What is PTO? Short for paid time off, it compensates employees during an absence from work. As policies shift and new benefits models emerge, it has become a hot topic in HR. PTO brings numerous benefits—like improving talent acquisition—as we’ll discuss.
Read on to learn best practices, and how to implement it effectively.
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PTO vs Vacation
Traditionally, companies separated vacation time from other forms of paid leave. Many still do. Let’s explore the differences between these types of plans.
A full 51% of companies use this type of plan, SHRM found. Such companies offer a certain number of vacation days and “sick days.” They may offer a separate number of personal days for things like appointments as well. They typically expect that employees will use vacation days in larger chunks of time (e.g., a week or two). Meanwhile, “sick days” are used as needed (e.g., for an occasional illness).
Combined PTO Plans
Other companies don’t separate “sick days” or other paid leave from vacation time. Instead, they combine them all into a set number of paid time off days. In other words, PTO provides for vacation time and all other personal days. If employees don’t need many sick days, they can use paid time off as extra vacation days.
These combined plans are usually simply called “PTO plans.” When we refer to paid time off plans or programs, that’s what we’re speaking of.
Benefits of Combined PTO
This flexible model for PTO is gaining traction quickly. In fact, 41% of companies use a combined paid time off plan. PTO provides paid leave for sick days, appointments, and other eventualities. Some companies may encourage employees to use PTO for volunteering. Importantly, paid time off allows for personal days that don’t relate to physical illness.
Reasons for the Rise of Combined PTO
Companies are becoming increasingly attuned to employees’ mental health needs, and PTO provides a more holistic solution than “sick leave.”
Why? The pandemic has blurred the lines between “sick days” and “personal time,” for one thing. Companies are realizing how vacations and personal time boost wellness. Taking a “mental health day” is gaining recognition as a legitimate use of time. Having one pool of paid time off days, rather than parsing them out into different purposes, simplifies matters.
Plus, it enhances employee privacy and shows trust. Employees can use PTO days at their own discretion.
Further, the importance of family priorities and holistic wellbeing is gaining recognition. Parents can use PTO to go to a child’s gymnastic competition or dance recital. Rather than having to claim illness to take the day off, they can simply use paid time off as desired.
Different PTO Models
Companies use a range of methods for calculating PTO. Here are several commonly used models. Some can be used together, like the accrual and rollover methods.
Increasing PTO with Seniority
In some companies, increased seniority brings more benefits. The longer employees work there, the more paid time off they receive.
Employees may accrue PTO hours throughout the year. In an accrual system, every day worked may lend a certain amount of paid time off.
At Humana, new employees have three weeks of paid time off, for instance. With each pay period, they can earn over seven more hours.
Some companies have rollover policies. This means PTO can be transferred from year to year. Deloitte has a rollover policy for employees’ 25 annual paid time off days, writes CNBC.
Some companies have a cashout option. At the end of the year, employees receive pay for a certain amount of unused PTO. Or, upon resignation or retirement, they receive this payment. The company must specify upfront what the cashout rate will be. Sometimes it is a certain percentage of an employee’s hourly (or daily) compensation).
Buying and Selling PTO
Some companies allow employees to “buy and sell” PTO, notes Glassdoor. American Express has such a policy. Buy/sell policies involve a system of trading paid time off. In exchange for selling PTO, employees receive extra compensation. Those who purchase paid time off pay (or take a salary cut) for additional time off.
This new concept has gained ground in recent years. It involves putting no caps on the amount of PTO employees take. Obviously, this shows a high level of trust in employees’ judgment. In a survey of 200 companies, U.S. News found that 20% offer unlimited paid time off.
“Unlimited PTO is often used by companies that have high achieving cultures,” writes U.S. News. “That sort of company’s leadership probably knows that most ambitious team members will not take excess advantage of the unlimited PTO.”
One advantage of unlimited paid time off is that it eliminates the need for tracking PTO. This reduces HR’s administrative load, notes Forbes.
Importantly, 50% of U.S. workers would choose unlimited PTO over a salary increase, a Fortune survey found.
In addition to PTO programs, some companies offer a sabbatical option. Adobe allows for a paid sabbatical every five years, notes Glassdoor. Their sabbaticals can last from 4 to 6 weeks, depending on seniority. This provides time for professional development, relaxation, or personal interests.
How to Use PTO Effectively
Here are several best practices for using PTO:
- Make sure your policy complies with state regulations. Ensure it compares favourably to competitors’ plans as well.
- Ask employees to schedule paid time off in advance when feasible.
- When using PTO for vacations, employees should seek approval first. In other words, they shouldn’t just schedule a last-minute week-long vacation.
- Let employees use paid time off in hourly increments when they don’t need a full day.
- Encourage employees to schedule vacations at less busy times. If they plan vacations during peak seasons, team performance could suffer.
Now, let’s look at how much PTO you need.
How Much PTO Do Employees Need?
You may be wondering how much PTO boosts productivity and satisfaction. First, let’s look at the average paid leave employees receive.
More than ⅓ of employees in private companies received 10 to 14 paid vacation days in 2021 after working there for one year. After ten years, 33% received 15 to 19 days of paid vacation, says the BLS. After one year of working for a company, employees also received an average of seven sick days.
The number of sick days tended not to increase over time. However, vacation time increased with seniority, the BLS shows.
Paid time off also varies by profession and industry—there’s no magic number. Survey employees on their preferences. You can then tailor plans to their needs.
Advantages of PTO
What are the benefits of paid time off? We outline four big ones!
Recruitment & Retention
An attractive PTO policy can help draw top talent. Plus, it helps retain good employees. A paid time off program rewards them for their loyalty and hard work.
Having adequate breaks from work helps prevent burnout. When employees can mentally and physically unwind, they return more engaged.
Use analytics to watch how PTO boosts engagement. Primalogik’s software provides detailed reports on the ROI of any program.
Using PTO (or vacation days) will help employees recharge. When they return to work, they have renewed energy. “Taking time off improves the capacity to learn,” writes Forbes. “When your brain is completely relaxed, it consolidates knowledge and brainpower.”
Use performance-tracking software to see how paid time off policies affect productivity!
Health and Wellness
Ultimately, the benefits of PTO come down to health and wellbeing. Taking vacation days lowers stress—and risk of serious health conditions like heart disease. That directly relates to improved engagement and performance. Plus, it improves overall quality of life!
What if employees are using PTO in a way that negatively affects the organization? HR should then discuss the matter with them. Here are a few such scenarios:
- Employees are using paid time off for unplanned vacations.
- Employees are using large amounts of PTO when they have a backlog of work.
- Employees are rarely using their paid time off (and may be burning out).
Are there specific drawbacks of unlimited PTO? Yes, but it’s not what you might think. It can actually lead employees to take less time off.
Why? “There’s no ‘use it or lose it’ incentive to expend their allotment of days off,” writes Forbes. “Plus, many workers are worried about appearing to abuse the privilege of unlimited PTO.” No one wants to look like the slacker on the team, after all.
Further, unlimited paid time off doesn’t offer a suggested number of days that employees take off. This can enhance the fear of overstepping. Having a set number of days can provide a helpful guideline. Moreover, it instills a cultural norm.
Encouraging Use of PTO
Some companies offer generous PTO but discourage employees from using it. Their paid time off policy “looks good on paper” to new hires. However, a culture of working overtime urges people not to use paid time off. Plus, having an unfair workload can prevent employees from stepping away.
In such situations, employees fear the repercussions of taking time away. They may fear they won’t look dedicated or loyal.
Instead, build a workplace culture that encourages use of PTO. Here’s how to begin:
- Encourage managers to set an example by using a reasonable amount of paid time off.
- Make sure workloads are reasonable, so employees can take breaks.
- Share clear guidelines on best practices for using PTO, like those stated above. Include them in your employee handbook. Send an email update if your policy has changed, too.
- Offer a clear process for requesting paid time off in advance.
- Give employees incentives to use PTO. Some companies offer a bonus in exchange for using a certain amount of paid time off. Evernote provides a bonus when people take off five days in a row, says Fortune.
- If employees aren’t using their PTO, ask them why. This helps instill a cultural norm of using paid time off. HR can have one-on-one conversations with such employees.
SHRM offers a paid time off leave request form. You can use it in your organization to streamline the request process.
As you can see, generous PTO policies are important to today’s employees. They offer numerous benefits for companies as well. By keeping employees happy, you’ll boost productivity and performance.