Paid Time Off Programs Pay Off

For many small businesses, an employee’s absence can affect the entire company. While the price of lost productivity can be high, the cost of misused paid time off (PTO) is even higher. In an effort to reduce unexpected or excessive absenteeism and to curb accrued vacation time carryover, PTO banks — which combine vacation days, sick days, personal days, and, in some cases, holidays, into one lump of time that employees can use for any reason — are gaining popularity with employers.

Traditional Program vs. PTO Bank

PTO is defined differently by different organizations. Traditionally, vacation days, sick days and personal days are segmented. Vacation time is intended for pre-planned leisure. With many traditional programs, unused vacation time can be carried over from year to year, or paid in lieu of taking the time off. Sick and personal days are usually more restrictive, with “use it or lose it” provisions. This arrangement can result in employees pretending to be sick, just to avoid losing paid days off and often at inopportune times for the company, customers and co-workers. Productive employees who do not play sick end up having less paid time off. Absenteeism is rewarded – not punished - in this system. The traditional method is simply not fair to the company or the conscientious employees. What’s more, three sets of policies can triple the amount of administrative time spent in categorizing, approving and calculating employee time off.

Increasingly, companies are combining these forms of time off into a “bank” of PTO, intended to be used for a variety of purposes. The bank provides additional flexibility for employees, who basically manage the bank and can use the time for whatever purpose they see fit. This flexibility can be an attractive recruiting tool. In general, unused PTO days can be carried over to the next year; however, employers may want to consider putting a cap on the total days that can be accrued. Many traditional PTO policies state that any unused sick days must be used by a set deadline the following year, or an employee will lose the time. PTO banks can reduce the amount of unnecessarily “calling in sick.” By not setting conditions on what time off is used for, employees can provide advanced notice to managers and make a plan for covering necessary job functions while they are out. When considering transitioning from a traditional program to a PTO bank benefit, several questions should be addressed:

How much time should you offer employees?

Most US employers offer workers 10 paid holidays, 10 days vacation, 2 personal days and 5 sick days per year. Under a PTO plan, the employees would be credited with 27 days paid time off instead (10+10+2+5). It is critical for the business owner to examine his or her operation to determine what is financially feasible in terms of the total number of paid days off for all employees in a given year, and its impact on productivity. For example, if employees were entitled to 30 paid days off per year and a business has 20 employees, they would need to consider how having employees absent for a total of 600 days per year will impact the operation or how work might be planned and scheduled to accommodate the absences. This might also be expressed in dollars based on how the company measures its productivity or labor costs

How to calculate/accrue the time?

Most PTO policies accrue time on a regular schedule. For most employees – even hourly workers – time can accrue per month or per pay period. For example, given the basic 30 day entitlement, the employee would be entitled to 2.25 days per month of work. This structure is critical to calculating how much time off an employee has available and what is reasonable to pay upon termination. Most payroll companies can help you keep track.
It may be well known in a company, even without a written policy, that employees receive two weeks vacation per year when they begin employment, three weeks after two years tenure, and so on. However, an employee who resigns may have had an offer letter that promised two weeks’ vacation. If the employee resigns within four months, the company may be compelled to pay the entire two weeks, even though it’s normally assumed that vacation accumulates based on time worked. Many employers explain vacation accrual in new hires’ employee letters.

What is considered PTO?

Employers should define what will be considered PTO before implementing the program. Vacation days and sick leave may be obvious, but what about holidays? You also may want to define whether or not employees’ PTO bank will be docked for doctor’s appointments, snow days, or other issues that may keep workers from working.

What other issues may arise?

For many business owners, the idea of spending a large amount of time setting up a PTO policy may be unappealing. Automation software can be helpful with these administrative matters, but can never totally replace effective communication and day-to-day management of the policy with employees.

The business owner must decide: 1) how and who will keep track of all the time off request data; and 2) what procedures may need to be implemented for employees to request time, for managers to approve time, and for reporting the time taken to payroll. Typically, the need for a more detailed policy grows with the number of employees.