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We all know that paid time off is a very important benefit to offer, but how to structure the policy? PTO accrual caps can create a lot of uncertainty, and there are many factors to consider in the process of determining the right policy for your company. Read on for help.

What Is a PTO Accrual Cap?

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!

Why Having a Policy Around Accrual Caps Is Important

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

  • PTO as wages earned. Several states have laws that define PTO as earned wages, and as such, it is owed to the employee when they separate from the company. Having a PTO accrual cap ensures you will not be paying more than a specified amount when the time comes.
  • Encourages time off. Having an accrual cap encourages employees to take time off. Typically, companies’ PTO policies will cap at a certain amount, for example, 80 hours, until such time that an employee uses some time. Then it will continue to accrue up to the annual allotment. This encourages employees to take PTO, which in turn supports wellness, higher job satisfaction, and work/life balance.
  • Clarity. Having a policy around PTO accrual caps provides a clearly stated expectation of how employees need to manage their time off. It should also include information on how the information will be tracked. Having this policy brings clarity to individuals and helps them to manage their PTO wisely.

Defining PTO

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.

Different Approaches to PTO Accrual Caps

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.

PTO Accrual Cap = Annual Accrual

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.

PTO Accrual Cap Higher than Annual Accrual

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.

Unlimited PTO Accrual

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.

How to Decide Which Accrual Cap Policy Is Right for 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.

Legal Requirements

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.

Recruiting and Retention

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.

Administrative Considerations

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.

Overall Compensation Package

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.

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Questions You’ve Asked Us About Accrual Caps

Reasonable PTO is different for different companies and varies from 40 to 200 hours, depending on the size and revenue of the company, and taking into consideration employee tenure.

If an employee’s PTO reaches the accrual cap, they stop accruing until they meet the requirement to continue accruing. This is usually triggered by a specific date (calendar year or employee anniversary) or the use of already-accrued time below a certain point.

Colleen manages a team of HR consultants that work with a variety of industries, specializing in the fields of human resources, strategic planning, and human capital management. Colleen applies expert knowledge, industry experience, and relentless energy to solving companies’ issues. She is a member of the Society for Human Resource Management as well as women in leadership groups. She is PHR, SPHR, and SHRM-SCP certified. She has an awesome pet cat, Attila and, when she’s not working she loves to travel, enjoy the great outdoors, and volunteer with different local charities.

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