How to Create a PTO Policy for Your Business
Paid Time Off (PTO) is constantly regarded as one of the most important and sought-after employee benefits.
If you’re running a business, you need to provide your employees with a competitive benefits package if you want to keep your staff motivated and productive, and to be able to attract new talent and retain existing talent.
Your PTO policy is an essential part of being able to offer employees enough paid time off, without letting productivity and company culture suffer. Read on and we’ll explain all you need to know about creating a PTO policy, including the 12 essential questions and considerations you need to answer when piecing your policy together.
What is a PTO Policy?
Your PTO policy is the set of rules and guidelines that manage how paid time off works in your business.
This includes processes for requesting and approving paid time off, which situations qualify for paid time off, how much PTO employees will get, and rules for specific situations, such as what happens to any unused PTO.
This policy should be communicated to all employees upon entering the business, and kept somewhere easily accessible, so anyone who wants clarification on how PTO works or their rights or responsibilities regarding PTO can find the answer quickly and easily.
12 Things to Consider When Setting Up Your PTO Policy
Creating a PTO policy might seem straightforward at first, but there are actually a lot of things to take into account, and the job can easily blow up into something overwhelming, if you’re not careful.
With our extensive experience in HR and managing teams, we’ve put together a comprehensive list of things to think about and/or answer in your PTO policy, to make sure you minimize disruptions and maximize efficiency, while being able to provide a generous PTO package for your valuable team members.
Types of PTO
Though the term “PTO” is often used to describe vacation days (or annual leave, holiday in some parts of the world), it actually includes many different types of leaves from work.
PTO could also mean:
- Sick leave
- Personal days
- Parental leave
Your PTO policy should list the different types of leave, and which situations come under which leave type (for example, does a doctor’s visit qualify for sick leave?).
Consider also whether it’s better to consolidate multiple leave types into one.
For example, you could offer sick leave, mental health leave and stress leave, or bundle them all into one instead.
Accrual methods and rates
PTO generally accrues over time, meaning as employees work more, they earn more time off.
There are many ways this can work, and you’ll need to decide which works for your business. You could decide that employees accrue a certain amount of PTO for each day, week or month worked (often, this aligns with your company’s pay period).
Or you could go with a simpler “lump-sum” method, where they get their whole yearly quota available at the start of each year.
When deciding on accrual methods and rates, consider industry standards, your company’s financial situation, and what’s best to help you attract and retain talent.
It’s also important to clearly communicate how PTO is accrued and when it becomes available for use, as some companies may require a waiting period before new employees can use their accrued time.
Want help figuring out PTO accruals in your business? Use our free PTO accrual calculator ->
Eligibility criteria
Determine who is eligible for paid time off, and how eligibility criteria differs depending on job role or status.
For example, there may be different eligibility for full-time and part-time employees. Full-time employees usually receive the full PTO benefit, while part-time employees may receive a prorated amount based on their worked hours.
If you have temporary or seasonal workers, you may decide to offer them PTO as well, but at a reduced rate.
When establishing eligibility criteria, consider legal requirements, fairness, and administrative complexity.
Requesting and approval process
A clear PTO request and approval process is crucial for maintaining smooth operations while allowing employees to use their time off when they see fit.
This process typically involves employees submitting requests in advance, usually through a leave management software, or to their direct supervisor. The approval process should balance employee needs with business requirements.
You want to let employees have as much flexibility as possible as to when they use their time off, but at the same time, balance it so that you always maintain productivity and don’t let business operations suffer.
Establish how far in advance requests should be submitted, and clearly communicate who has the authority to approve PTO requests and any escalation procedures. Also, decide how to handle conflicts when multiple employees request the same time off.
Blackout periods or peak seasons
Many businesses have peak seasons or critical periods where employee absences can significantly impact operations.
Examples might be the holiday period for retail businesses, or the end of the financial year for accounting firms.
Implementing blackout periods during these times will help ensure adequate staffing, and avoid disappointment or discontent with employees by making it known ahead of time that these are important periods where leave may not be approved.
When establishing blackout periods, be transparent about the reasons and dates. Communicate these well in advance to let employees plan around them. Consider offering incentives for working during these periods or allowing more flexibility during slower times to offset the restrictions.
Carryover, expiry and payout policies
Your PTO policy should determine how much, if any, unused PTO can be carried over to the next year.
Some companies allow full carryover, others cap it at a certain number of days, and some have a “use it or lose it” policy (make sure you’re aware of the laws in your area, as some state/national laws prohibit “use it or lose it” PTO policies).
If you do a more granular accrual policy (employees earn PTO each day, week, month, etc), consider instead whether there is a set timeframe in which PTO must be taken (e.g. 12 months or 18 months after it was earned), and whether there is a “cap” where PTO stops accruing once a person’s balance reaches a certain amount.
Another factor is whether employees are allowed to cash out their earned PTO. Some companies allow employees to cash out their unused PTO when it’s set to expire, or simply let employees take a cash payment for their PTO at any time.
When crafting these policies, consider the financial implications of PTO liability on your books. Also, think about the message you want to send – encouraging employees to take time off for well-being versus rewarding those who don’t use their PTO.
Integration with legal requirements (e.g., FMLA)
It’s crucial that your PTO policy aligns with all necessary and relevant legal requirements.
An example is the Family and Medical Leave Act (FMLA) in the United States. Your policy should clearly state how PTO interacts with legally mandated leave. For instance, you might allow or require employees to use their accrued PTO to supplement unpaid FMLA leave.
Consider other legal requirements that may affect your PTO policy, such as state-specific paid sick leave laws or regulations regarding PTO payouts upon termination.
If there’s a minimum amount of paid leave you have to offer, or specific rules that you need to follow in regards to PTO, make sure your PTO policy is compliant with these regulations.
It’s advisable to consult with legal counsel to ensure your policy complies with all applicable laws while still meeting your business needs.
Learn more about the FMLA, who it applies to, and what benefits it provides to eligible employees, here.
PTO tracking and management systems
Implementing an efficient PTO tracking and management system is essential for smooth policy administration.
This could range from a simple spreadsheet for small businesses to simple or sophisticated software tools for larger organizations. The system should allow for easy tracking of PTO accruals, usage, and balances.
We use Flamingo in our business – it integrates smoothly with Slack, makes it super easy both for employees to request time off, and for managers to review and respond to leave requests, and automatically tracks all important information, such as balances and scheduled leaves.
The right PTO management system will significantly reduce administrative burden, minimize errors, and provide valuable data for policy review and workforce planning.
Ensure that whatever system you choose is user-friendly and can be easily integrated with all your other business processes.
Communication and training on the policy
A policy is no use if no one knows about it.
That’s why you need to clearly communicate your PTO policy to all employees, and offer a helping hand to ensure that everyone fully understands it.
This involves more than just adding it to the employee handbook. Consider creating a dedicated PTO guide that explains all aspects of the policy in simple, easy-to-understand language. Share this guide with all new hires as part of the onboarding process, and make it easily accessible should someone need to brush up on how your PTO system works.
Training is equally important, particularly for managers who will be responsible for approving and managing PTO requests. Provide training on how to use the PTO tracking system, how to handle conflicts in PTO requests, and how to ensure the policy is applied fairly.
Handling unused PTO upon termination
Your policy should clearly state how unused PTO will be handled when an employee leaves the company.
Some companies pay out all accrued, unused PTO, while others may have caps on payouts or a “use it or lose it” policy.
Be aware of what the law in your location says regarding unused PTO payout upon termination, and ensure you comply with any legal regulations (you can read up on each state’s PTO payout laws here).
Consider also how you’ll handle negative PTO balances (if you allow this) if an employee leaves before the end of the year having used more PTO than they’ve accrued. Will you deduct this from their final paycheck? Your policy should address these scenarios to avoid confusion and potential disputes.
Special considerations (e.g., sabbaticals, bereavement leave)
Consider including provisions in your PTO policy for special circumstances.
This might include bereavement leave for when an employee loses a loved one, or sabbatical policies for long-term employees. You might also want to address how your policy handles jury duty, voting time, or military service leave.
Another consideration is how to handle extended illnesses or injuries that exhaust an employee’s PTO. Some companies offer a separate bank of “catastrophic leave” or allow employees to donate PTO to colleagues in need.
These special considerations can demonstrate your company’s commitment to supporting employees through various life events and circumstances.
Policy review and updates
A PTO policy should be a living document that evolves with your company and workforce needs. Schedule regular reviews of your policy, ideally annually, to ensure it remains competitive, compliant with current laws, and aligned with your company culture and goals.
During these reviews, analyze PTO usage data, gather employee feedback, and stay informed about industry trends and legal changes.
When updates are necessary, clearly communicate changes to all employees, explaining the rationale behind the modifications. Be prepared to address questions and concerns, and consider grandfathering in certain benefits if changes might be perceived as less favorable to long-term employees.
How you handle policy changes can significantly impact employee morale and trust, so approach updates thoughtfully and transparently.
Summing Up
PTO is an important part of your business, because it’s important to your employees.
Any hard-working employee wants to know they can take time off at some point for a vacation, to pursue personal interests or commitments outside of work, or just to cover for when they inevitably get sick.
Your paid time off policy ensures that this all runs smoothly, that it’s clear and transparent how PTO works in your business, and lays out procedures for any situations that arise in the PTO management process.
It doesn’t matter what kind of PTO system you run – whether it’s a traditional approach to PTO, or you run an unlimited PTO policy, mandatory vacation time, or anything else, in the interest of fairness, transparency, accountability and efficiency, you need a clear policy in place.
