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What is PTO?

Written by: Elizabeth Walker
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Published on October 12, 2022.

As an employer looking to hire new talent or retain your existing employees, it’s important to offer fringe benefits including paid time off, also known as PTO.

Offering PTO is a crucial element of a healthy and attractive workplace. When employees take PTO, productivity is increased and burnout is reduced. In fact, Forbes1 lists PTO as a highly valued employee benefit to have at your company if you want to stay competitive.

Because PTO is so important, if you’re not currently offering your employees enough time off, you may struggle with attracting new workers and retaining the staff you already have. However, like other employee benefits, the ins and outs of PTO can be confusing at first.

In this article, we’ll walk you through how PTO works, common types of PTO benefits and strategies, and why making a generous PTO plan a priority at your company is advantageous.

Want to read more about fringe benefits? Check out our guide for more information

What does PTO mean?

The term PTO describes any time employees are paid when they’re not working. Traditional paid leave policies typically include a few different categories of leaves, such as vacation, sick time, personal days, and paid holidays.

Under this method, employees are given a designated amount of leave per category and can earn additional time off based on how long they’ve been with the company. For example, and employee can earn more vacation time every one, three, or five years.

However, PTO is a more modern approach to the traditional way of offering leave. PTO rolls all paid leave categories—such as vacation, sick time, personal time, holidays, and more—into one category.

Employees may receive 20 days of PTO each year, which they can then use on whatever they choose. According to our 2022 employee benefits survey, 79% of small and midsize employers surveyed offer PTO.

Some companies may prefer a traditional leave policy if they want to understand how employees use their time off. But for employees willing to give their employees more freedom to choose for themselves, PTO better provides that flexibility.

What are the common types of PTO?

There are many different types of paid leave categories that can be included in your overall PTO policy. While you can choose whichever works best for your business and employees, below we’ve listed the eight common types of leave you can include in your PTO policy.

1. Paid vacation

PTO and paid vacation policies are often used interchangeably, but they’re not quite the same. PTO is any time an employee is paid while away from work, so it includes more than just vacation. To make it easy, vacation time is PTO, but not all PTO is vacation time.

Paid vacation days are usually planned in advance, requested, and approved by a supervisor or manager. Employees typically use these days to relax, recharge, or simply take a few days of break from working.

Your PTO policy should include guidelines on when your employees can take vacation time (if your industry has specific requirements or blackout periods), how early they should give notice to their supervisor, and how work should be managed in their absence.

2. Paid sick leave

Paid sick leave is another PTO benefit that is just as popular as paid vacation time. It allows sick employees to take time off to recover from health issues, like an illness or an injury.

On a federal level, no requirements mandate you to offer paid sick leave. However, many states now require employers to provide a certain amount of paid sick days either based on company size or how many hours an employee has worked. So it’s essential to check your state requirements when designing your PTO policy.

3. Paid holidays

Paid holidays include national holidays or specific days off that an entire company observes. Some states, like Texas, include state holidays as paid holidays for state employees.

Employees don’t request time off for paid holidays since they’re usually already declared as paid days off for the whole company. If a holiday falls on a weekend, employers can choose to designate the previous Friday or the following Monday as the paid day off to observe the holiday.

4. Paid family leave

If you’re an employer with 50 or more employees, the Family Medical Leave Act (FMLA) requires you to provide up to 12 weeks of unpaid, job-protected leave to eligible employees to care for a family member with a serious health condition. However, employers of any size can also offer paid family leave outside the FMLA.

This is typically leave for employees to take care of a family member, such as a newborn baby, newly adopted child, or someone with severe medical issues. Maternity and paternity leave can often fall under this bucket as well.

5. Paid personal time

Like vacation time, “personal time off” is often used interchangeably with “paid time off.” But personal time off is a category that falls under the PTO umbrella. Personal time includes any time an employee takes off to handle short-term activities, like doctor's appointments, bank visits, car repairs, attending a child’s school events, etc.

6. Paid bereavement leave

Bereavement leave is time off taken by an employee due to the death of a close individual, usually a family member. This time off is given so they can have time to grieve their loved one, attend a funeral, and/or manage other post-death arrangements.

Employers typically don’t pay employees for bereavement time. They may instead offer a few days each year of unpaid time for bereavement. However, you can provide a certain number of days for paid bereavement leave in your PTO policy if you choose.

7. Paid military leave

Military leave is time taken off for an employee to serve on active duty or attend military training. To be eligible for military leave, the employee must offer advanced notice, written or verbal, of the upcoming military service or training.

Federal military leave policy doesn’t require employers to pay employees while on military leave. Employees can use their PTO for military-related absences if they wish, but employers aren’t allowed to require that they use their PTO for the leave.

Additionally, employers must maintain the employee's position and restore all pay and benefits when the employee returns from leave.

8. Paid jury duty

Many companies provide paid time off for employees to report for jury duty. However, it isn’t mandatory for most states.

Some states require employers to pay employees, in part or in full, for jury duty while others prevent employers from creating policies requiring employees to use their PTO for jury duty. Many states also prohibit employers from docking pay or PTO when an employee serves jury duty.

Each state has its own jury duty service laws, so make sure you understand the laws in your area.

How is PTO typically structured?

There are a few standard ways you can structure your PTO policy at your organization. We’ll explain what those are in the sections below.

Set number of days

The first way to structure your PTO is with a set number of days per year. For example, you may allow employees 20 days of PTO upfront starting on January 1 of a given year for them to use whenever they wish, whether it’s for sick leave, personal time, or a vacation.

If you want to delay PTO benefits for new hires, that’s also an option. You can place new hires on a probationary period for a certain amount of time, like their first 90 days of employment, before they receive their 20 days of PTO for the rest of the year.

You may also choose to increase the number of PTO days for employees who have been with your company longer.

Accrued time off

Accrued time off lets employees accumulate a certain amount of PTO for each pay period. It’s often used with hourly workers, so they can earn PTO based on how many hours they worked during a given period of time.

For example, if you offer your full-time employees with less than two years of tenure 13 days of PTO a year, each biweekly pay period they will accrue four PTO hours, if they work a 40-hour workweek. Employees can only use the time they’ve accrued up to the current date.

Employers often choose to let all unused accrued PTO expire at the end of the calendar and reset their employees at the beginning of the year with a zero-hour balance. This is known as a “use it or lose it” policy.

Rollover allowances

Another way of structuring your PTO is by allowing rollovers from one year to the next. This gives your employees a chance to use their unused PTO days the following year if they didn’t have the opportunity to use them in the current year.

For example, if you have an employee who has only used ten of their 15 days of PTO one year, five days would roll over to the following year. If you give a set amount of PTO at the start of each year, your employee may start the new year with 20 PTO days.

However, you may set a cap on how many hours employees can rollover each year before they start to lose unused hours.

Unlimited PTO

Lastly, there’s unlimited PTO. This structure is the latest form of offering PTO as it gives employees the freedom to take off as much time as they want as long as it’s approved by their supervisors and they still complete their work on time.

Unlimited PTO is typically given to exempt, or salaried, employees over hourly employees. This is because salaried employees are paid regardless of the time they take off. Some employers may also be concerned that their employees will abuse the unlimited policy, and therefore may be hesitant to use this strategy.

However, if used properly, unlimited time off can strengthen the trust relationship between managers and employees, attract talent, and improve employee satisfaction2.

What are the advantages of offering PTO at your organization?

Federal law doesn’t require most U.S. business owners to offer paid time off, but that doesn’t mean you shouldn’t do it. Offering PTO at your company is an excellent way for you to stay competitive in the job market so you can hire and retain the best workers.

Part two of our employee benefits survey found that most employees, particularly younger employees, consider PTO a “very important” benefit, with 93% of employees valuing it strongly.

Other advantages offering include:

  • Improved manager/employee relationships: Instead of cashing in allotted sick days for vacation time and other personal matters, employees can use their total PTO allotment at their discretion without being dishonest or their employer looking down on their reason for taking time off.
  • Greater transparency: Employers typically receive more notice about scheduled vacations and can plan for adequate coverage. When employees can allocate their PTO days accordingly without having to use sick days, employers have more notice for time off, allowing them to fill in absences without any last-minute stress.
  • More productivity: A positive and inclusive company culture encourages the use of PTO so employees can take breaks and return to work more refreshed and productive.
  • Flexibility and employee satisfaction: PTO allows employees to use paid time off when they most need it. This flexibility goes a long way toward greater work-life balance, making employees feel more satisfied with their job.

How does PTO work with hourly and salaried employees?

PTO can work for both non-exempt and exempt employees. But managers need to know how to process time off requests accurately. Non-exempt employees are only paid for hours worked, but exempt employees receive their salaries regardless of time worked.

Let’s look at how you can manage these two groups at your company, so you remain in compliance with federal law.

Hourly employees

The accrual method is the best way to allot PTO for your hourly employees. This is because companies with a significant amount of hourly workers tend to have a high employee turnover.

It may be easier for you to budget your PTO with the accrual method instead of setting the money aside at your employee’s start date, and the employee decides to leave soon after.

The following is a step-by-step method of PTO for hourly employees:

  1. PTO for hourly employees will be accrued every biweekly pay period.
  2. Employees earn an hour of PTO for every 30 hours they work.
    1. You can decide if you want to give more hours of PTO for every year an employee remains at your company.
  3. When your employee requests PTO, they can only use the amount they have accrued. They’ll be paid for their time off at their standard hourly rate.
    1. Hourly employees should be held to the same time-off request standard as salaried employees, such as requesting time off in a reasonable amount of time so their work will be covered during their absence.

Interns, independent contractors, part-time employees, and temporary employees are typically not eligible for PTO.

Salaried employees

If you have exempt, or salaried employees, you must pay them for their full workweek, typically 40 hours, regardless of PTO. You can deduct used hours of PTO from their balance, if you don’t have unlimited PTO, but their total pay rate remains the same.

This is because the Fair Labor Standards Act (FLSA) requires exempt employees to be paid a fixed weekly salary that can’t be reduced based on the quality or quantity of the employee's work.

However, pay deductions are permissible under FLSA regulations for salaried employees in specific situations, like if they have exhausted their PTO benefits. For clarity, these situations should be outlined in the employee’s contract of hire and your employee handbook. Plus, you should check your state’s laws before making any deductions.

Do employers have to payout an employee’s PTO if they leave their organization?

There aren’t any federal laws mandating PTO to be paid out; however, PTO payout laws vary by state. This means that some states require employers to pay out PTO upon employment termination, but some don’t.

Without a state law or company policy requiring PTO to be paid out, you’re not obligated to pay your employees for unused PTO if they leave your business.

However, some states, like California, require employers to pay out accumulated and unused PTO when an employee is terminated unless the employer shows the employee had the opportunity to use the vacation time before termination.

Because each state is different, it’s important to check your PTO payout laws for your state to ensure your payout structure is in compliance.

Conclusion

PTO programs give your employees more power and flexibility when determining their work-life balance, which makes the benefit a major selling point for today’s workforce. It’s a good way to recruit top talent, increase productivity, and encourage your employees to take time off to recharge and recover—without worrying about losing pay.

The way you structure your PTO will vary based on your business needs, size, state, and industry. But it’s worth taking the time to put a policy in place and outline it in your employee handbook. Whatever method you choose, your employees will surely value your company’s commitment to creating a strong company culture where they feel appreciated.

1https://www.forbes.com/sites/carolinecastrillon/2022/10/02/top-ten-most-valued-employee-benefits/?sh=7541613221ac

2https://www.betterup.com/blog/unlimited-pto

Originally published on October 12, 2022. Last updated October 12, 2022.
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