Creating a Paid Time Off (PTO) Policy for your small business

Creating a Paid Time Off (PTO) Policy for your small business

What is PTO?

PTO refers to paid time off work. It can refer to separate vacation days, sick or personal time-off policies, or it can refer to a single policy offering “paid time off” that can be used for any of those reasons. PTO policies allow companies to define a pool of paid days off that selected employees can use however and whenever they want.

Why you should offer PTO.

There are a lot of reasons to offer employees PTO. One of the big reasons is to attract top talent to your company. Who wouldn’t want to work at a company where you can get paid even when you take time off for personal needs or just to recharge your batteries?
PTO helps give employees a better work/life balance. The flexibility to work with the personal needs of employees is critical to job satisfaction and retention. A recent study by the Society for Human Resource Management (SHRM) proves it. According to SHRM, 63 percent of employees view paid time off as one of the top three employee benefits influencing their job satisfaction.
For employers, PTO can help reduce unscheduled absences and improve employee morale. Managing PTO with a modern software tool like Eddy can save employers a lot of time and effort. Most employers would agree that offering PTO is important, you just need to do it in the right way so it doesn’t become a pain in your neck.
A 2016 poll done by the National Federation of Independent Business gives some interesting ideas about how you can implement PTO.
“The vast majority of small employers (73%) offer paid time off (PTO) to the majority of their full-time employees, and 67 percent of them offer two weeks or more of leave. The number of days offered is dependent on an employee’s length of service in 76 percent of small businesses offering the benefit.” 1

PTO vs. Vacation vs. Sick Time

Paid time off benefits can be managed in a variety of ways. In the past, companies often offered PTO in categories, usually vacation time and sick time. These days, a lot of companies are shifting to a more generic model where all paid time is included in a single category.
There are benefits and drawbacks to both time-off models. Let’s explore them a little bit.
Generic time-off plans give employees more flexibility with how they use time off. It also gets rid of any excuse to play sick, which is nice. On the other hand, there’s always the chance that employees could use all of their time-off for vacation during the summer months, then when they get the bug that’s going around at the end of the year, they get into trouble.
Dividing your time-off plans into vacation plans and sick plans put you in the opposite situation. It might help your employees be a bit more careful with how they use their time, but it opens the door for gaming the system.
As with most things in business, there’s no right-for-everyone answer. Deciding on a plan will likely come down to individual characteristics of your company like culture and size.

Do you have multiple time-off policies? Manage them easily and effectively.

How to define a time-off policy

You have a lot of flexibility in how you define your company’s PTO policy to best attract the top available talent, but there are some things to consider as you define your PTO policy. Make sure to take into account things like your business objectives, local laws, and limits that your tools may have.
Here are some other things to take into account as you define your policy.

Company Holidays

At Eddy, we take our holidays seriously. We have top-notch company celebrations, but there are also holidays we celebrate by staying home. Most US companies offer seven or eight company holidays. At Eddy, we observe the following:
  • New Year’s Day
  • Memorial Day
  • Independence
  • Labor Day
  • Veteran’s Day
  • Thanksgiving Day
  • Christmas Eve
  • Christmas Day

Who's Eligible

According to the 2016 NFIB Research Center study, 73 percent of small employers offer PTO to most full-time employees, and 38 percent of small employers pay overtime to everyone who works more than 40 hours a week.
That said, it’s up to you to define which employees are eligible for PTO. Part-time workers often participate based on hours worked rather than work anniversary accruals.

How to earn PTO

The Accrual Method

The accrual method lets you choose the number of PTO hours an employee receives based on how much they work. For example, a policy can specify an employee will accrue (receive) four hours of PTO for every two weeks of work. Through Eddy these accrual dates can be timed to coincide with your payroll dates.

The Lump Sum Method

Another option is a lump sum. This plan is pretty simple. At the beginning of the year (or at the employee’s work anniversary) the employee is given a specified number of days of paid time off.


A third option that is becoming more common is an unlimited pto polixy where the employee can request an unlimited amount of time off. This model offers the benefit of flexibility to the employee and to the employer the benefit of not having to treat accrued paid time off as unearned wages, since there is no accrual. It’s also very attractive to job seekers.

Consider Local Laws

When determining the appropriate PTO policy for your small business it’s important to get legal help from your attorney. Different states and even cities have laws regulating some aspects of paid time off.
The National Conference of State Legislatures reports that ten states and Washington D.C. currently require paid sick leave, but no federal laws require employers to provide sick leave. Keep in mind also that if your business has more than 50 full time employees, you’ll need to offer FMLA benefits.
In addition to sick time, some states view accrued paid time off as unpaid, earned wages that the business must pay to the employee when the employee quits or leaves. You can minimize this by defining a maximum balance for your PTO policies or by paying out unused time.
Local laws can also apply to waiting periods for PTO accrual or usage.For more details, you can check out this guide to local and regional Department of Labor programs and services provided by the U.S. Department of Labor.

Do you get overwhelmed with time-off requests? You no longer need to.

We'll deliver HR articles and insights directly to your email inbox.


1 Employee Compensation and Small Business
Eddy's HR Newsletter
Sign up for our email newsletter for helpful HR advice and ideas.
Simple and accurate payroll.
Pay your U.S.-based employees on time, every time, with Eddy.