The complete guide to creating a PTO Policy

Last updated:
February 4, 2022
March 9, 2022
min read
Meenz Nautiyal
Nextiva
pto policy
Table of contents

Want to improve employee morale and reduce burnout? Consider creating a paid time off policy.

Paid time off, or PTO, is a transparent and fair way to manage employee leave. It helps employees and managers set fair standards and create a more productive atmosphere. And its flexibility can help your organization be more competitive in the job market and attract top talent.

There are an infinite number of ways to create a policy that works for your business.

Today, we’ll explore the benefits of a PTO policy and what matters most for an effective blueprint. We’ll share how to create a policy that fits your culture and team—plus how to choose a PTO tool.

Let’s get started!

What is PTO policy, and how is it different from vacation or personal days?

It’s easy to confuse a PTO policy with guidelines for personal days, sick days, or vacation time.

There are some specific differences which we’ll cover in a bit. But in general, PTO consolidates personal, sick, and vacation leaves into a single category. For example, under a PTO policy, an employee’s sick days and vacation time would count from the same bank.

According to the Bureau of Labor Statistics, 71% of employees in private industry professional and technical services have access to consolidated leave plans.

A PTO policy includes all paid personal time but usually doesn’t include bereavement, jury duty, or parental leave. There aren’t any federal guidelines about paid time off, but you’ll need to follow state and local laws.

PTOs are a particularly good option with the surge in remote hiring. Employees that work remotely appreciate flexibility. A traditional leave policy based on showing up at the office increasingly doesn’t make sense.

What are the benefits of a PTO policy?

There are plenty of reasons why businesses choose a PTO policy, such as:

  • An all-in-one system that’s easier to remember and follow
  • More flexibility for employee needs
  • A better way for companies to plan for staffing needs
  • Better productivity and morale
  • A modern and competitive policy for attracting talent

For employees, a unified PTO policy can be easier to remember and follow than separate policies for vacation, sick days, and the like. An employee only has to remember the total number of PTO days.

It’s also more flexible and accessible. Time off doesn’t always fall into a neat category, and PTO gives employees freedom on how they take time off. For example, a 2021 study showed 57% of Americans think their boss would think less of them for taking time off for mental health. A PTO policy can help reduce this stigma.

And it can be a fairer system, offering more leave to employees who’ve been with the company longer.

There are plenty of advantages for businesses. It creates a more organized system that’s easier to predict, with employees asking for time off in advance and without having to give extra information. These benefits make PTO policies perfect for organizations like multichannel contact centers that must keep a steady workforce without unexpected absences.

Multiple studies have also shown that employees are more productive when they take time off and that rest improves morale. Plus, since most employees enjoy the freedom of a PTO policy, it can become a great asset for employer branding.

How to create your own PTO policy

You can make thousands of variations to your PTO policy that matches your organization’s values, goals, and culture.

Here are a few elements that go into PTO and some of the most popular choices companies look at.

PTO system

There are four main types of PTO policies you’ll find across every organization. These can provide a helpful starting point to create your policy.

Accrual. In this method, employees earn time off based on hours worked. An employee’s tenure can often determine the amount of time off. For example, a recent hire might earn 2 hours off for every 40 hours worked. But an employee who’s been with the company for ten years might earn 4 hours for every 40 hours worked.

Allotment or bank. With this method, employees start each period with a set number of PTO hours. This is typically January 1st but is sometimes a work anniversary or the beginning of the fiscal year.

Unlimited. There’s no cap on the number of hours an employee can take off in this system. As long as an employee completes their objectives and gets approval, they’re allowed to take off as many days as they like. Startups like Netflix, Evernote, and Dropbox have brought attention to this PTO policy. However, only about 4% of businesses used unlimited paid time off in 2021.

Mandatory. This is the newest and least common system. Under it, employees must take a certain number of days off. This method responds to research showing employees feel overworked yet reluctant to take time off.

Accumulated paid time off

There are a few different ways to handle accumulated days. Some jurisdictions have clear rules about what employers can do with these banks of leave days. Be sure to research applicable legislation before setting your policy.

Rollover plan. With this system, employees can accumulate paid days off from one period to the next. In other words, an employee with five remaining days on December 31st still has those days on January 1st. This can provide freedom but can also be challenging for employers. Employees can accumulate leave for years and take off a month or more at a time—with full pay. Some employers include rollover limits or require giving notice far in advance for extended time off.

Use-it-or-lose-it. Under this method, employee days off don’t carry over to the next period. An employee with five leave days left on December 31st would have zero on January 1st. This encourages employees to use their time off but can lead to a cluster of time off requests toward the end of the year. A variation on this method is to pay a year-end bonus for each unused day, though this could lead to employees hoarding days instead of taking time off.

Unlimited. If you’ve chosen an unlimited PTO policy, there are no days to count, so employees don’t need to worry about using or saving their time off.

What leave counts as PTO (and what doesn’t)

If you’re serious about letting employees take time off, it’s a good idea to include more PTO days. A survey published in 2021 showed that employees felt more PTO was a better encouragement even than mandated time off.

Standard PTO includes time off for vacations, personal days, and sick days. But there are other types of time off you can choose to include or not include in your PTO policy.

Holidays. Most U.S. organizations offer time off during some federal holidays. Employees receive these days off, and those who choose to work on these days are often paid time and a half. Currently, most organizations observe the “standard six” holidays:

  • New Year’s Day
  • Memorial Day
  • Independence Day
  • Labor Day
  • Thanksgiving
  • Christmas Day

As workforces become more diverse, some businesses are replacing these standard holidays with floating holidays. Employees can use them for celebrations important to them rather than those observed by employers.

Setting floating holidays might require adjustments to your timesheet app. Employees who choose to work during company holidays may need to track hours manually. And employees may need to disable the app for all kinds of PTO to ensure they don’t return to work with “billable hours” that have been counting for days.

Community service. Some organizations also provide extra time for their employees to volunteer. This is often optional, with a cap on the total days for volunteering.

Bereavement. Typical bereavement policies offer employees 2-5 paid days off following the death of a close family member.

Jury duty and voting. Most state laws require companies to give time off to employees for jury duty, though it is commonly unpaid. Some businesses also choose to offer paid time off for voting.

Family requirements. According to the Family and Medical Leave Act of 1993, businesses must offer up to 12 weeks of protected leave in certain circumstances. These include caring for a child or seriously ill family member or recovering from an illness. Several state laws add additional requirements to the federal mandate.

Other considerations

There are a few additional factors that go into an effective PTO policy.

Start date. Typically, PTO policies don’t go into effect immediately for new employees. For example, an employee may need to be with the organization for two months before using their paid time off. And time may not start accruing for an employee until they’ve worked for a month.

Early notice. You’ll need to decide how soon in advance employees should request time off. Two weeks is a standard notice period.

Leave donation. Some organizations allow employees to donate their leave hours to other employees. This can be a way to encourage camaraderie and morale.

Resignation. Typically, organizations will pay for unused time off for employees who resign. Check with local laws, as states often dictate what should happen in this instance.

How to choose a PTO tracking system

No matter how simple your PTO policy is, it can be challenging to manage on your own. Keeping track of requests, approvals, and leave allocations for each employee is too complicated for a single person or spreadsheet.

That's where a PTO tracking system comes in. This type of software:

  • Saves your and employees time
  • Makes your policies easier to understand
  • Improves accuracy and reliability
  • Reduces paperwork
  • Creates more transparency
  • Saves money through automation and clarity
  • Streamlines employee leave in a single platform

There are plenty of options to choose from. As you decide what type of PTO software to use, pay careful attention to its capabilities. Will it work well with your company's policies?

You can also consider how it integrates with your existing software. The HR platform you’re already using may include PTO features. And most well-known PTO software integrates with other popular applications.

Some of the essential features to look for are:

Mobile-friendly. Choose a platform that works on any device. Ideally, choose a tool with a mobile app.

Document upload. Make it as easy as possible for employees to share documents, context, and information in their requests. Mobile apps with built-in scanning make this easy.

Real-time tracking. The best PTO software lets employees see how many hours they have accrued so far.

Analytics. When do most employees take vacations? Should you plan for flu season? Software with good analytics will help you understand and prepare for trends.

The bottom line on a PTO policy that’s right for you

Whether you’re looking to encourage time off, create a more straightforward approach, or make it easier to attract top talent, a paid time off policy can help.

Today’s employees are looking for fair, friendly policies that give them the freedom to create a healthy work/life balance. PTO policies are one way of empowering employees to enjoy time away from work.

There are a nearly infinite number of options you can consider as you create a policy. And the choices you make should reflect the values and goals of your organization. Look at the options and decide what kind of PTO policy makes the most sense for you.

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