Creating the Best Paid Time Off Policy for Your Company

Creating the Best Paid Time Off Policy for Your Company

Paid time off is an important part of a company’s benefits package. Creating a paid time off policy that employees love will not only produce a happier, more productive group of workers, but it’ll also prove to be a competitive advantage in hiring top talent. Our goal is to help you understand what goes into a time off policy, and assist you in deciding what type of policy will be best for your company.
Compensation has notoriously given many HR professionals a huge headache. Instead of doing it all yourself, consider utilizing Eddy's payroll services to relieve the stress. Request a free, custom quote today to see how we can help you love your job even more.

What is a Paid Time Off Policy?

A paid time off policy is a plan that employers create to facilitate paid days away from work for their employees. Paid time off, also known as PTO, can come in many forms. The two most common categories for PTO are vacation and sick days. Some companies designate other categories such as paid days off for jury duty, community service, or even birthdays.
Today, it is common for a company to consolidate all of these different time off categories into a single category called PTO. This simplifies the process of managing hours accrued and hours used across categories.

What are the different types of Paid Time Off Policies?

As there are different categories of PTO, there are also different types of PTO policies that you may choose from. The four most common types of policies are as follows:
  1. Traditional/Accrual
  2. Allotment
  3. Unlimited
  4. Mandatory


This is the most common policy type and has been for a long time. The details of traditional PTO plans can change depending upon the company, but the general idea is this: Employees accrue a certain amount of hours of paid time off based on a specified criteria. That criteria can be related to the number of hours worked, or a certain passage of time (i.e. every 2 weeks).
For example, your company might adopt a policy that states that employees will be able to accrue 2.5 hours of PTO for every 40 hours of work they complete for the company. At this rate, an employee would be able to accrue 130 hours (or about 16 days) of paid time off by the end of the year.
Traditional plans also allow employers to create milestones, where an employee can accrue PTO at a faster rate if they’ve worked at the company longer.
In our previous example, we said that employees can accrue 2.5 hours of paid time off for every 40 hours worked. We might also say that employees who have been at the company for five years or longer can accrue 4 hours for every 40 hours worked. This could give long-tenured employees an additional 58 hours of paid time each year.
Creating these types of milestones is a great way to incentivize employees to stay at your company for an extended period of time, especially when the milestone accruals are generous.
"Creating these types of milestones is a great way to incentivize employees to stay at your company."
These PTO plans work well because they are directly correlated to the amount of work completed by the employee. However, accruals can be challenging to track without great PTO management software. If you don’t have software in place, the administrative cost of continually calculating and recalculating employee balances can be a nightmare. Luckily, there is plenty of great software out there that makes this manageable.
Another thing to consider when adopting a traditional or accrual PTO policy is that your company may be liable for the hours accrued by your employees. This means that upon termination, if an employee has a balance of hours remaining, some states require that the employer compensate the departing employee for that remaining balance.
Although many states do not require a payout of PTO liability, some companies have adopted the policy to pay this money out anyway, as a gesture of good will to their workforce.

Managing PTO accruals can be a headache! Eddy makes this easy.

Allotment PTO Policies

Allotment policies are similar to traditional policies in that employees are given a limited number of hours of paid time off each year. However, unlike traditional policies where time is accrued, allotment policies typically give an employee their allotment of PTO for an entire year all at once.
These allotments are commonly dispersed either on January 1st, on the employee’s work-anniversary with the company, or on another predetermined date that may align with the company’s fiscal year.
As an example, a company might allot each of their employees 120 hours of PTO on the first day of January each year. The employees are then invited to use the 120 hours throughout the year, and will be allotted another amount of time when January rolls around again.
Some companies allow employees to carry time over into the next year if they did not use their entire allotment in a given year. This allows employees who rarely take time off the ability to accrue a large balance. To deter against this, some employers might specify that there is no carry over, and others may create boundaries like a “maximum balance” that an employee cannot exceed.
Similar to the traditional PTO plans, allotment policies may need to be paid out upon termination depending on your state and company policies.

Unlimited PTO Policies

The concept of an unlimited paid time off plan is relatively new and has largely been popularized by startup and technology companies who are looking to gain a competitive recruiting advantage. Of course, the word unlimited is a bit misleading as most companies would never actually consent to an employee being in a constant state of paid leave. That said, the defining characteristic of an unlimited plan is that, unlike traditional or allotment plans, there is no balance of hours to track. Employees are simply granted the time off they need when they need it, and they (theoretically) do not have to worry about the number of hours off they take each year.
In general, the unlimited vacation plans offered are popular with job seekers and existing employees alike. Employees like to feel like they’re entrusted to make decisions about their own life and they see unlimited policies as a sign of empowerment from their employer.
These PTO plans are also attractive to company leaders because they greatly reduce the amount of time and administrative effort it might otherwise take to track PTO balances for their employees.
Another benefit from an employer perspective is that because employees do not carry a balance, they do not carry any liability that may need to be paid out upon termination. This means that, unlike traditional and allotment policies, employers are completely off the hook for remaining PTO balances.
But despite its rise in popularity, skeptics of unlimited PTO plans are beginning to push back.
Employees who function under unlimited plans are often confused by where the “line” is, and how much time they can realistically take off before it becomes a problem. In fact, a study published by Namely in 2017 said that “employees who were offered unlimited vacation took, on average, 13 days off a year, while workers with capped vacation days took, on average 15 days off.”
"Creating these types of milestones is a great way to incentivize employees to stay at your company."
So despite the exciting premise of unlimited vacation days, employees who participate in unlimited policies might actually be taking fewer days than if they were given a hard limit.
Another downside to an unlimited vacation policy is that employees who have tenure in the company are not rewarded by extra vacation days like they might be on a traditional or allotment plan.
Finally, the approval for time off often lies with an employee’s manager. An employee may have a manager that is bias, restrictive, or otherwise unwilling to grant an employee’s time off request. In this scenario there is very little recourse for the employee as they are not entitled to a certain amount of time off like in a traditional or allotment plan.
So while unlimited PTO policies certainly have plenty of upside, beware that there are downsides you also need to account for.

Mandatory PTO Policies

Mandatory PTO is a far less common type of policy and one that you likely haven't heard much about. Thus far, we’ve only ever heard of a handful of companies adopting such a plan, but we find the concept interesting and wanted to expound on it here. Mandatory PTO plans are a lot like allotment policies in that every employee is given a certain amount of time off each year. However, in a mandatory PTO plan, employees are actually mandated (or at least very highly encouraged) to use their entire allotment of time.
Why would a company want to mandate PTO? Well, many studies have shown the time away from the office is actually extremely beneficial for both the body and the mind. Employees often report higher levels of productivity after extended time off, and employers notice that their workforce is happier and more effective.
Additionally, some employers are concerned that certain employees may feel uncomfortable or afraid to take time off unless they have specific instructions to do so. By mandating employees take a certain amount of days off each year, no employee ever has to question whether or not they’re taking too much time.
Although the concept isn’t as popular as some of the other types of policies we’ve discussed, the idea of mandatory PTO seems to be catching on. Employees love it because it’s basically a guarantee of time away from work. Employers love it because they see the emotional, physical, and mental benefits it brings for employees. And although managing a mandatory policy has its fair share of scheduling and logistical challenges, it couples many of the benefits from the other three policies.

We help companies manage PTO policies, track time, and stay compliant.

Company Holidays

In addition to the type of PTO policy, you should also consider how holidays, both at the national and local level affect your company. Choosing which holidays to observe, and how many, may factor into decisions about how many days or hours you grant full-time and part-time employees.
Common paid holidays observed in the United States include:
  • New Year’s Day
  • President’s Day
  • Memorial Day
  • Independence Day
  • Labor Day
  • Veteran’s Day
  • Thanksgiving Day
  • Christmas Eve
  • Christmas Day
In addition to these nine days, some companies will grant paid days that are closely linked to these holidays. For example, many companies will not only give their employees Thanksgiving Day off, but will also give them the Friday following Thanksgiving as well.
The technology firm Adobe famously decided that they’d take two “company-wide breaks” each year. One during the summer around the 4th of July, and another during the winter around Christmas time. These “breaks” last up to a week and allow much of the company to enjoy an extended holiday celebration.
Just to show how every company differs when it comes to creating a paid time off policy, we compiled a list of companies you might recognize, as well as the type of PTO policy they've adopted:
Netflix - Unlimited
Facebook - Allotment (typically 20-30 days/year)
Basecamp - Allotment (18 paid days + 10 holidays)
Getaway - Mandatory
Amazon - Traditional/Accrual
Walmart - Allotment (Depends on position)
Eddy - Unlimited

Create a Paid Time Off plan that’s right for your company

So now that you have an idea of what you can do, the next step is to take an inventory of the pros and cons of each type of policy and determine what will be best for your company.
As you review your options, don’t hesitate to combine certain concepts or get creative. We know of some companies that use accrual or allotment policies for the majority of employees but have an unlimited PTO policy for executives. We’ve also heard of companies that do not technically mandate that employees take PTO, but they reward employees with a cash bonus if they do take the encouraged amount of days allotted.
However you decide to create a PTO plan, be sure it’s easy to manage and easy to understand. The last thing you want is to have all your employees confused by how many hours they can take or how to track their balance.
"However you decide to create a PTO plan, be sure it’s easy to manage and easy to understand."
When you roll out your plan, present it in detail to your employees. Take questions and make sure everyone is on the same page. Be clear and upfront about how employees are to make time off requests, how those requests will be handled, and how they’ll be notified about approval/denial of their request.
Paid time off is an extremely valuable, important benefit. We hope you’ll consider a generous PTO plan for the employees in your company!
If you still feel overwhelmed about PTO or compensation, let us help! Eddy's payroll services can take away the headache and make sure your payroll is done right every time. We'd love to give you a free, custom quote today.
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.