Paid time off (PTO) and vacation are commonly offered employee benefits. While the two terms are often used interchangeably, there are differences between PTO and vacation time. Choosing the appropriate benefits affects employee recruiting and retention, labor law compliance, and compensation. Therefore, it’s important to distinguish between PTO and vacation time so you can create the best time-off policy for your organization.
What is PTO?
“Paid time off” is an all-encompassing term for when an employee is away from work but still getting paid as if they are there. Rather than having multiple leave categories, PTO can include multiple excused absences, including personal time, vacation days, sick leave, and mental health days.
Each employee receives or accrues a specific number of PTO days in a PTO bank, and the company has a policy for handling it. The employer might front-load PTO days, such as offering employees 14 days at the beginning of each calendar year or on their hire date anniversary. Alternatively, employees may accrue or “earn” PTO based on hours worked. For example, an employee may earn ten paid days per year by accruing a specific number of hours per pay period.
Employees can use their PTO days as they wish. For example, the employee can take a five-day vacation on one occasion, a day off to attend a parent-teacher conference on another, and two days of sick leave recuperating from a sudden illness.
While PTO includes most kinds of paid days off, most employers create separate policies for time off that are out of the employee’s control. For example, a company may have a separate written leave policy for jury duty, long-term illness, bereavement, and disability.
Most organizations that offer PTO don’t require the employee to state a reason for taking time off. However, they are typically required to request time off in advance for non-emergency leave, and it is usually subject to a manager’s approval.
What is Vacation Time?
Vacation time is a more traditional type of leave. Unlike a PTO bank, vacation time strictly refers to time off an employee takes for vacations and does not include sick days. For example, the employee might use this time to go on holiday, staycation, or stay home to reconnect with family. Most employers offer paid vacation time where the employee continues to earn an income while they’re away from work.
Some companies offer a set amount of paid vacation days a year as part of a standard package. Others require employees to earn vacation days, similar to accrued PTO. You can use either model depending on your organization.
Vacation time is also less flexible than PTO banks. For example, many organizations’ vacation policies include clauses for how vacation time is allocated monthly, quarterly, and annually, leave request procedures, and vacation time eligibility. On the other hand, PTO is more flexible, requiring little more than advance notice and a manager’s approval for non-emergency leave.
Most organizations that offer paid vacation time also have other paid leave categories. For example, the company may provide separate time off for sick leave or personal and mental health days.
Ultimately, PTO can mean any type of paid leave, including vacation time. However, vacation time is only one type of leave time.
PTO Bank vs. a Separate Vacation Policy: Which is Better?
To recap, a PTO bank encompasses all types of time paid off, including sick leave, vacation time, and personal time off. On the other hand, vacation time is a stand-alone leave policy often paired with other leave policies for sick off and personal days.
Most modern organizations are moving toward PTO, and it is easy to understand why. If nothing else, an all-inclusive PTO is easier to administrate and track than separate leave policies; HR, managers, and employees only need to track one type of time off rather than different hours and procedures for sick, personal, and vacation days.
Combining leave types is especially attractive for startups and businesses needing more HR personnel to track multiple accruals. Larger organizations can also reduce their leave administration burden with a combined PTO policy. This strategy allows HR more time for recruiting and hiring, employee relations and compliance, and other essential HR functions.
Combining sick time and vacation days with other leave types helps build trust and transparency in an organization. For example, an employee might not be ill per se but doesn’t feel well enough to attend work. The employee might be exhausted or dealing with family issues, and they can still take the day off without lying about being sick to utilize sick days.
Furthermore, employees typically take more vacation time than sick days under a PTO bank policy. This means fewer unscheduled absences since employees can schedule vacation time or personal time in advance. Allowing regular breaks also creates a refreshed, productive workforce.
A PTO bank can also be an attractive recruiting tool. Many employees prefer to use their time off as they wish. For example, employees don’t have to disclose taking a personal day to sleep in or a mental health day after exhausting their vacation days. Many employees also appreciate the privacy of not having to specify why they need to take time off.
Finally, a PTO bank is the best policy for a multicultural workplace. Employees can take time off for religious or cultural holidays. For example, Eid al-Fitr, Diwali, Rosh Hashanah, and Yom Kippur aren’t federal holidays. A bank PTO allows employees to observe these holidays without worrying about the technicalities of what constitutes personal days or vacation time.
The Downside of Combining Vacation and Sick Time as PTO
While more companies prefer all-inclusive PTO, there are still instances where traditional policies that separate vacation time and sick time make sense.
For example, some companies have a toxic work culture where employees don’t take vacations, or taking time off is frowned upon. Rolling out a specific vacation policy can be a terrific solution for promoting a culture shift. The vacation policy can dictate that employees must take some or all of their vacation days by a specific date.
While some employees may abuse a sick time policy, a separate sick leave is still the best way to discourage employees from coming to work when ill. Many employees prefer to “save” their PTO days for vacation and may be willing to work while sick to save up their vacation days. Unfortunately, this practice can expose other employees to diseases and infections.
Transitioning from vacation time to PTO can also be expensive for companies with limited budgets. For example, you must still pay vacation time accrued under the old system before switching employees to the PTO bank program. In addition, the transition might mean high payouts before employees leave or retire, thus inflating the budget unexpectedly.
Organizations with a lean HR department may have similar problems transitioning from vacation time to PTO. HR needs to define time off notice requirements and times of year employees can or cannot take time off. Sticking to the old vacation policy might be better, especially if it has served the company well.
PTO can also breed resentment in organizations with a mixed workforce. For example, younger workers with no family obligations may use their PTO days for vacations and personal time. Conversely, parents might spend most of their PTO days caring for sick children, attending school events, and managing other parental responsibilities without being able to save time for real vacations. Designated sick days help level the field in this case.
Lastly, employees may have difficulties managing their time without designated vacation and sick days. For instance, employees may use their PTO bank days at the beginning of the year and exhaust their leave days for illness or emergency, causing issues when they become ill or injured and requiring additional days off.
What Employees Care About The Most
PTO vs. vacation time isn’t a deal breaker for most employees. Most workers care more about how much annual vacation time they get. So whichever policy type you choose, allow sufficient paid vacation time.
It’s important to note that most PTO policies provide slightly less time off than traditional paid vacation. It’s something to be conscious of if you offer PTO. For example, you may give new employees 15 PTO days for the first year, while a candidate’s current job offers 12 vacation days and nine sick days. It might be a tough sell if all other factors, like compensation, are similar to their current position.
Additionally, many employees want more than just PTO days, and it is one of Silicon Valley’s main recruiting tools. For example, many tech companies offer floating holidays, parental leave, mental health days, sick time, family leave, corporate holidays, and personal holidays in addition to standard PTO.
A separate paid leave policy for unexpected absences is also worthwhile. This is standard practice in big tech. Employees may be unhappy using potential vacation days for family emergencies or personal time. These provisions can help create a better work environment.
Why It’s Important to Distinguish Between PTO and Vacation Time
PTO and vacation time are often used interchangeably. However, each policy type has budgetary and legal ramifications. So, it’s essential to clearly define your policy type to avoid financial and legal liability.
If nothing else, this distinction is essential for legal compliance. Many state laws require employers to pay out unused vacation time when an employee leaves the company, whether voluntarily or otherwise. This scenario can play out differently depending on your policy type.
For example, PTO banks don’t separate sick time from vacation time. Therefore, all the accrued PTO time is subject to payout when the employee leaves. While the same applies to accrued vacation time, most states don’t require employers to pay out unused sick time.
The Colorado Wage Act is a terrific illustration of why defining PTO vs. vacation time is important. The law treats accrued vacation time as a vested entitlement, meaning you must pay out unused vacation or PTO time.
If an employee of company A has accrued 15 PTO days, they are entitled to the monetary equivalent of the 15 days when they leave. However, company B only has to pay out ten days if the employee has ten unused PTO days and five unused sick days.
Similarly, states like Louisiana and California are considered vested right jurisdictions. An employee cannot forfeit vacation or PTO days once granted or accrued. Therefore, employers cannot impose a use-it-or-lose-it vacation or PTO policy in those states.
Again, distinguishing between PTO and vacation time is critical in this case. This law doesn’t apply to paid sick leave. So separate vacation and sick leave policies can help minimize the accrual an employee can carry over into the following year.
Furthermore, some state laws extend to accrual caps. The California Division of Labor Standards Enforcement (DLSE) is a good example. The agency specifies a “reasonable” cap for limiting accrual. Therefore, California-based organizations may break the law if they impose an accrual cap below 1.75 times the annual accrual rate.
Definitions once again become important. There’s no legislation for capping sick time accrual. Thus, an organization can limit paid leave accrual by separating sick time and vacation instead of an all-inclusive PTO policy.
Although most jurisdictions focus on paid vacation time and PTO bank, others have paid sick leave laws. For instance, Santa Monica requires a separate sick leave policy regardless of how generous your PTO is. Therefore, you must expressly define PTO and sick leave provisions in your policy document if you have employees located there.
Some states and localities also have rules for sick leave accrual, accrual rate, eligibility, permissible uses, and carryover. For example, California doesn’t require employers to pay for unused sick leave, but the state requires employers to carry over unused sick leave to the following year.
Having separate vacation and sick leave policies adds to the administrative burden. For example, you must ensure both policies are compliant and track accruals, carryover, etc., for both policies. It might be easier to manage one PTO bank by combining sick time and vacation time.
Lastly, offering unlimited PTO doesn’t always mean that the employer isn’t required to pay out unused PTO upon the termination of employment. Again, Illinois is a good example. The Department of Labor stipulates that an employer must pay the vacation time an employee would have otherwise used under an unlimited vacation plan.
Of course, this scenario makes the amount of “unused” vacation time challenging to determine. One solution might be calculating the payout based on the employee’s average leave time in previous years. However, it’s easier to avoid unlimited PTO altogether in favor of a PTO bank providing a specific number of paid leave days.
Final Thoughts on PTO and Vacation Time
The first port of call when deciding between vacation time and PTO is your state and local laws. Many states have guidelines for PTO and vacation time accrual, carryover, unused PTO payout, and minimum paid time off. So legal compliance is the primary consideration when creating a paid leave policy.
Lastly, it doesn’t matter what kind of paid leave policy you offer. The most important thing is to provide competitive benefits for your industry. So, providing ample paid leave days is critical whether you choose PTO or vacation time.