Paid time off (or PTO) is one of the many benefits employers may offer to employees. Although PTO is not required by federal law, giving employees some time away from work has been proven to be overwhelmingly positive for both the worker and the company. In fact, over 73% of businesses offer PTO to their employees, and the average employee takes around 10 days off work each year.

If your business is considering implementing a PTO plan, we’d highly recommend it. There are a few different types of PTO plans to choose from, so you’ll want to carefully consider the best plan for your company.

In this article, we’d like to focus on companies who choose an accrual-based PTO policy. This type of PTO plan is most common among small businesses, and there’s a few key decisions that go into creating an accrual-based PTO policy.

We’ll review what those are so that you can build the best plan possible for your company.

An accrual-based PTO policy is one where an employee receives a designated amount of time off after the passage of a certain amount of time.

Unlike “unlimited” PTO plans, employees can not simply take time off whenever they’d like. Instead, PTO is accrued or earned over time and then the employee can draw from their account when they’d like to take time off.

Within an accrual-based PTO policy, there are five key questions you’ll want to answer before rolling the plan out to employees. The five keys center on the following:

We’ll dive in and explain the significance of each of the questions and what you should consider when creating your PTO plan.

When creating your PTO plan, you’ll first want to ask yourself about the accrual frequency. We’ve seen companies do this in many different ways, so you’ll have to consider the best option for you.

The first (and the most simple option) is to grant employees their PTO hours once each year. This is called a lump-sum grant. This method of accrual drastically simplifies the time and effort that both the employee and the company will exert in calculating PTO.

Let’s look at an example to illustrate this idea.

Lucky Lanes Bowling Alley has 20 employees. At the beginning of each year (on January 1st) they grant each employee 80 hours of PTO for the year. During the following 12 months, employees will be able to request time and draw down from the 80 hours they’ve accrued until they have no time remaining.

Another option is to allow employees to accrue PTO after a short passage of time. You could create a system where once a week or once a month, every employee accrues a designated amount of PTO hours.

For example, let’s pretend that Marco’s Pizza Restaurant has 15 employees. Each month, all 15 employees receive eight hours of PTO. An employee who works at Marco’s for 12 months would accrue 96 hours of time off (eight hours for each month worked).

A third option when considering accrual frequency is to allow employees to accrue time based on the number of hours they work. In the previous example, all 15 employees at Marco’s Pizza Restaurant earned the same amount of PTO based on a designated passage of time (one month) and not based on the number of hours worked by the employees.

Some companies like to use hours worked in order to reward employees who work more often.

Let’s look at an example of this accrual frequency in action.

Jane’s Jewelry has four employees. Two of the employees are part time, and the other two are full time. Jane’s Jewelry has an accrual-based PTO policy where an employee may earn three hours of PTO for every 40 hours worked. The two part-time employees work 20 hours each week. After two weeks of work, they accrue three hours of PTO. However, the two full-time employees both work 40 hours each week, and therefore it only takes one week for them to accrue the three hours of PTO.

Many employers like this system because it rewards employees who work more often, and the systematic accrual based on hours worked is more fair.

The final accrual frequency you might consider is one where employees earn micro-amounts of PTO every day based on hours worked.

In the Jane’s Jewelry example, employees could only accrue time after working 40 hours. But in a micro-accrual plan, employees can earn a small amount of PTO every single day they’re clocked in.

For example, the fictional company Renovation Retailers has 50 employees. They have some employees who work as little as 10 hours each week, while others log significant overtime and work up to 50 hours in a week. Renovation Retailers uses a micro-accrual policy where all employees earn 0.10 PTO hours for every one hour they work. Employees do not need to wait until they’ve worked a certain amount of hours before accruing PTO. Instead, they’re rewarded with micro-accruals every day.

While many employees favor this kind of policy, it can be a headache for the HR team to handle. Without excellent PTO software in place to manage the policy, you’ll likely lose track of all the micro-accruals very quickly!

As you can see, there are a lot of options when it comes to accrual frequency! This is probably the most important choice you’ll make when creating your accrual-based PTO policy. Spend some time considering each of these options and then decide what’s best for your business.

We’ve already mentioned this a few times in the paragraphs about accrual frequency, but accrual amount is simply the number of hours you grant to employees at each accrual.

When considering how many hours to allow your employees to accrue each year, we recommend thinking about the following things.

First, ask yourself how important it is to recruit and hire truly great people to come and work for your company. If you need elite talent or highly skilled workers then you’ll be competing with many other businesses for those employees. Offering generous amounts of PTO is one way to attract great talent.

"Ask yourself how important it is to recruit and hire truly great people to come and work for your company."

Second, you’ll want to determine how PTO fits into your company’s business structure. If your business literally cannot afford to have certain people miss extended periods of work, then you might offer less paid hours away from work. However, if your company does not at least offer the national average of 10 days off, you’ll likely struggle to recruit and retain great employees.

Finally, you may decide to create different accrual schedules (as well as determine different accrual amounts) for part-time and full-time employees. Many companies create policies where part-time employees earn fewer PTO hours than full-time employees.

The next aspect of your accrual-based PTO policy to consider is tenure milestones. In many companies, employees who have worked at the company longer are either granted more frequent accruals or accrue more hours than the average employee.

For instance, in the Jane’s Jewelry example we walked through earlier, we established that Jane’s employees receive three hours of PTO for every 40 hours worked. However, one of Jane’s employees recently celebrated their fifth year work-anniversary at the company and Jane has decided to reward the employee’s loyalty with larger accrual amounts. Jane added a tenue milestone to her PTO policy so that employees with five or more years of service now accrue four hours of PTO for every 40 hours worked.

Milestones are incredibly easy to integrate into a policy. They’re also a fantastic way to reward long-tenured employees.

Milestones can be added after an employee’s first year work-anniversary, on the fifth year, on the tenth year, and anywhere else you might see fit.

The max balance is simply the maximum number of hours an employee can accrue. Some employers choose to cap accruals for various reasons.

One common reason is to encourage employees to use the PTO they’re accruing. If an employee never takes a vacation, it’s actually detrimental to their health, and negatively impacts the company. With a max balance, an employee cannot accrue more time off until they’ve used some of the time they have stored.

Another common reason is to cap an employers’ liability. In some states, employers are liable for the number of PTO hours accrued by their employees. If the employer were to terminate an employee who had 50 hours of PTO accrued, they’d have to pay out the equivalent of 50 hours worth of wages when the employee leaves the company. Because this can be incredibly expensive without a max balance, many companies choose to put a cap on the number of hours accrued.

"In some states, employers are liable for the number of PTO hours accrued by their employees."

One final decision you’ll make when creating your accrual-based PTO policy is in regards to carry-over limits. A carry-over limits dictates how many hours of unused PTO an employee can carry over from year-to-year.

Carry-over limits are common but are not universal. Many employers do not place a carry-over limit on PTO and allow employees to maintain their balance regardless of when the time was accrued.

Companies who use carry-over limits may do so in different ways.

Some companies designate a “max carry-over” that outlines the maximum number of hours an employee can carry from one year to the next. Other companies simply do not permit any carry-over and force employees to use the time accrued in the year it was allotted.

When thinking about a carry-over limit for your PTO policy, you should consider the accrual frequency. If your company gives lump-sum grants to employees at the beginning of each year, then it might make sense to have a maximum number of hours that they can carry over into the next year.

However, if your employees are accruing time based on hours worked, a carry-over limit might not make sense. Consider an employee who works from December 15th to December 30th. During that two week stretch of time, let’s pretend that they earned 6 hours of PTO. That employee will never get to use that time they’ve earned if they immediately brush up against a carry-over limit a few days later when the calendar turns to January.

The reasons for a carry-over limit are similar to the reasons for a max balance. If an employee knows that they’ll potentially lose the PTO they’ve accrued, they’re more likely to use it. Additionally, carry-over limits can reduce employer liability for unused time off.

"If an employee knows that they’ll potentially lose the PTO they’ve accrued, they’re more likely to use it."

Accrual-based PTO policies can take many twists and turns. There is no “best” way to create a plan. Each question needs to be answered while considering the other factors of the equation. The right PTO plan for one company will most certainly not be the right one for another. As you build out your plan, be sure to take your time. Think through each question individually and cohesively. As you do so, you’ll create a PTO policy that works best for your business.