Writing a PTO policy? Read this first.

by Eddy Team — May 15, 2024

Creating or updating your company’s paid leave policies might not be the most exciting thing you’ll do today, but a recent study confirms it remains top of mind for your employees. PTO consistently ranks as the second most important benefit after health insurance.

Because PTO benefits employees’ mental, physical, and spiritual health, it's no surprise that employers want to create satisfying and generous PTO plans. Turns out that making sure your people regularly take time off is key to creating a more sustainable workplace with healthier, happier employees.

Because PTO is so important both for business and employees, we’ve created this article to help you determine what PTO policy is right for your business. We’ll take a close look at what PTO is and review the benefits of different options.

PTO Definitions

Here are some of the most common words and phrases that relate to PTO.

PTO (Paid Time Off): PTO refers to a company’s leave policy that allows employees to take time off from work while still receiving pay. PTO typically includes vacation, sick leave, paid holidays, and personal time.
Carryover: The process by which employees can transfer unused PTO from one year to the next. Policies typically limit the amount of PTO that can be carried over to prevent excessive accumulation.
Accrual: The process of earning PTO over time. Employees accumulate a certain amount of PTO hours based on the number of hours worked or time period employed.
Accrual Frequency: The regular interval at which PTO is added to an employee's PTO balance. This could be weekly, bi-weekly, monthly, or another set period.
Milestones: Specific points in time or criteria used within a PTO policy that trigger a change or benefit, such as increased accrual rates after reaching a certain length of service.
Unlimited: A type of PTO policy where employees are not limited to a specific number of days off but are generally expected to ensure their work responsibilities are met. These policies rely on trust and promote work-life balance.
Cycle Date: The starting date of a new accrual year or period in a PTO policy, which is significant for calculating accruals, carryovers, and other aspects of PTO management.
Waiting Period: A designated period of time that a new employee must wait before becoming eligible to use accrued PTO. This is common in many companies' onboarding processes.
Max Balance: The maximum amount of PTO an employee can accumulate or carry in their PTO bank. Once this cap is reached, employees must use some of their PTO before accruing more.
Payout: Payout refers to the process where an employer compensates an employee for accrued but unused PTO when the employee leaves the company or under certain other conditions specified in the PTO policy. The payout amount is typically based on the employee's current rate of pay and the total amount of unused PTO hours. Some states require organizations to pay out unused PTO upon termination of employment.

Types of plans

Two of the most common types of paid leave are Traditional Leave plans and PTO Bank plans. Each of these approaches offers distinct structures and benefits, catering to different organizational cultures and employee needs. We’ll first talk about the differences between the plans, and then walk through where each is more common.

Traditional Leave Plans

In Traditional Leave plans, various types of leave such as vacation, sick days, and personal days are allocated separately. Each category has its own accrual and usage rules, which means that employees have designated days for specific purposes. The benefits of Traditional Leave Plans are:

Clear Distinctions: By separating vacation, sick, and personal days, these plans make it easier for management to track the purpose of absences, facilitating more straightforward administrative processes.
Discourages Hoarding: Employees are less likely to hoard days since they can't save up one type of leave to use for another purpose, leading to more consistent usage throughout the year.
Specialized Usage: These plans often reflect a traditional approach to employee benefits, where specific needs like sickness or personal emergencies are separately acknowledged and accounted for.
Preventative Health Care: Encourages employees to stay home when sick without impacting their vacation days, thus preventing the spread of illness and promoting a healthier workplace.

PTO Bank Plans

PTO Bank plans consolidate all types of leave into a single pool. This means that employees have a total allotment of days that they can use for any purpose, whether it’s for vacation, sickness, or personal matters. The benefits of PTO Bank Plans include:

Flexibility: Employees appreciate the flexibility of using their time off as they see fit without having to justify the reason or fit into specific categories of leave.
Simplicity in Administration: Simplifies the HR administration of leave as there is only one type of leave to track and manage, reducing paperwork and policy complexity.
Enhanced Privacy: Provides privacy concerning the reasons for absences, as employees don’t need to specify if they are sick or taking a personal day.
Potential for Increased Satisfaction: Can lead to higher employee satisfaction and morale, as employees feel trusted and valued with the freedom to manage their own time off.

Traditional Leave plans offer more control and clarity for specific leave types, PTO Bank plans provide greater flexibility and simplicity, which can be more aligned with contemporary work environments that value autonomy and work-life balance.

Overall about 50% of paid leave plans are traditional-type plans. But PTO Bank plans have been gaining popularity in recent years. PTO Bank plans are considered more modern and are favored in many dynamic industries like technology, where they align well with progressive workplace cultures that prioritize employee autonomy and simplified administrative processes.

Traditional Leave plans, however, are more common for organizations with unionized workers or in regions with specific legal requirements for sick leave. These plans are often found in government, education, and more traditional corporate settings, where structured policies are necessary to meet regulatory compliance and operational needs.

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Unlimited PTO

Unlimited PTO (sometimes called flexible PTO) provides employees with an “unlimited” amount of paid time off that they can use for vacation, sick leave, or personal matters. Unlike traditional or PTO bank systems, there is no specific cap on the days employees can take off, provided they meet their work responsibilities, and also that their manager is willing to approve the PTO request. Unlimited PTO offers the following benefits:

Flexibility and Autonomy: One of the biggest benefits is the flexibility it offers employees to take time off when needed without worrying about depleting their PTO balance. This autonomy can enhance job satisfaction and morale.
Attract Talent: Especially attractive to top talent in competitive fields, unlimited PTO can be a major draw for prospective employees looking for progressive workplaces with substantial work-life balance.
Reduced Administrative Burden: For the company, this policy can simplify the administrative workload related to tracking PTO accruals, usage, and remaining balances, cutting down on HR overhead.
Focus on Productivity: By emphasizing results over hours, companies encourage a performance-oriented culture where the primary concern is the work being done, not the time spent in the office.

Unlimited PTO is particularly popular among startups and technology companies where workplace flexibility is a key part of the company culture. But despite its benefits, unlimited PTO is not without controversy. Without clear guidelines, employees may actually take fewer days off under unlimited PTO plans, either because they feel uncertain about what is deemed acceptable or due to high workplace demands.

In addition, in a high-performance culture, employees might feel pressured to keep working despite the availability of PTO, especially if taking time off is perceived as a lack of dedication. Because this sense of pressure varies from person to person, there can be inconsistencies with some employees taking much more time off than others, which can lead to perceptions of unfairness or resentment.

Because of these challenges, some organizations are adopting modifications such as requiring a minimum 3-week vacation policy to encourage teammates to recharge away from work.

Accrual vs Lump sum

When it comes to granting workers time off, employers can give employees all their PTO allotment up front in a lump sum, or they can allocate it in smaller increments throughout the year.

Lump sum

In a lump sum system, employees are granted their entire year’s allotment of PTO at the beginning of the year or on the anniversary of their employment start date. For employees starting part way through the year the allotment can be prorated.

Lump sum can simplify administrative tracking since the PTO is distributed all at once and not accrued over time. It's also easier to calculate during the onboarding or termination of employees. For Employees lump sum provides immediate access to the full amount of PTO, offering flexibility for early-in-the-year vacations and allowing for better personal planning and emergencies.

Critics of this approach point out that it can encourage employees to take longer vacations, increasing the workload for the rest of the team. In addition, a new hire could use all their PTO early in their new employment, then quit.

Accrual

In an accrual system, employees earn PTO hours progressively throughout the year, based on the number of hours they work or the length of their service. This means that PTO accumulates over time, usually with each pay period.

Accrual systems are more common because they provide a balanced approach, rewarding ongoing employment and minimizing potential financial and operational risks for the company. They are seen as fairer from a cash-flow perspective and prevent situations where an employee uses all their PTO then leaves the company shortly after.

Limits on accruals are also common. A company’s policy might enforce a maximum accrual amount to encourage workers to take time off and also to avoid an extra large PTO payout. Here are some examples of limits placed on accrual plans:

Use It or Lose It: "Use it or lose it" policies refer to a rule where employees must use their accrued PTO within a certain timeframe, typically within the calendar year, or they forfeit the unused time. This means if the PTO isn't used by a specific deadline, it disappears and cannot be utilized in the future. This type of policy is designed to encourage employees to take their allotted time off each year and can help employers manage financial liabilities associated with accrued time off.
Carryover Cap A carryover cap limits the amount of PTO that an employee can carry over into the next calendar year but does not necessarily mean the excess must be forfeited. For instance, a company might allow employees to accrue 20 days of PTO per year and carry over a maximum of 5 days into the next year. Any accrued days beyond this cap may either be forfeited or, in some cases, paid out, depending on company policy and local labor laws.
Max Balance: A max balance policy sets an upper limit on the total amount of PTO an employee can accumulate at any given time. Once this maximum balance is reached, the employee cannot accrue any more PTO until they use some of their accumulated time. This is similar to a carryover cap but applies at any time during the accrual period, not just at the end of a year.

Some states have specific rules. For example in California, employers cannot implement "use-it-or-lose-it" policies. All accrued vacation time is considered earned wages and must be carried over and paid out upon termination. In Illinois, recent amendments to the Illinois Wage Payment and Collection Act require that employers reimburse employees for all unused accrued vacation pay upon separation, regardless of the reason for separation.

How much is too much?

The amount of paid leave you should offer will of course vary. Your company size, location, and competitive practices in the local market all come into play. However, there are general ranges for what might be considered low, medium, and high amounts of PTO.

These ranges can include all forms of paid leave such as vacation, sick days, and personal days, especially if the company uses a PTO bank system. SHRM research on paid leave programs found that companies with PTO bank plans typically offer 13 to 26 days of leave. For policies that allot separate categories for vacation, sick, and personal leave, the averages for full-time employees were 8 to 22 days for vacation, 7 to 19 for sick leave, and 4 personal days.

Low Range—10 days or fewer per year: This is generally on the lower end for full-time salaried employees. It might be more common in industries with higher turnover rates or smaller businesses with tighter budget constraints. New employees, especially in their first year with a company, might also fall into this range.

Medium Range—15 to 20 days per year: This is a typical range for many companies and is often seen as a balanced offering that is competitive for retaining and attracting employees without being exceptionally costly for the company. It allows for adequate vacation along with some sick/personal days.

High Range—25 to 30 days per year: Considered a generous amount of PTO, this range is often found in companies that place a high value on work-life balance, aiming to attract top talent and decrease burnout and turnover. This range is more common in senior positions, companies with a strong focus on employee benefits, or in European countries where longer vacations are the norm.

Some companies find a balance in these ranges by offering Tenure-based Increases, using employment milestones. For example, an employee might start with 15 days of PTO but earn additional days after certain milestones, such as each 5-year anniversary.

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See how Eddy can simplify your HR processes

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Document & Communicate your policy

Creating and communicating your PTO policy effectively is essential. It should be clear and understandable for employees. And also be easy for you to manage and be legally compliant.

Key Elements to Define in a PTO Policy

Eligibility: Clearly specify which employees are eligible for PTO (e.g., full-time, part-time, temporary, or seasonal workers). Mention any exclusions, such as contractors.
Accrual Method: Detail how PTO is accrued. Specify the rate at which employees earn PTO (e.g., hours per pay period, days per year) and whether accrual starts immediately upon employment or after a waiting period.
Accrual Caps and Balances: Define any maximum accrual limits or carryover rules. Explain how much PTO can be carried over into the next year and the maximum amount of PTO an employee can accumulate.
Usage Rules: Outline how and when PTO can be used. Specify any rules regarding the minimum amount of time that can be taken at once, any blackout dates during busy periods, and any notice requirements for scheduling PTO.
Requesting PTO: Explain the process for requesting PTO, including how far in advance requests should be made, any required forms, and how conflicts (e.g., multiple requests for the same period) are handled.
Approval Process: Describe who approves PTO (e.g., direct supervisors, HR department) and the criteria used to approve or deny PTO requests.
PTO Upon Termination: Specify how unused PTO is treated upon termination of employment. State whether PTO is paid out or lost and under what conditions, depending on local laws.
Special Types of Leave: If applicable, include information about other types of leave that might interact with PTO, such as parental leave, jury duty, bereavement, and sick leave.

Best Practices for Communicating the PTO Policy

Employee Handbook: Include the PTO policy in your employee handbook, which should be distributed to all new hires as part of their onboarding package. Make sure the language used is clear and easily understandable.
Company Intranet: Post the PTO policy in a shared company space accessible to all employees. Consider a FAQ section that addresses common questions about the PTO policy.
Training Sessions: Conduct training sessions to go through any updates or changes. These sessions can help clarify any points of confusion and allow employees to ask questions in real-time.
Managerial Training: Ensure that all managers are well-versed in the PTO policy as they are often the first point of contact for employees’ questions. Managers need to understand the policy fully to enforce it fairly and consistently.
Regular Updates and Reminders: Send out regular communications about the PTO policy, especially before peak vacation seasons, to remind employees of how to request time off and encourage them to use their PTO.
Feedback Mechanism: Provide a way for employees to provide feedback on the PTO policy. This can help identify areas of confusion or dissatisfaction and allow the company to make necessary adjustments.

Sample Paid-leave Policy

Here is a sample policy for a fictitious company’s PTO policy:

ACME, Inc. Paid Time Off (PTO) Policy

Effective Date: [Date]

Applicability: This Paid Time Off (PTO) policy applies to all full-time employees of ACME, Inc.. This policy does not apply to part-time employees, interns, or contractors.

1. PTO Accrual

Full-time employees accrue PTO biweekly, which may be used for vacations, personal time, or illness. The details of the accrual are as follows:

Employees with 1-5 years of service accrue PTO at a rate that provides for 20 days of PTO per year.
Employees with more than 5 years of service accrue at a rate that provides for 25 days of PTO per year.

The accrual for new employees begins on their first day of employment. However, new employees may not use accrued PTO during their first 90 days of employment, unless otherwise approved by management.

2. Accrual Rate Calculation

For Employees with 1-5 years: Accrual rate is approximately 6.15 hours per biweekly pay period, equating to 160 hours (20 days) per year.
For Employees with more than 5 years: Accrual rate is approximately 7.69 hours per biweekly pay period, equating to 200 hours (25 days) per year.

3. Use of PTO

Employees are encouraged to use their PTO for rest, relaxation, and personal pursuits. To take PTO, employees must request approval from their direct supervisor at least two weeks in advance, except in cases of unforeseen illness or emergencies. Approval of PTO requests is subject to business needs and staffing requirements.

4. PTO Carryover

Employees can carry over a maximum of 10 hours of unused PTO into the next calendar year. Any unused PTO beyond this carryover limit will be forfeited without compensation, except where prohibited by law.

5. PTO Upon Termination

Upon termination of employment, unused PTO will be paid out according to state law. The payout amount will be calculated based on the employee's current pay rate and the amount of accrued, unused PTO.

6. Recordkeeping

Employees are responsible for tracking their PTO, and should regularly verify their PTO balances through the company's HR system. Discrepancies should be reported immediately to the HR department for resolution.

7. Compliance

ACME, Inc. complies with all applicable state and federal laws governing paid time off. This policy will be reviewed annually and may be updated as required by changes in law or business needs.

8. Contact Information

For questions or more information regarding this policy, please contact the Human Resources Department at hradmin@acmeinc.com.

Note: This sample policy should be tailored to fit the specific legal requirements and needs of your organization. It is also recommended to have this policy reviewed by legal counsel to ensure compliance with local, state, and federal laws.

How Eddy helps manage your PTO plan

Once you have a plan in place, a software tool such as Eddy makes managing your PTO plan simple and automatic. Eddy includes an accrual engine to manage all the math and handles things like employee requests, manager review and approval processes, includes a PTO calendar and a system to define your company holidays.

With Eddy it’s quick and easy to set up custom policies to automate the management of your employees’ time off accruals and tracking. You can create various policies. For example if you need unlimited PTO for the corporate office, but hourly accruals for warehouse workers? No problem. How about annual carry over limits and tenure milestones? Done.

You can create as many custom Time Off policies as you need.We support pretty much any type of time off you offer: paid, unpaid, vacation, sick, parental leave, bereavement—if you can dream it, Eddy can help you manage it.

Employee experience

Eddy’s streamlined time off management makes for a better experience for everyone. That includes any employee that is eligible for Time Off as well as any employee that manages time off.

With our super simple Eddy mobile app, your employees can easily see their own balances and request time off, right from their phone. Eddy keeps a complete history, including accruals, approved days off, and denied requests, so employees (and their manger) always know exactly what is going on with their time off.

Because it is so easy for employees to self-serve, your HR admins and managers are saved from answering questions about time off balances or doing paperwork to handle requests. Designated approvers get notified immediately via email or the app. Requests can be approved or denied with a single click.

Holiday Calendars in Eddy are set-it-and-forget-it simple. You can set up as many calendars as needed for your workers. Then you can add those calendars to your Time Off policies, and holiday hours will automatically be tracked and flow right into payroll.