A PTO accrual cap is the maximum balance of paid time off an employee can accrue, either in a given period or in general. You may have both an annual accrual cap (for example, employees can accrue up to 40 hours annually), and/or a maximum they can carry (for instance, employees can accrue up to 80 total hours). To learn more about PTO accrual, see this article. To learn about how PTO accrual caps work, and how to choose the right one for your company, keep reading!

There are a few key reasons why having an accrual cap is important.

The first step in any PTO policy is to define the term. You can separate PTO into multiple “buckets” like vacation time and sick time. Typically, sick time has different protections than vacation does, and combining them into one policy requires that both types of PTO meet all minimum requirements for both, which may mean being more generous. For example, in California, sick time is a protected leave with accrual minimums and specific regulations that must be met. It is not paid out at termination. Vacation is not required but does need to be paid out if the company offers it. If you combine sick leave and vacation time, you would need to meet the most generous requirements of both, meaning that upon separation you would pay out sick leave as earned wages. Combining sick and vacation time may be simpler to administer and reduce administrative costs. But separating them—managing each type of time off separately and with its own guidelines—may be more cost-effective in the long run. When you are structuring your policies, take your state's regulations into consideration and plan accordingly. Another part of defining PTO is deciding whether or not to take employee tenure into account. For example, employees with less than two years of tenure with a company may receive less PTO and a smaller cap than employees who have been with the company for 10 years. You may also choose to break up accrual caps by level within the organization (i.e. staff, managers, executives), or create hybrid situations where you give employees specific holidays plus a certain amount of time to use outside of those predetermined days.

Let's discuss three basic PTO policies you may choose to implement: PTO accrual as the same as annual accrual; allowing PTO accrual in excess of the annual limit, and offering unlimited PTO.

One option for a PTO accrual cap policy is to match the cap to the total annual accrual. For example, your policy allows employees to accrue up to 40 hours a year, rollover up to 40 hours a year, and never accrue beyond 40 hours each year. Employees who didn’t use any time in the first year would roll over that time but not be able to accrue more time until they use the 40 hours already earned.

A second option for your PTO accrual cap policy is to choose an accrual cap that is higher than the annual accrual. Your policy might allow employees to accrue up to 80 hours per year, rollover 120 hours, and then continue to accrue up to 120 hours. 120 hours is the accrual cap. This would allow employees to continue to accrue for a while, but eventually, they would need to use some PTO in order to continue to accrue more.

The last option is to have unlimited PTO. Unlimited PTO can be handled in different ways. One option is to choose a specific amount for employees to accrue each year and track that over time. For example, employees earn 40 hours per year, rollover 40 hours, and continue to accrue indefinitely. Another option is to not track PTO formally but to simply allow employees to take PTO as appropriate or requested. You may want to consider state laws or specifications, have a clear policy that specifies “reasonable” use of time off, and make sure that all managers and employees are consistent in their understanding and application of the policy. This can be a great benefit to employees and fosters trust in your organization.

Deciding what PTO cap policy works best for your company involves several factors. You must begin with legal requirements, of course, but the culture you desire, your overall benefits plan, and administrative factors all must be considered as well.

Consider state and local laws that impact your PTO policy. If you have employees in different states or countries, this may become complex. It is important to understand how these interplay with each other and how the laws of multiple states or jurisdictions affect your company.

PTO policies impact both recruiting and retention. Do you want to create a benefit to set you apart from your competitors in the war for talent, or are you looking for creative new ways to reward your employees? This can help you define how generous of a PTO cap you are interested in.

Tracking PTO is a considerable undertaking. Most companies use a Human Resources Information System, or HRIS software. If you are going to build a PTO plan into the system as opposed to tracking everything manually, you need to know what it’s capable of handling. Regardless of how you accomplish it, consider the cost of administering whatever policy you consider.

Consider the other benefits you offer employees or your Employer Value Proposition. Are you compensating employees above or below the market average? How rich are the healthcare benefits you offer, and what is the cost to employees as opposed to the company? What other types of compensation are you offering? Answering these questions may help you decide how generous your PTO accrual cap should be.