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What Every Business Owner Needs to Know About Paid Time Off

every business owner needs know paid time off
Daphne Blake

By Daphne Blake

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Paid time off is a topic that has received, and continues to receive much attention in human research circles. From articles titled Sneezy Does it- The Paid Time Off Debate Heats up, to studies highlighting the growing trends of Paid time off bank (PTO) systems vs traditional systems, there’s no shortage of material on this subject. For example, In writing this article I found myself swamped with hordes of material. It was overwhelming. It’s easy to feel lost when you’re bombarded with all this information. Do you feel the same? Do you have a ton of questions that need answering? Questions like.

a. What is PTO?
b. What are the benefits of PTO?
c. What are the drawbacks?
d. Do PTO Days carry over?
e. How do I implement a PTO policy?
f. Is PTO suitable for my organization?
g. What are the regulations on a per state basis?

We will answer these, and many more questions.

Now let’s jump right in…

So,What is Paid Time Off?

With PTO there is a traditional system and PTO banks. Traditionally, companies assign a predefined number of days for vacation, sick leave, bereavement leave, and personal days. This system involves compartmentalizing leave days and limits the number of paid days.

Many companies still use the traditional system despite its use having declined over the years as companies switch to PTO banks. Some reasons for switching are that with the PTO banks you’re not managing your employee’s reasons for taking time off. Rather, you’re giving your employees the flexibility and freedom to manage their own time off.

The new system gives your employees more paid time off. It does this by pooling together vacation, sick days etc. instead of having separate categories. Employees are then able to draw from a bank of hours/days. Consider the following - on average most employees in the states receive 10 paid holidays, 2 weeks vacation, two personal days, and 8 sick leave days. Under PTO banks, you’re required to credit employees with 30 paid days (10+10+2+8) and not ten.

Common Questions Delving Deeper

Now let’s delve a little deeper by exploring some of the common questions about paid time-off.

Am I required to pay for time off on holidays

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By law, this is not a rule. But, there are employers that choose to pay for certain holidays as they recognize the value of PTO in retaining employees.

What is the average number of PTO days I should offer?

This will vary among business owners and differs according to the length of service. Below is the average or common number of vacation days most companies offer-

1. After 1 year - 10 days
2. After 5 years - 15 days
3. After 10 years - 18 days
4. After 15 years - 20 days

The maximum amount is usually capped anywhere from 20-25 days. Take note, for new hires, the amount is usually anywhere between 5-10 days if you’re using the traditional system. For the PTO banks, 10-15 days is common. However, for a new hire who has lots of experience, he/she may negotiate more days.

A paid holiday occurs while my employee is on vacation. Should I credit him/her this day?

The short answer to this question is yes, you should. Most people regard this as good practice.

How do I deal with employees who take off unscheduled days, often before or after holidays?

The best way to handle this is to make it clear in your Paid time off policy and consistently enforce this. Another way is to enforce the idea of prior approval before leave.

What’s the deal with PTO donation programs?

Donation programs are on the rise and allow employees to voluntarily transfer their PTO days/hours to other employees who may need them (e.g. due to family emergencies). When implementing a PTO donation program you need to consider-

1. Who is eligible for donations?
2. How many hours donors are willing to donate?
3. What are the administrative implications (e.g. tax considerations)?

Do PTO days carry over? And how many carry-over days am I allowed?

Most employers don’t allow carry overs. If unused at the end of the year, these hours are simply lost. Although, some employers will allow it, with certain limitations. For example, some employers may specify an expiry date for these days.

The reality is that paid time off days accumulating over several years can be a heavy financial burden. In the end, you’re faced with a trade-off between financial cost and employee satisfaction.

Are my employees allowed to cash-out unused time?

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This is not common, but some employers offer it, paying out between 75%-100% of the value of PTO accrued.

Am I required to pay out vacation time when an employee leaves?

This is more common for employees that leave involuntarily e.g. retrenchment. Usually, it’s not the case when an employee chooses to leave.

What are the advantages and disadvantages of offering my employees unlimited vacation time?

First, it’s important to mention that unlimited vacation time is becoming more common among companies. Offering this works particularly well if your business culture is flexible. Administratively, it also limits the tracking of your employees. And for employees, it gives them improved flexibility and freedom.

Undeniably, there are drawbacks. For hourly employees, you may find it difficult to administer, and it also opens up your business for abuse – particularly if your company lacks a responsible and respectful workforce. Tracking important information required for certain programs like the Family Medical Leave Act (FMLA) is also more difficult.

Now, you may be thinking, 'I'm strongly considering offering a PTO program for my employees, but what are the benefits and advantages? And If I choose to implement one, how do I go about doing it?

Benefits of a PTO System

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There are benefits for both you and the employee.

Encourages Work Life Balance

If an employee spends the majority of his time just working, you may find that they develop resentment toward their job – and your business – as they have little or no time for family and friends. In the long run,this may even lead to burnout.

Paid time off allows employees to take a break when they need it and not live in fear that they won’t get paid when they’re not working. It affords them the opportunity to spend time with loved ones, attend to emergencies, and not infect everyone else in the office when they sick.

Attracting and Retaining Employees

PTO is a benefit that many employees look for. Pretend you’re an employee for a second. Let’s assume you’re applying for two similar jobs at two different companies. The salaries are the same and both companies want you. Which company would you choose? Probably the one that offers a better PTO policy. PTO programs allow you to attract and retain better talent. Employees are happier, have a better work-life balance, and feel valued. This has ripples effects on productivity and profits for your business.

Drawbacks of a PTO System

A PTO system is not without its drawbacks. Consider the PTO bank system. At its core it’s strength is that it lumps all leave days under one umbrella, whether it’s sick, vacation days etc. It’s easier to administer, and gives employees more paid time off. Yet, its strength is also its biggest weakness.

Employees often view all paid time off as vacation days. So, they don’t take time off when they’re sick. Instead, they bring their germs into the office, “infecting” more people, which negatively impacts the productivity of the office. Also, employees view it as a major benefit and will use all their time off, something that they would not have done in the past with more traditional systems.

Despite the drawbacks, there are plenty of benefits, and that’s why so many companies have adopted PTO, particularly the PTO bank-systems. Now you may be wondering, “How do I go about setting up a PTO system. Here are a few considerations.

PTO System Considerations

Paid time off can contribute positively to your business. However if not implemented and managed correctly PTO it will lead to abuse. Here are several considerations when setting up a PTO policy.

Company Culture and PTO Fit

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Will it work for you? Is it suitable for your business? The reality is that despite the many benefits of PTO policies – particularly PTO bank policies – they are not suitable for all companies and sectors.This partly explains why 66% of companies still adopt the traditional PTO system in the manufacturing industry, while 72% adopt PTO banks in the healthcare industry. Two different sectors. Two different systems.

PTO bank policies allow for flexibility and certain companies are not a fit, particularly larger companies. And for small business? Well, some cannot afford to lose a few employees regularly out of an already small workforce. But, be cognizant that some form of PTO policy is necessary to ensure happy, loyal, and more productive employees.

Establishing Clear Guidelines

Some questions to ponder over-

1. How do employees earn PTO?
2. How is it distributed?
3. How many paid time off days do employees receive?
4. Can they bank their PTO days?
5. Should PTO require prior approval?

These are just some of the questions you need to take into account. For any PTO policy, it’s imperative to establish clear guidelines from the start and communicate these to employees, particularly to new hires. This prevents any miscommunication.

Manage the People

ou need to recognize that you’re dealing with people. So, while you want to manage the program you also need to manage the people. If someone comes in sick, send them home! If someone doesn’t follow the PTO policy, discipline them

Consider Local Regulations

There are no federal requirements in the US on paid time off. Regardless, as a business owner you need to be cognizant of local regulations, as these will differ from state to state. For instance, In California, accrued vacation days don’t expire. Employers then need to pay these employees out for those days.

Final Thoughts

PTO programs are likely to remain a controversial topic in HR circles for a long time. As a business owner, it can be difficult to stay abreast of the conversation, norms, practices, and new rules and regulations. We hope that this post has shed some light on essential aspects you need to know about paid time off. While many business owners have adopted PTO banks – which offer many benefits – we recognize that they man not be suitable for every business, including yours. When implementing a PTO policy be wary of your unique circumstances, while balancing the needs of having such a policy in place to attract, and retain the best talent on the market.

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