But it doesn’t really matter.
Many companies have a standard practice of paying out all unused PTO when an employee leaves the company. The regulations on this differ greatly state by state. To stay in the clear, you’ll see many HR folks recommend always paying it out.
So yes, a PTO cap means that unpaid PTO can only get so high when employees leave. This limits your financial exposure.
In my experience, the unused PTO just isn’t a material cost to the company. Compared to the comp and benefits you’re already paying, that extra PTO paid out as comp is a drop in the bucket. Even for the few folks that bank an absurd amount of it if they’re allowed to. For me, I don’t care about the cost savings at all, that’s not why we have a PTO cap.