Crafting a PTO Policy for Your Growing Business

Posted September 5, 2018 by Justworks in Benefits and Perks
Periodically revisiting your paid time off (PTO) policy is crucial as your business matures. Here are a few key components to think about.

The average American worker receives 10 days of vacation per year, according to the Bureau of Labor Statistics. But paid time off (PTO) is not a guarantee in the U.S.

In fact, America is the only industrialized nation with no laws requiring paid vacation, according to the Center for Economic and Policy Research. The EU and Australia, for example, each require at least 20 days.

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Comparisons aside, the lack of federal PTO requirements in the U.S. means employers have more or less a blank canvas when it comes to crafting their own policies — often a daunting prospect. Employers must balance the bottom line with employee expectations, which can be difficult to pin down.

The policy a company sets in place early on in its trajectory may not be the best fit as the business matures. Periodically revisiting your PTO policy is crucial as your company grows. Here are a few things to keep top of mind.

Structuring a PTO Policy

While the term “paid time off” is often used interchangeably with “vacation time,” PTO technically refers to a single bank of hours that employees can use when sick, on vacation, in need of personal days, and/or on holidays. By creating a single PTO policy, companies enable employees to manage when and why to use their time off — whether it’s to take a Caribbean cruise, go to the dentist, celebrate a religious holiday, or play solitaire at home.

PTO technically refers to a single bank of hours that employees can use when sick, on vacation, in need of personal days, and/or on holidays.

Fifty-eight percent of businesses offer bundled PTO plans while 40% offer stand-alone paid vacation plans, reports Entrepreneur magazine. Bundled PTO policies put a bit more power in the hands of employees. Rather than faking a sore throat on a Friday in June to use up a “sick day,” employees can schedule a day off in advance — no need for explanation or deception. As a business grows, such a system can foster a sense of trust and help retain employees.

However, keep in mind that bundling sick, vacation, and other personal days can introduce complications in certain states. For example, California has a law requiring all remaining vacation days to be paid out when an employee leaves a company (vacation days can be capped). If an employer decides to bundle vacation days with other types of leave in one PTO policy, all PTO is subject to that law, according to the State of California’s Department of Industrial Relations.

State Laws on PTO

On that note — it’s important to stay compliant with all state laws regarding paid leave, particularly if your business is expanding across state lines. Typically, if you hire an employee based in a different state than your business’ headquarters, you will need to comply with the laws of state where the employee is based.

Again, there are no federal or state laws that require paid vacation time, but for companies that do offer paid leave, state laws vary around issues like whether these companies are required to pay employees for unused leave each year and what happens if an employee is fired. (This chart from Thomson Reuters provides a general overview of relevant laws by state.)

Related Article: 6 Paid and Unpaid Leave Laws Every Employer Should Know About

Tracking PTO

When your business only has a few employees, it might work to maintain a shared calendar with everyone’s vacation days. But as your business grows to a few dozen or a few hundred employees, having an easy-to-use, comprehensive system to track paid time off is crucial. (The Justworks platform allows managers to approve vacation easily and keep track of time off.)

Knowing which employees took advantage of PTO, and when, is helpful when evaluating potential changes to your policy.

Knowing which employees took advantage of PTO, and when, is also helpful when evaluating potential changes to your policy. Tracking vacation time is important — even if your company has an “unlimited” vacation policy — to ensure work still gets done and make sure people are taking enough time off to prevent burnout.

Unspoken Rules of Paid Time Off

Having a carefully worded, well thought-out PTO policy is important — but as a company grows, unspoken “rules” can sometimes take over and begin to influence employees’ actions more than official regulations.

For example, unlimited vacation policies, popularized by tech companies like Netflix, are all the rage these days. But some companies have found that these policies in reality create a competitive environment where employees are unclear about management’s expectations and ultimately feel pressure to take as few days off as possible.

Related Article: Defining Work-Life Balance for Your Small Business

“[Unlimited] paid time off is a publicity stunt. Most companies know that their best employees aren't going to take advantage of it. And by leaving the policy open and ‘up to the employee’ managers are now creating a different kind of competitive environment, one that encourages taking less time off, rather than more,” argues Gene Marks in Inc. Magazine.

Take tech company Kickstarter, which changed its unlimited policy to a set 25 days in 2015: “What we found was that by setting specific parameters around the number of days, there was no question about how much time was appropriate to take from work to engage in personal, creative, and family activities,” a Kickstarter spokesperson told Buzzfeed News.

Some companies have found that unlimited vacation policies create a competitive environment where employees feel pressure to take as few days off as possible.

Another issue to watch out for as your company grows is uneven policies across teams. Mid-level managers may run their departments slightly differently in practice than company-wide rules specify — for example, requiring more notice for vacations or subtly shaming employees who take PTO at a certain time of year or for a certain number of days in a row (even if such practices are permissible under company guidelines). Managers who institute their own systems for individual teams are often well-meaning, trying to increase productivity and watch out for the bottom line — but the end result is frustrated, distrustful employees who don’t have faith in company leadership.

These issues are important to watch out for as your company grows large enough that most team members are reporting to mid-level managers rather than senior leadership. If you’re not careful, the company culture you worked so hard to build and maintain can begin to disintegrate in the blink of an eye.

Gathering Feedback

Conducting regular surveys can help you determine whether employees are satisfied with your PTO policy (and many other aspects of your business). Of course, you can’t kowtow to every employee’s wants and needs, but if it becomes clear that workers are overwhelmingly dissatisfied with one aspect of your policy, it may be worth revisiting.

Consider using “pulse surveys” — quick, uncomplicated polls periodically conducted over email. As your business grows, your workers’ needs with regard to PTO and benefits will change too. Surveys help keep the lines of communication open between employees and management and show employees that you value their feedback.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.