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Is it Time To Update Your PTO Policy?

According to WorldatWork, employers are increasingly moving away from traditional leave policies—which allocate vacation, sick and personal time off separately—and towards paid time-off (PTO) bank-type systems, which pool all three PTO benefits into one comprehensive program. With a pooled PTO program, employees are able to clearly see how much total time they have to use, and they are able to use this time according to their discretion.

Modern PTO programs provide employees greater flexibility and peace of mind. This can be a valuable tool for attracting talent to your organization as younger employees tend to value flexibility over other “perks.” Employers tend to favor PTO plans because they are less expensive and easier to administer than traditional leave plans. For example, the reason that an employee uses leave time does not have to be tracked or managed—a plus for small and midsize companies operating on a tight budget.

In one fell swoop, a well-designed PTO program covers five essential “Cs” (you might recognize this same approach from our broader strategy for defining HR elements):

CARE | Investing in your employees’ well being

COST | Clear standards for paid and unpaid time-off

CULTURE | Makes a positive statement about your company

COMPLIANCE | Adheres to applicable government regulations

COMPETITIVE | Helps secure top talent in a competitive market

Behind a successful PTO program are well-documented policies and consistent procedures. Therefore, we recommend considering the following steps when preparing your PTO policy.

Identify mandatory paid leave requirements. Under the Fair Labor Standards Act (FLSA), private employers do not have to provide paid leave; however, some states and cities mandate paid sick leave and a few states have enacted paid family leave programs. Although the FLSA does not require paid leave, it has specific rules regarding the conditions under which you can dock the pay of exempt employees who are absent due to sickness or disability.

Make sure the PTO policy does not discriminate against employees based on race, color, gender, national origin, age, sexual orientation, pregnancy, age, or disability, as mandated by the Equal Employment Opportunity Commission.

State what PTO may be used for (e.g. vacation, illness, and personal time off) and which categories of employees are eligible, such as full-time and part-time employees. Specify what constitutes “full-time” and “part-time” under company policy.

Explain the accrual rate for PTO, which is typically based on the employee’s length of service and whether the employee is full-time or part-time. Per WorldatWork, the average accrual is between 16 and 27 paid days off each year.

Source: WorldatWork

Clarify whether active employees can carry PTO over into the next year or whether they can cash it out. If allowed to cash out, state the criteria for eligibility, including how much PTO employees should have in order to qualify for the cash out, and the cash out rate.

Consult state law before implementing a “use-it-or-lose it” PTO policy, as this is not allowed in some states. If it’s not permitted, employees must be allowed to keep their unused PTO (though you may be able to limit the accrual rate). Note that Michigan does not address the issue; therefore, employers in Michigan can establish “use-it-or-lose it” policies.

Specify what happens to PTO balances when employees leave the company. Some states require that employers pay out unused vacation time upon termination, regardless of how the employee left the company. In Michigan, PTO must be paid out according to the written company policy. Accordingly, if there is no company policy on the issue you do not have to pay out unused time to departing employees.

Describe the process for requesting PTO (including how much notice employees should give before taking time off), the maximum amount of time off that employees can take consecutively, any minimum amount of PTO that employees must take before a certain date, and the process for approval—such as supervisory approval and restrictions based on role or department.

Other considerations:

  • When are employees allowed to use paid versus unpaid leave?
  • From a payroll standpoint, what happens if a holiday occurs while the employee is on paid leave?
  • Will nonexempt employees be required to use their PTO during business closings?
  • Can employees who are collecting short-term disability use their PTO simultaneously?

The final step is to document these policies and clearly describe PTO terms in the employee handbook. As employment laws and company policies change, update the policy and communicate the changes to your employees. If you’re interested in learning more about how to create a competitive PTO program that’s part of a total benefits compensation package, contact us today!




February 1, 2018




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