Employees appreciate 401(k) contributions and health insurance. But no matter how many perks and benefits you offer your employees, chances are good they have a clear-cut favorite.
Employees love paid time off (PTO).
Even though the United States does not have state or federal laws requiring private companies to provide PTO, most companies do. According to the U.S. Bureau of Labor Statistics, roughly three-quarters of private-sector companies offer paid vacation time to employees; the number exceeds 90% for large companies.
It’s crucial to have a clear PTO policy in place to ensure all employees understand how and when to use it. This policy should be in writing and accessible to all employees anytime.
Your PTO policy should provide the benefits your employees want. A favorable PTO policy improves morale and retention rates, and helps you attract top candidates during the hiring process.
I’ll break down the most important items to consider when building a PTO policy your employees will love.
What Do Employees Care About in a PTO Policy?
Figuring out what your employees want to see in your PTO policy seems easy. However, everyone has different priorities.
Even in a business with 30 or fewer employees, the chance of everyone agreeing on what the PTO policy should include is small.
I recommend taking a survey of employees about their preferences. You don’t have to follow the recommendations of most employees exactly, but the survey responses will give you a general idea of what’s important to them.
You must also consider what traits you primarily want your employees to have.
- Younger Perspective: If you want to hire younger employees, consider emphasizing personal days over vacation days. Parents of young children can take days off for illness or school events and non-parents can take mental health days to prioritize wellness.
- Loyal: If you are looking for employees who will stick with you, consider increasing the number of vacation days earned as employees stay longer.
- Highly Skilled: In a highly competitive industry, you may have to offer significant PTO benefits immediately to newly hired employees. This can give you an edge when hiring in-demand skilled employees.
- Dedicated: Employees are more likely not to take sick and personal days if they have to use vacation days. In other words, if you lump all PTO days into a single category, you may have fewer absentee days. However, this policy could negatively affect morale, as employees feel like they have to work even when sick to “save” time for vacations.
Typically, employees like flexibility in a PTO policy above all else. They want to feel in control of their PTO days and how they choose to use them.
Giving your employees a flexible PTO policy also shows you trust them, which can boost morale and increase employee retention.
Unlimited PTO vs. Standard PTO vs. Accrued PTO
When creating a PTO policy, an important early decision involves deciding between unlimited PTO and standard PTO.
Unlimited PTO lives up to its name by providing employees with as many days off as they want. Employees can take PTO for whatever reason, including sick, personal, and vacation days. With unlimited PTO, there is no accrual of hours over time.
Standard PTO provides a specific combination of sick, personal, and vacation days, but employees can only take a limited total number of each type of day off.
Accrued PTO is when employees accrue or “earn” PTO hours, generally a set number per pay period. For example, if you offer three weeks of paid time off per year and employees get paid every two weeks, then an employee will earn 4.62 hours per pay period, for a total of 120 hours every 26 paychecks (per year). Your company can choose to let employees accrue PTO by the hour, week, pay period, month, etc. The accrued hours can be but are not necessarily all one type of PTO (not separated into sick, personal, and vacation days).
Standard PTO policies can also have employees accrue PTO hours/days, or employees may get a lump sum at the beginning of each month, quarter, year, or however the company wants to divvy it up.
Some companies combine sick, personal, and vacation days in standard and accrued PTO policies, while others may provide separate caps for each option.
State and federal policies like FMLA and company-observed holidays are typically not included in any of these policies.
Setting Caps for Standard PTO
With standard PTO, you must set a cap on how many total hours/days of PTO each employee receives.
You could give employees 10 to 15 days of PTO to start. Employees who remain with the company for a certain number of years may begin receiving an extra five days of PTO. This type of PTO policy encourages loyalty among employees.
You’ll need to think about the caps you set and how long the years of service intervals are.
In addition, you’ll need to consider if you will provide one “bucket” of PTO that can be used for sick, personal, and vacation days or if you want to separate them and have a limited number of each. I go deeper into this later in this guide.
Gaining employee input on the caps can be beneficial in receiving employee buy-in.
Setting Limits on Unlimited PTO
Although unlimited PTO sounds like it should be easy to implement because it has no limits, most companies end up placing certain limits on its use, including the following:
- Approval: Even though the PTO is unlimited, you may still require employees to ask permission and get manager approval to take consecutive PTO days.
- Notice: Many companies ask employees to provide at least two weeks’ notice before taking consecutive days as PTO.
- Tracking: Some employees see tracking the number of PTO days they take in an “unlimited” policy as unfair. However, if you want to ensure no one is abusing the policy, tracking days is necessary.
- Compliance: If your company is subject to federal regulations, such as the Family and Medical Leave Act (FMLA), you have to determine how such regulations will co-exist with unlimited PTO. FMLA is unpaid leave, while PTO is paid leave, and they require different treatment in PTO policies.
Implementing an unlimited PTO policy sometimes causes employees to become wary of taking too many days off. They may worry that the company will punish them when it comes time to receive a promotion if they take too many days off.
Consequently, some employees work more days than they would if a standard PTO policy were in place. This can lead to burnout.
When you offer unlimited PTO, you may find it necessary to require that employees use a minimum number of days each quarter or year to counteract this issue. By enforcing minimums, everyone must take a certain number of days to recharge.
Another potential issue occurs when certain employees abuse your unlimited PTO policy by taking an unfair number of days off. If other employees must pick up extra work because someone else is abusing the system, it causes problems with morale.
Ultimately, although employees may believe unlimited PTO sounds great, implementing it can be challenging. Employees may find that they prefer standard PTO policies because of the certainty involved.
Who Qualifies for What Types of PTO?
Many companies have different PTO policies for hourly workers versus salaried workers.
PTO for Hourly Workers
Because an hourly worker’s productivity is tied to being at work, you likely want to craft this part of your PTO policy to emphasize regular attendance. For this reason, hourly workers almost never qualify for an unlimited PTO policy.
For hourly employees, PTO that is accrued by the hour is a good choice.
You may want your policy to encourage hourly employees to plan their days off ahead of time, which you can do by limiting personal and sick days in favor of more vacation days for hourly employees.
PTO for Salaried Workers
Because a salaried worker’s productivity is tied to completing projects and meeting goals, regular attendance isn’t as important as it is for hourly employees. If a salaried employee can complete a project a week before a deadline, taking a personal day or short vacation with less notice shouldn’t cause issues. Some companies choose to give salaried workers unlimited PTO for this reason.
Another option is to provide salaried employees with a larger number of personal, sick, and/or vacation days than hourly employees receive under standard PTO. If you choose to have employees accrue PTO
Combined or Separate PTO Buckets
If you offer standard or accrued PTO, your policy should specify how each employee can divide PTO days.
Combined PTO Days
If you have a combined PTO days policy, you’ll offer each employee a certain number of total days per year as PTO. The employee then chooses how to use those days, and sick, personal, and vacation days all count against the combined PTO days available. It is all one type of PTO and can be used however the employee wants.
Using combined PTO days gives employees flexibility in managing their PTO, which your employees may prefer.
A disadvantage to using combined PTO days is that employees don’t want to lose a potential vacation day for an illness, so they may feel compelled to come to work when sick to “save” their PTO days.
Co-workers won’t be happy with colleagues who show up when sick, which can affect morale.
Separate PTO Days
Another option is to create separate buckets for PTO. You’d offer a particular number of PTO days for illness, personal use, and vacation. Many companies combine sick and personal days within a single bucket under this plan.
While this policy gives employees less flexibility in choosing how to use their PTO, it also encourages employees to stay home when sick because they don’t have to use potential vacation days.
Using Separate Buckets With Unlimited PTO
If you offer unlimited PTO, you may find it necessary to create separate buckets and place limits on some of them.
For example, most companies require employees to request permission to take PTO days. Such a policy lets you know who will be absent and when so you can plan accordingly for last-minute tasks or important meetings.
But it’s nearly impossible for an employee to request time off ahead of time for a sick day. So, you may want to have a “bucket” within your unlimited PTO plan where employees receive a certain number of days they can take without requesting permission. These days can serve as sick or mental health days.
Even if you limit sick or last-minute use days, you can still offer your regular unlimited PTO for longer PTO use, like vacations.
Calendar Year Cutoff vs. PTO Days Carryover
If you offer a standard PTO plan, each employee receives a certain number of days to use as PTO during a quarter or a year. With accrual, employees receive that same number of days within the year.
Should the employee fail to use all the allotted days, how will your company handle it? Do you want employees to carry unused days to the next period? Or do you want to force employees to use the days within the specified period without carryover?
Employees usually like the idea of carrying over unused PTO days into the next quarter or year. They may want to take a vacation of multiple weeks in the future, and carrying over PTO days makes this possible, so they can stockpile time until they have enough for a more extended vacation.
Employees also like PTO carrying over because it gives them more flexibility in using their days off.
However, if such a policy risks your company’s productivity, you may not want to allow PTO carryovers.
One potential drawback to carryovers is that some states require companies to pay their employees out for any remaining PTO days when the employee quits. Large amounts of PTO hours being carried over could leave your company on the hook for a bigger payout to some employees, which can affect your budget.
A solution to this situation would be to allow a limited, specified amount of PTO to be carried over into the following year. For example, if you offer 15 days (three weeks) of PTO days per year, you might allow up to five business days (one week) to be carried over, and anything over five days is lost.
Some companies prefer to require that employees use their PTO days by the end of a quarter or year. Under this policy, there is no carryover of unused PTO days.
This type of policy ensures employees take their days off during each period, preventing burnout and ensuring employees get a good work-life balance.
However, when you have PTO days cut off, you may end up with multiple employees trying to use their days at the same time at the end of a quarter or year. This can be a consequence of employees not realizing they will lose the days if they don’t use them, or the employees are particularly busy that quarter and haven’t had a chance to take time off until the end.
Depending on your business type, this could leave you short-handed at a critical time.
To prevent this, you may need to limit the number of employees who can take PTO simultaneously.
Another drawback is that employees may get frustrated when they cannot save their PTO. For example, allowing every employee to take five business days off of PTO per quarter is four weeks per year, which sounds generous. But how will you handle situations where the employee wants more time, such as getting married or a two-week international vacation?
These are scenarios you must consider when thinking about whether you want to allow carryovers or institute a cutoff.
How Much PTO Should You Offer?
Finally, you must determine how much PTO you should give employees.
You may need to offer extra PTO as an incentive when hiring and retaining highly skilled employees in a competitive industry.
If you don’t have much competition or if you don’t need employees with specialized skills, you may be able to offer less PTO without affecting your ability to hire.
Average Number of Vacation Days
The U.S. Bureau of Labor Statistics tracks vacation days offered by various industries. Remember that these are national averages and are based on years of service.
For private businesses, the average number of vacation days provided are:
- After one year of employment: 9 to 12 days
- After five years of employment: 13 to 16 days
- After 10 years of employment: 15 to 19 days
- After 20 years of employment: 17 to 23 days
Companies with 100 or more employees tend to offer more vacation days than smaller ones.
Average Number of Sick Days
The U.S. Bureau of Labor Statistics also tracks sick days offered. Sick and/or personal days are generally much fewer than vacation days.
For private businesses, the number of sick days provided is as follows:
- Fewer than five days: About 20% of businesses
- 5 to 9 days: About 48%
- 10 to 14 days: About 27%
- 15 to 29 days: About 4%
It’s important to note that these statistics only include companies that limit the number of PTO days they offer. Companies with unlimited PTO are not included in these statistics.
My PTO Policy Recommendations
If you are developing a PTO policy from scratch or want to change what you currently offer, I recommend focusing on a few areas to create a successful PTO policy.
First, ask for some employee input. If employees believe the company listens to their ideas as part of creating the PTO policy, they’ll almost certainly be more willing to accept the final version. You don’t have to use all their preferences, but it’s good to understand what they prefer.
Second, decide what you want to accomplish with your PTO policy. Are you trying to reward longevity and loyalty? Then allow employees to receive extra PTO days after a few years of continuous employment and let them carry over unused PTO days into the following year.
If you’re trying to make a splash in the hiring process, consider offering unlimited PTO immediately to new hires.
Before making that choice, though, you must decide if you should you offer unlimited PTO or standard/accrued PTO.
I strongly recommend against implementing unlimited PTO. As a CEO, I do not offer an unlimited PTO policy. I don’t believe it works well for the company or employees.
Your highest-performing workers often refuse to take PTO when there’s no requirement to take a minimum number of days off. They always find work to do or feel like they’ll fall behind if they leave. Then they end up burning out faster than they should.
Standard PTO works just fine for most companies and employees, and it is a solid foundation when building your company’s PTO policy.