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Among the benefits that employees want from their employers, paid time off (PTO) is often at the top of the list. Everyone needs time off to regroup and recharge their batteries — or take care of things in their personal lives — and the availability of PTO allows them to do that without a significant financial impact.

However, despite the fact that a majority of American companies — including 73 percent of small businesses — offer PTO, there is no one-size-fits-all policy for this benefit. Not only do companies need to determine the most fiscally responsible way to pay employees for hours they aren’t at work, but they also need to consider productivity and staffing levels, how PTO is earned, how it can be used, and a host of other issues. In short, a paid time off policy is a bit more complex than simply offering two weeks of paid vacation per year.

So, how do you develop a paid time off policy? Follow this guide to create a policy that is both attractive to employees and supportive of your bottom line.

The First Question: How Much Time — And Who Gets It?

There are several types of PTO, which generally fall into two categories. In the first category is the time off that you are required to offer by law, including jury duty, disability, parental leave, and bereavement leave. In the second category, is vacation, holidays, personal time, and sick leave. The latter are the types of PTO that you will need a policy for.

Some companies break their paid time off policy into multiple categories, providing paid time off for specific holidays, as well as a set number of sick days and vacation days. If you opt for this route, you need to specify exactly which holidays are covered, and how many sick and vacation days each employee receives. One option is to use a formula, in which you calculate the number of billable hours required to cover overhead and reach your profit goals multiplied by an employee’s average billing rate. Given that most employees are able to bill (or are productive) for about 75 percent to 80 percent of the time, an offer of 20 percent to 25 percent of the calculated overhead is usually a fair amount of vacation.

Many companies take a simpler route, and offer vacation time based on seniority. The longer you work for the company, the more time you earn. A typical tier breakdown is 10 days for one year or less; 15 days for years two to five; 20 days for up to 10 years, and so on. Another option is to allow employees to accrue time off based on hours worked, with the amount of PTO earned increasing each year. For instance, an employee might earn 10 minutes of PTO per hour worked in the first year, with an additional minute of PTO earned for each year of service. Employees can then deduct hours from their PTO “bank” when they wish to take time off. In some cases, this pool of hours covers all time off, including holidays and sick days.

Typically, a paid time off policy is a benefit for full-time employees, although some small businesses do offer less PTO to part-time employees. Your first order of business, then, is to determine who is eligible for PTO, and when. Some companies will only allow employees paid vacation time after they have worked for at least 90 days; others require a longer period of employment, up to six months or longer.  When developing your policy, specify a time period for the PTO, usually either a calendar year or employment anniversary. In other words, when does the “two weeks per year” begin and end?

In summary, then, your PTO policy must:

  1. Outline what types of PTO your company offers.
  2. Specify who qualifies for PTO.
  3. Specify when employees can begin earning PTO.
  4. Specify how much PTO an employee receives, and how it is earned.
  5. Specify any holidays that employees are paid for.
  6. Specify the number of sick and personal days an employee is allowed, if applicable.
  7. Specify the time period for PTO accrual and use.

Someone filling out a vacation request formDispersing PTO

Once you determine who qualifies for PTO and how much they get, you need to outline the process for using the time. Among the points to include:

  1. How do employees request time off?
  2. How much notice is required?
  3. Which employees get priority for popular dates? If two employees request the same time off, what is the procedure?
  4. How many days or weeks can be taken off consecutively?
  5. Any requirements in terms of minimum amount of time taken.

Your paid time off policy also needs to address what happens to unused PTO. Some companies have a use-it-or-lose-it-policy (which is illegal in California), which could mean that any unused vacation time is forfeited at the end of the year. Others allow employees to roll over all or some of their unused time to the next year. Although California does not allow use-it-or-lose-it policies when it comes to PTO, they do allow companies to cap the amount of PTO an employee has earned.

This often comes into play when an employee leaves the company. In some states and jurisdictions, employers are required to pay out all PTO that an employee has earned when he or she leaves the company. This isn’t required in all states, but if your company is located where this law is in effect, an employee with an excessive amount of PTO saved up could be costly. Therefore, your policy needs to address how earned time is rolled over (if at all) but also what happens when one’s employment ends.

Mandating Time Off

Some companies have adopted use-it-or-lose it policies to encourage employees to actually take time off from work. Americans take the least amount of vacation days in the world, but research shows that taking time off is vital to productivity, creativity, and overall work-life balance.

Therefore, your paid time off policy should address requirements for using PTO. Consider requiring employees to take at least one week of vacation per year, and limiting the amount of time that can be rolled over to the next year to ensure that the PTO is used.

Following the Law

Finally, before communicating your PTO policy to employees, confirm that it complies with all local and state laws. Again, rules may vary, and you may be required to offer certain types of PTO or adhere to other guidelines. Keep in mind that remote workers are typically governed by the jurisdiction in which they are working, so you may need to adjust your policies according to other rules.

Some companies have taken their PTO policies to the extreme, offering unlimited vacation and sick time, paid sabbaticals, and even stipends to help cover the costs of vacations. If your company is in a position to offer these perks, don’t hesitate to include them in your policy. However, even if you just offer the standard two weeks and major holidays off with pay, you need a clear, detailed policy to ensure it is fair and effective.

If you need help developing and implementing a paid time off policy for your business, contact National PEO today.

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