A paid time off (PTO) policy refers to a company program that sanctions employee time off work without losing pay. Specifically, a PTO policy pools various time off, including paid vacation time, sick days, and personal time into one bundle. Employees can take time off for any reason without tapping into specific allotted days, such as vacation time or sick days separately.
For the most part, PTO policies are not specified. It is left up to the employees to decide the details of the policy. Unlike most advanced economies, US federal law does not require employers to offer paid time off. Still, employers understand the importance of PTO and are quick to offer this perk.
With a highly competitive job market, attracting and retaining top talent is a major headache for employers. Many employees cite employee benefits as a top consideration when looking for a job. An attractive PTO policy can be a great starting point for attracting top talent.
I will take you through everything you need to know about creating a strong paid time off policy in this guide.
Why Does a PTO Policy Matter?
A PTO policy is instrumental in creating a flexible workplace, boosting employee productivity, and encouraging a work-life balance. The details of the policy can vary from one organization to the next. However, there are many benefits to be gained from a successful paid time off policy.
What Does Success Look Like?
It’s not always apparent if your PTO policy is working as intended. But, there are a few success indicators that point to a successful procedure.
Fewer Unscheduled Absences
Many employers are already aware that employees tend to take a sick day on the Monday after their vacation. Since it’s impossible to approve sick days in advance, this practice leads to sudden and unscheduled absences.
Giving employees the freedom to schedule their time off can work in your favor in this case. The employee can request their Monday off in advance, allowing the manager to make arrangements to cover the absence. According to a study by the Alexander Hamilton Institute, 54% of companies that switched to a combined PTO policy enjoyed a 10% drop in unscheduled absences.
Less Time Spent Handling Time-Off Requests
From recruiting and hiring to administering benefits and ensuring compliance, the HR department has a lot on its plate. Following up with employees to confirm that the sick day was not a personal day is tedious and unnecessary. A PTO policy makes it easier for HR to handle and approve time-off requests and will be a much welcome relief.
PTO policies can also improve relations between employees, managers, and HR. Since employees don’t have to justify why they’re taking a day off, there will be less friction when requesting and approving time off. Also, employees won’t need to be dishonest if they need time off for personal reasons but have exhausted their personal days. This practice is common under traditional paid time off programs.
Better Quality Hires
It is hardly a trade secret that prospective employees value benefits like paid time off. According to Glassdoor, 57% of people report that benefits and perks are top considerations before accepting a job. An attractive PTO policy can help to boost the quality of new hires.
The job market is getting increasingly competitive, with prospective employees having more options than ever before. A firm PTO policy is a great way to single yourself out as a good employer. The positive effects of your policy will be felt long after onboarding new hires.
A sound paid time off policy also shows that your organization cares about its employees. Additionally, such a policy promotes a work-life balance, increasing employee loyalty and retention.
Improved Employee Morale
Overworking employees leaves them with less time to pursue their private interests and hobbies. This can quickly build resentment and push your top talent to explore other job opportunities. More considerate competitors would also be more than happy to entice your top talent with better hours and more flexible paid time off.
Additionally, overwork can cause employees to burn out. This often makes them ineffective and works at cross purpose to your productivity goals. The correlation between taking time off from work and increased productivity has also long been established.
Case Study – Netflix No Vacation Policy
Netflix kicked up a storm in the HR world when it implemented its no vacation policy in 2003. In actuality, it is an unlimited vacation policy, the brainchild of Netflix CEO Reed Hastings. Under this policy, employees can take as much time off as they need, when they need it.
According to Hastings, the idea came to him when an employee pointed out that the company did not track extra hours worked responding to emails after-hours or working online on weekends. But the company was keen on recording time off per year.
This revelation led Hastings to scrap the traditional fixed vacation time to favor a free-for-all unlimited time off. According to Hastings, the new PTO policy has reduced bureaucracy and administrative costs, increased employee satisfaction, and has been instrumental in attracting and retaining top talent.
The daring Netflix PTO policy hasn’t been without hiccups. There was an incident of an employee taking time off during the busiest time of the year, dramatically slowing down the accounting department. To this end, Netflix had to create the context for taking vacation time. This context included creating expectations of what is reasonable and fair and giving team members advance warning for looming lengthy vacations.
A far more pervasive yet unforeseen consequence of the unlimited vacation at Netflix was employees taking less time off. Hastings attributed this trend to employees working under workaholic managers fearing taking time off. According to these employees, they felt taking time off may be construed as not pulling their weight. The CEO remedied this issue by taking at least six weeks of vacation a year and talking about it as often as possible.
Despite the challenges, Netflix reports a net positive from its unlimited PTO policy. Other notable companies that have jumped on the unlimited vacation bandwagon include General Electric, Sony Electronics, Evernote, and Hubspot.
While unlimited paid time off may not be appropriate for your organization, this Netflix case study highlights the importance of a flexible PTO policy. As a final note, Hastings observes that employees are more likely to behave appropriately when given the freedom to make the right choices.
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One Secret Weapon To Master Creating a PTO Policy
HR software has been a game-changer for Human Resource management around the world. This software handles everything, including hiring, onboarding, compensation, company culture, offboarding, and of course, PTO policies.
Zenefits is exceptional all-in-one HR software with robust PTO features to help you create the best policy for your organization. This software lets you create your time off policies from scratch. You can also create multiple policies and switch employees between the policies when you want.
You can also choose between limited and unlimited PTO policies with Zenefits. The software offers additional features to handle every aspect of your PTO policy, including:
- Tracking balances for different types of time off
- Importing time off balances
- Setting and changing time off accrual rates
- Tracking time off accrual
- Defining holidays
- Creating time off rules
- Notifying employees of their assigned time off policy
Zenefits cheapest plan costs $8 per month per employee and includes all the time off tracking features you’d need to create and enforce a successful PTO policy.
4 Essential Strategies for Creating a Successful PTO Policy
There is no such thing as a perfect PTO policy. Differences in company culture, state laws, employment contracts, and industry standards affect the type of PTO that would work well for your specific organization.
Still, there are 4 strategies that you can implement to ensure you come up with a solid PTO policy that addresses your specific organization and workforce.
1. Re-Think Your Traditional PTO Policy
On the surface, a traditional PTO policy makes sense. Allot your employees set time off divided into categories like sick days, vacation, and personal days. However, many organizations are moving away from this module in favor of more flexible policies.
Traditional PTO can make tracking and reporting PTO unnecessarily complex, burdensome, and costly for HR. Top talent who are interested in work-life balance may also shy away from companies with rigid PTO policies.
So, what are the alternatives?
PTO Banks
PTO banks work very similarly to traditional PTO but with one significant difference. While employees still get a fixed number of paid time off in the year, these days aren’t delineated between vacation days, sick days, or personal days. Employees can take time off for whatever reason as all the days are grouped into a single time-off bank.
This strategy allows employees the freedom to organize their personal lives while still meeting their targets. Additionally, PTO banks are less burdensome to employees, managers, and HR personnel. Finally, PTO banks offer attendance information that HR and managers can use for resource and workforce planning.
Accrued PTO
Accrued PTO is also another alternative to traditional PTO policies. In this case, employees earn time off based on their years of service or how many hours they work. For example, an employee may accrue four PTO hours for every 40 hours worked. Most organizations that use this policy set a cap on the number of PTO hours an employee can accrue.
Such a policy can encourage employees to work harder to earn their time off. Time off can also be a rewarding experience in this case. However, sick employees may be more likely to come to work to avoid wasting their hard-earned days off.
Unlimited PTO
Unlimited PTO is also steadily gaining popularity, especially in the tech space. This policy doesn’t allot employees a specific number of days off but instead allows them to take time off as needed.
In most cases, employees don’t need to report or track their time off. HR and managers are left to approve days off at their discretion. This policy effectively shows employees that you trust them to manage their work and time off. Additionally, sick employees are less likely to come to work in an attempt to save their PTO days.
Finally, unlimited PTO means less paperwork for managers and HR, giving them more time to focus on other business needs. Contrary to what most managers may believe, employees typically don’t abuse unlimited time off. Research shows that employees are less likely to take days off under an unlimited plan.
In most cases, however, a PTO bank makes the most sense. Consult with HR and individual managers to come up with a PTO policy that best fits your organization. It’s also worth speaking to your employees about what they want.
2. Make Your PTO Policy Clear and Understandable
It’s in everyone’s best interests if your PTO policy is clearly defined. Ideally, employees shouldn’t have any questions about what is permitted and what isn’t. This is especially the case with unlimited PTO, where employees may not be clear about how much time off they are reasonably allowed to take.
Where possible, share your PTO policy with all employees. In Zenefits, for example, you can create customized time off policies for all your employees. This feature is helpful if your time-off policy is based on tenure. Many employees prefer this strategy since it rewards employee loyalty. Zenefits also allows you to share your PTO policy with employees, so they know exactly what to expect.
3. Consult Your State Laws
Even the best meaning PTO policy may be against state laws. This can put you at risk of litigation, so it’s always a good idea to consult your state laws when developing or changing your PTO policy.
For the most part, federal law doesn’t mandate employees to offer a time-paid off policy. Additionally, federal law doesn’t require employers to pay out unused vacation time. However, things might be different in your state.
For example, some states require employers to pay for unused PTO days that an employee accrues. In this case, an employee can request to be paid for PTO days that they haven’t taken. Additionally, some states set a specific PTO payout rate that employers must use when calculating the total payout for an employee.
Finally, some states like California have mandatory PTO rollover requirements. This means that unused employee paid time off days roll over into the following year. Also, stay up to date with your state’s PTO laws. These laws tend to change and are amended fairly often, so it’s necessary to stay current.
4. Speak to Your Employees About Taking Time Off
Just because you have an attractive PTO policy doesn’t mean that your employees will take advantage of it. The benefits of taking time off from work are well documented. These benefits include better mental health, lower stress, and improved productivity. Therefore, it’s essential to encourage your employee to maximize their PTO.
The Netflix case study we referenced previously is a perfect example of what can happen when an organization doesn’t push workers to take time off. Employees may also have certain reservations about taking time off if the practice isn’t overtly encouraged by higher-ups.
A Glassdoor survey confirms this claim, citing various reasons why employees don’t exhaust their vacation time. These reasons include fear, guilt, and workplace pressures. It’s worth opening a channel of communication between managers and employees. Managers can encourage employees to take time off and dispel any fears that they might have.
Most Common Mistakes When Designing a PTO Policy
Creating a successful PTO policy takes time, consultation, and forethought. However, there are a few common PTO mistakes worth noting. This way, you have a good chance of creating a solid policy right out of the gate.
Not setting attendance expectations: If you constantly have to deal with last-minute absences, there might be a problem with expectations. At the very least, you should expect predictable attendance at work. This expectation also applies to unlimited PTO. Consider setting out these expectations in your PTO policy and include them in your employee handbook.
Being unaware of attendance trends: It is vital that HR keeps accurate records of attendance. You can use these records to notice attendance trends. For example, you might find employees often miss the Monday after their vacation or take time off at the beginning of summer or at the start of the hunting season. These insights can help you adjust employee schedules or request early notice.
Inconsistent PTO policy application: Some supervisors or managers may show favoritism when applying your PTO. Others may be careful to avoid conflict that may arise from attendance issues. Whatever the case, insist that managers apply your PTO policy consistently. It also helps if there is a documented process that managers can use to approve or deny PTO requests.
Not encouraging workers to use banked time: Your employees may not be getting the proper encouragement to use their banked time. This can harm morale, mental health, and job satisfaction. This practice can also increase the cost of paying out time off if this is part of your policy.
There isn’t a perfect template that you can follow to create a PTO policy. However, some overarching themes are worth paying attention to when designing or changing your policy. These include open communication, collaboration, and advance notice. Employees are less likely to resist the policy if they feel it’s in their best interest.