According to the U.S. Department of Labor, paid time off (PTO) accounts for roughly 7% of an employee’s total compensation, but an important one. Studies show that employees who take vacation time are healthier, more productive, and at far less risk of burnout. Despite the high cost, a good PTO policy is an enticing perk when recruiting top talent and retaining great employees. An attractive PTO policy helps to boost employee morale, create a work-life balance, and increase retention. In addition, PTO policies are flexible, so we’ll look at a few real-world examples to help you create a great PTO policy for your company.
Traditional Accrued PTO Policy
The accrued PTO policy is the most common type of paid leave program. Under a traditional PTO policy, employees accrue or ‘earn’ paid time off every pay period. Most companies don’t advance PTO days to new hires and instead have a blanket accrual policy based on either time of service with the company or standardized across all employee levels.
Accrual rates are typically based on an employee working 2,080 hours per year, which equals 40 hours per week (full-time).
This type of policy allows a specific number of vacation, sick, and/or personal days for each employee. In addition, the employee needs to specify the reason for taking leave, such as going on holiday or recovering from an illness. Employees can request PTO at any point once the hours are accrued.
Many organizations also have a separate policy for obligatory time off, such as federal holidays, bereavement, becoming a parent (FMLA), military leave, religious holidays, or jury duty. Typically, these days do not count toward an employee’s PTO. Therefore, we won’t go into detail about these exemptions.
For example, according to the SHRM Customized Paid Leave Benchmarking Report, the median PTO days companies using the traditional PTO model offer are 15-20 days per year plus federal holidays. This report is a valuable document to reference when creating your PTO policy.
Following this example, you might allocate your 20-day PTO schedule like this:
- Ten vacation days
- Eight sick days
- Two personal days
Again, PTO policies are flexible. So the number of PTO days and what kind you want to offer is up to you.
Most companies have a 30-day waiting period before new hires are eligible to take paid time off. However, while new employees may have a waiting period before they’re qualified to take time off, they typically start accruing PTO immediately after they’re hired.
Your PTO policy should also specify the number of PTO hours employees accrue per pay period. For example, you may determine that employees with less than one year of service accrue 3.08 hours of PTO every two weeks (10 days per year), and employees with two to four years of service accrue 4.62 hours of PTO per pay period (15 days per year), and so on.
Most organizations using this type of policy allow longer-tenured employees to accrue more PTO hours per pay period. For example, new employees may accrue two weeks of PTO per year, while someone with five years of service will accrue 3.5 weeks, and a senior executive may accrue six weeks per year.
To calculate the accrued PTO hours into days off, multiply the number of accrued hours per pay period by the number of pay periods. Then, divide that total by eight (typical work day).
3.08 (hours per pay period) x 26 (pay periods in one year) = 80.08 total hours accrued.
80.08 (hours accrued) / 8 (one work day) = 10.01 days off per year (two weeks).
This example is based on a 40-hour work week and a two-week pay period. You can adjust it to match your pay period or preferred schedule. For instance, employees may also accrue PTO hours each week, each month, or each pay period.
Many organizations cap the number of PTO hours an employee can accrue per year. This might be by calendar year, fiscal year, or the employee’s hire date anniversary. You should also decide whether employees can roll over unused PTO into the following year. Most companies that allow this also cap the hours an employee can roll over to avoid hoarding paid time off.
This type of policy is popular because it rewards employee loyalty and is a terrific incentive for employee retention. It’s also one that most employees are familiar with.
On the downside, tracking and calculating employee PTO hours for this type of policy can be labor-intensive and complicated. This is especially prevalent in large organizations with different types of employees and multiple pay periods. Fortunately, most time-tracking and HR software automatically track and calculate PTO.
Another downside is that some states require you to pay out unused PTO when an employee leaves the organization. For example, California, Illinois, Colorado, and Arkansas require employers to pay out unused PTO, so it’s a good idea to refer to your state laws before implementing the policy. This way, your PTO policy doesn’t become an accrued liability on your balance sheet.
PwC Traditional Accrued PTO Policy
PricewaterhouseCoopers (PwC) offers a traditional accrued leave policy with separate holidays, extended holidays, vacations, and personal sick time policies. Employees can draw paid leave days from the appropriate PTO bundle.
PwC offers 15 paid holidays per year, including company-observed national holidays and separate vacation time. The company also offers four extended holidays around July 4th, Christmas, and New Year. Finally, the company provides unlimited sick days for full-time and part-time staff.
Employees earn vacation time based on their length of service and staff classification. Employees accrue between three and four weeks of paid vacation annually.
Employees can use sick time for personal illness, medical treatment, preventive care, or a family member’s illness or injury. However, paid sick time off only applies to five or fewer consecutive days of absence.
Traditional Front-Loading PTO Policy
Front-loading PTO is a traditional paid leave program similar to the accrued policy; the main difference is that the employees don’t have to accrue paid time off. Instead, the company allocates all PTO hours at the beginning of the year (front-loaded), and employees can then use the hours at their discretion throughout the year.
Front-loading PTO is a common alternative for accrued PTO for organizations that want to minimize the administrative burden. This way, you don’t have to calculate employee PTO. You can also offer longer-tenured employees more PTO. For example, new employees may receive 15 paid days off per year, while those who’ve been with the company for more than three years receive 18 days, and so on.
Traditional policies like accrued or front-loading PTO allow HR to collect crucial data and spot trends. For example, an organization may notice that most employees take time off in the week between Christmas and New Year’s. Such insights allow the organization to streamline its PTO policy by offering company-wide time off for this week and not requiring employees to use PTO days.
One significant benefit of front-loading PTO is its simplicity. It is easy to communicate with employees. They know the specific number of paid leave days they’re entitled to each year. It’s also an excellent alternative to accrued PTO to differentiate your organization when recruiting new talent. For example, new hires can take a week off at the beginning of the year without worrying about finances or waiting to accrue enough hours.
Should you require PTO preapproval, it is crucial to account for emergencies like illness or injury. You may allow employees to take up to a certain number of hours or days off without prior notice. Otherwise, employees should submit their PTO request for approval within a specific timeframe, usually at least a week’s notice. You can use a similar policy with accrued PTO.
On the downside, many states also require companies to pay unused PTO when employees leave the organization. A generous PTO policy may mean higher payouts when employees exit the organization.
Another downside is an employee may exhaust their PTO days at the beginning of the year and then quit. You can avoid this by implementing a waiting period before employees can use their PTO days or including a PTO use policy that requires management to approve PTO days before use.
Referring to your state’s laws before implementing front-loading PTO is essential. For example, Washington paid sick leave (WPSL) law makes it challenging to front-load PTO hours accurately. The law doesn’t cap PTO accrual, including overtime. So you’d need to accurately anticipate an employee’s work hours, including overtime, and front-load the appropriate PTO for hours worked to be compliant.
Intel’s Traditional Front-Loading PTO Policy
Like PwC, Intel categorizes PTO for different purposes. However, Intel employees don’t have to wait to accrue sufficient PTO hours to take a vacation. Instead, paid vacation time is available at the beginning of each calendar year, including a calendar of 12 major paid holidays.
Non-exempt Intel employees receive up to 80 hours (10 days) of paid vacation time per year. The company also offers 80 additional hours (10 days) of paid personal absence time.
Employees also receive two floating days to use at their discretion. Additional PTO policies provide eligible parents up to 12 weeks of paid family leave, which includes birth, adoption, and foster care.
Intel also offers up to eight weeks of paid sick leave and up to two weeks of bereavement leave. Finally, the company provides up to four weeks of paid sabbatical leave every four years or eight weeks every seven years.
Unlike traditional policies, PTO banks don’t distinguish between vacation time, sick days, or personal time. Instead, employees receive PTO days to use as they wish. For example, an employee can draw from their pool of PTO days for a vacation, illnesses, or jury duty. However, like traditional policies, PTO banks also cap the number of annual PTO days.
PTO banks may not include some types of excused absences. For example, some organizations don’t include bereavement leave, federal holidays, or jury duty in this bank. Similarly, many organizations don’t include familial or medical leave, short-term or long-term disability leave, and sabbaticals in the PTO bank. Some of these, like FMLA or medical leave, may have state and federal laws you must comply with.
PTO banks are more common in larger organizations with more than 500 employees. One main reason is that PTO bank policies are easy to implement and administer. Employees and HR don’t have to keep track of the number of sick days vs. vacation time–it’s all one type of PTO.
Employees also have greater control over their time out of the office. PTO banks can also be a powerful recruiting tool since these policies are contemporary and appealing.
There are also more subtle advantages to implementing PTO banks. For example, sick days often have a use-it-or-lose-it policy. This can encourage people to abuse sick days by calling in sick when they aren’t so that they can take extra time off. Allowing employees to use their PTO as they wish discourages this abuse.
PTO bank policies are very flexible. So you can decide the number of days to allocate, whether accrued or front-loaded, PTO notice requirements for non-emergency absences, and rollover for unused PTO. You can create a customized policy that makes sense for your organization.
One downside of a PTO bank is its ambiguity. To mitigate this, you’ll need a comprehensive policy document to clarify the grey areas. For example, some employees may exhaust their annual PTO, forcing them to come to work when they’re ill. Similarly, some employees may use most of their allotted PTO recovering from an illness, with less available vacation time.
Most state laws requiring payout for unused PTO also view PTO banks as vacation time. And in many cases, organizations aren’t required to pay out unused sick time. Therefore, combining sick time and vacation days can expose the organization to higher financial liability when employees separate from the company.
Finally, it is essential to gain employee buy-in before implementing a PTO bank. Employee buy-in is critical if you switch from a traditional PTO system to a banked system. For instance, employees may view their PTO bank days as vacation time and become reluctant to take sick days off. So it is vital to communicate the purpose of the PTO bank.
Wells Fargo’s Accrued PTO Bank Policy
Wells Fargo is a perfect example of a company that utilizes an accrued PTO bank policy and also provides generous PTO to all employees. All employees are eligible to accrue and use PTO after one full calendar month of employment.
Wells Fargo employees accrue PTO hours in their bank based on their years of continued service, standard work hours, and active working status. For example, a full-time employee with a 40-hour work week accrues PTO according to the following schedule:
- 0 – 2 years of service – 144 hours (18 days) per year
- 3 – 9 years of service – 184 hours (23 days) per year
- 10 – 24 years of service – 224 hours (28 days) per year
- 25+ years of service – 246 hours (33 days) per year
Employees can draw from their PTO bank for any reason: vacation, illness, family member’s illness, personal business, religious observances, school conferences, weather problems, etc.
Wells Fargo provides up to 11 paid observed holidays, including New Year’s Day, Memorial Day, Juneteenth, Thanksgiving Day, and Christmas Day. And as an added bonus, Wells Fargo also offers 13 paid holidays annually, including personal holidays employees can use for cultural, religious, family, or patriotic observances.
Employees just need to submit a leave request using the Workday Absence app before taking time off. Time off approval is subject to a manager’s approval based on business needs, workflow, and operational requirements.
Interestingly, Wells Fargo’s PTO policy is flexible based on the employees’ location. For example, employees in certain states may have different entitlements for paid sick time and PTO carryover and accrual requirements that satisfy specific state or local laws.
While the company does allow employees to carry over accrued PTO to the following year, it is capped at five days to encourage employees to use their days off.
Wells Fargo also offers additional time away aside from the accrued PTO hours for reasons such as:
- Jury duty (for the jury duty service period)
- Bereavement (up to two weeks)
- Military duty
- Voting (up to three paid hours)
- Testifying in court
- Community service
Of course, employees must work with their managers to arrange this additional time away. Again, employees in certain states may also be eligible for other types of leave based on state and local laws.
The United Services Automobile Association (USSA) Front-Loading PTO Bank Policy
The USSA is a renowned financial service group that also uses a bank-style PTO policy. Employees have up to 40 PTO days annually that they can use for any purpose, including illness, personal/family reasons, or vacations.
Unlike Wells Fargo, which is an accrued PTO hour system, USSA employees can access all of their yearly PTO days on January 1st each year.
The USSA also offers additional leave days, including bereavement and civic responsibility leave. This paid time off doesn’t count toward the employee’s PTO days.
Like most PTO policies, USSA also rewards employee loyalty. For example, their PTO policy places employees in one of three categories based on years of service:
- Tier 1 – Less than ten years of service
- Tier 2 – Between 10 and 20 years of service
- Tier 3 – 20+ years of service
Employees are awarded PTO days depending on their tier. Naturally, longer-service employees receive more PTO days per year, and the employee’s service tier is recalculated annually.
Unlimited PTO is a relatively new and somewhat controversial benefits policy. As the name suggests, employees can take paid time off without worrying about hitting a cap. Unlimited PTO is more prevalent in tech companies these days and is very popular in major companies like Sony Electronics, GE, and Dropbox.
It is not a free-for-all; companies with unlimited PTO still require advance notice before taking time off for non-emergencies.
A significant benefit of unlimited PTO is the lower financial payroll liability. Employees don’t accrue PTO days. Therefore, these organizations aren’t required to pay out unused PTO when an employee leaves the company.
However, if your company is switching from a traditional to an unlimited PTO policy, you must use extra caution.
For instance, most employees know they’re entitled to cash payouts for unused PTO when they exit. Employees with accrued PTO prior to the policy change may lose this benefit when a company switches to unlimited PTO, causing internal friction and potential legal issues. This will not be an issue if you are creating a PTO policy for the first time.
One excellent way to avoid this issue when making a policy change is to enroll employees in unlimited PTO only after they’ve exhausted their allocated leave days under the old policy. While this may be more frustrating to manage in the short term, it avoids potential legal problems.
A massive benefit of unlimited PTO is that it is simple to administer.
HR doesn’t need to track time off or calculate payouts when employees leave. So it’s a good solution for startups that don’t have the HR infrastructure to track and manage an accrued time off policy.
Unlimited PTO can also boost morale as employees feel trusted and in control of their work-life balance. For example, employees can take a day off if they’re sick or need to attend a parent-teacher conference without worrying about exhausting their vacation or personal days.
This type of policy also allows managers and employees to focus on performance and work output rather than time spent off the job. As with any PTO policy, employees with unlimited days still usually need to be approved by managers.
One disadvantage of unlimited PTO is its ambiguity, which can be a significant issue. For instance, asking employees to estimate “reasonable time off in a year” is difficult. Therefore, employees may end up taking fewer days off than they would with a traditional PTO policy with specified leave days and limitations.
One study published by the NIH examines how companies with unlimited PTO policies reported that “employees took less time off than previously, presumably leading to higher burnout rates” and explores the idea of unlimited PTO on performance, productivity, and output.
This is a major disadvantage of this seemingly “unlimited” PTO policy and one that any manager or business owner must consider how to avoid.
You’ll need to discuss work-life balance and appropriate PTO use within the company and be transparent about it. It should also be clearly spelled out in onboarding paperwork and employee handbooks.
One way to avoid that issue is to institute a requirement that employees take a minimum number of days off each year. For example, Goldman Sachs introduced unlimited PTO for its executives but has a contingency built into the policy that requires them to take at least 15 days off every year.
Your managers and leadership team must lead by example and be clear with employees that the PTO is there for them to use, and they should use it.
Another glaring issue with unlimited PTO is the potential for employees to abuse this policy. For example, employees who have only been with the company for six months may request several weeks off simply because they can and believe it will or should be approved.
Serious discussions about appropriate PTO use can help solve the problem. It may also be important for you to think about and discuss internally what a cap on “unlimited” might look like. Requiring manager approval to take time off also helps reduce abuse.
Netflix Unlimited PTO
Unlimited PTO is prevalent in today’s recruiting landscape. But Netflix was one of the forerunners when they introduced unlimited time off in 2003. The company has since had sufficient time to streamline its policy and overcome the roadblocks of unlimited PTO.
Netflix employees can choose when to take a vacation or time off as long as they meet their obligations. The company doesn’t track worked hours or time off, allowing employees the autonomy to manage their own schedules.
While many studies show that unlimited PTO policies lead to employees taking less time off, Netflix found a solution. Its co-founder and executive chairman, Reed Hastings, leads by example and takes at least six weeks of vacation annually. Hastings also encourages management to take vacation days and to talk to staff about taking time off.
Hastings expects all managers to set expectations about appropriate unlimited PTO use. For example, managers need to create guidelines about advance notice for time off and the number of people who can take time off simultaneously. Netflix also attributes much of the policy’s success to hiring talented, highly skilled, and mature employees.
It’s worth noting that Netflix originally had a traditional PTO policy, which offered ten holidays, ten vacation days, and “a few” sick days. Interestingly, one of the revelations that led Reed to move to an unlimited PTO policy was realizing that some of the employees’ best ideas and innovations came on the heels of a mental and physical break from work.
Final Thoughts on Adopting a PTO Policy
Every organization is unique, so there’s no such thing as the “best” PTO policy. Instead, the best policy achieves your objectives, such as boosting employee morale, attracting and retaining top talent, or creating a culture of a great work-life balance. It’s also essential to refer to your state’s specific guidelines before crafting your PTO policy to ensure compliance with the relevant laws.
You should consider certain PTO best practices regardless of your chosen policy type. You need a comprehensive policy document outlining expected employee work hours, PTO accrual and rollover policies, PTO request procedures, and payment upon termination.
The policy documents should also detail other time off besides the regular one. For example, the policy should include federally protected absences such as disability leave and the Family and Medical Leave Act (FMLA). Similarly, the policy document should specify recognized paid or unpaid holidays, such as Christmas day, The Fourth of July, Labor Day, Memorial Day, Juneteenth, Thanksgiving, etc.