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How to Determine a Paid Time Off Policy for Your Business
August 03, 2017
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How to Determine a Paid Time Off Policy for Your Business

The lot of a small business owner is not an easy one. There are many decisions to make that can affect the success of your enterprise. Determining a paid time off policy is one aspect that often doesn’t get enough attention.

It can be challenging to ensure you stay well-staffed when employees are on vacation and to attract good employees to whom PTO days are an important benefit, all while adhering to state regulations.

A PTO policy for small businesses addresses how an employee can bank hours for sick days, personal days and vacation days. Employees can take PTO days and use them as they see fit, although most businesses have a maximum amount of PTO days. In addition, some allow them to expire if unused. In comparison, some businesses offer unlimited PTO, and employees can take days off as long as their work is completed.

A lot of these components depend on the state’s regulations. There are no federal laws governing vacation policy for small business, and a company’s main consideration concerning paid time off policy is a function of recruiting desirable employees. In the U.S., PTO usually begins with two weeks per year plus paid federal holidays. The number of PTO days might increase with tenure. In some industries, PTO accumulates based on hours worked, and might be carried over from one year to the next, or might be forfeited if not used within a specified period. Some states require unused PTO time to be paid off at termination, while others don’t.

What are the Top Paid Time Off Policy Factors?

A study from TSheets uncovered facts that impact a PTO policy for small business. PTO is an important part of a benefits package, and many potential employees consider a business’s PTO policy prior to accepting a job offer. However, it’s also true that many employees don’t use all their PTO. The study found:

1. Usage

In 2016, 70 percent of respondents did not use all their PTO. On a national level, that equates to 600 million unused PTO days. Employees with 10 or more days of unused PTO at year’s end accounted for 26 percent of the study sample. The average vacation policy for small business gave employees 11 to 15 PTO days per year, although 16 percent of respondents got none. As a business owner, you should encourage your employees to take advantage of their PTO. This will allow them to have time to relax, so that they return to work feeling rejuvenated and ready to work hard.

2. Cognitive dissonance

The usage numbers conflict somewhat with another interesting finding, that 63 percent of workers wouldn’t take a job that didn’t include PTO. About 88 percent of respondents want their employer to provide PTO, and 85 percent said sick leave is important. It seems that PTO is demanded but not always used. Nearly half of the study respondents complained that they were too busy to use all their PTO, yet a third said they’d be happier with more PTO.

3. Parental leave

The study found that only 11 percent of businesses provided paid maternity leave in addition to PTO, a figure swamped by the 72 percent of employees who favor this benefit. Approximately 8 percent of employers offer maternity and paternity leave on top of PTO. Paid leave for both parents is more important to younger workers. If you are interested in recruiting millennials, offering maternity and paternity leave could give you an edge.

4. Spending PTO days

A little under a third of respondents would use their PTO days to take a vacation. About 5 percent of these would travel overseas, while 25 percent would stay at home. Some 28 percent indicated that they’d use PTO time to spend more time with family. Having PTO days gives your employees the freedom to take time to do activities that matter to them.

5. Trading salary for PTO

Survey says that 20 percent of employees would accept more PTO in lieu of a raise, and 62 percent would give up a raise to get more flexible work hours. The latter benefit is often a good choice for employers, since it costs almost nothing. If you’re unable to give hardworking employees a raise, you might want to consider giving them some additional PTO instead.

The Family and Medical Leave Act of 1993 requires covered employers to give employees unpaid leave for qualified family and medical reasons. State laws regarding paid leave vary. For example, California doesn’t allow paid vacation time to be forfeited, and any balance must be paid out at termination. In New York City, businesses with five or more employees must offer paid sick days.

How Can You Establish Your PTO Policy?

Given these recent survey results, the path toward your business’ PTO policy rests on several considerations:

  • Determine the PTO days appropriate to your business, industry, geography and staffing needs.
  • Decide whether PTO days will expire or roll over. Beware that an expiration policy might trigger an avalanche of turnover at year’s end.
  • Select dispersal method – an annual amount at the beginning of the year, or an accrual policy in which employees earn their PTO over time.
  • Determine what to do with departing employees’ unused PTO days. Some states require it be paid out at the end of an employee’s tenure.
  • Publish your PTO policy and ensure all employees understand it. The policy should address all the key questions regarding earning and using PTO days.

It isn’t difficult to set up a PTO policy, and other nearby businesses can give you sensible recommendations. If you offer PTO, make sure your payroll system accounts for it correctly. Having a suitable paid time off policy will promote employee retention and contribute to your future recruitment efforts!

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].
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