Paid time off, or PTO, acts as an all-in-one policy that replaces the need for individual paid sick leave, personal time and vacation days. This makes tracking paid time off a lot easier for the employer and leaves just one policy for the employee to understand rather than three distinct policies.
A paid time off policy is not required by federal law, which gives you a lot of flexibility as an employer. Still, it can be nice to have guidelines when determining what kinds of policies are typically successful for small businesses, especially if you do not yet have a human resources manager on your payroll.
TL;DR (Too Long; Didn't Read)
The amount of paid time off that employees should get is entirely up to you. No federal laws regulate PTO.
Developing PTO Policies
PTO policies need to define who qualifies for paid time off, how far in advance employees should ask for time off, how to handle conflicts that arise when more than one person wants the same day off, whether or not PTO accumulates or carries over and whether holidays are included in PTO. You'll also need to develop a system for tracking PTO.
It's a lot to consider, so it can be helpful to take a look at a few of your competitors' existing PTO policies. You do not necessarily need to copy your competitors, but you also don't want to end up offering a less-attractive policy that will discourage qualified job applicants nor do you want your current employees to look for a job that has a friendlier PTO policy. Your small business should either match or slightly improve upon your competitors' PTO plans.
What's Regulated and What's Not?
Next, it's important to understand that paid time off is not regulated by the United States government. However, some states do have PTO payout laws, which require business owners to pay an employee for accrued PTO upon termination. At the federal level, some unpaid time off is subject to the laws outlined in the Fair Labor Standards Act. For example, religious discrimination laws make it illegal to allow individuals to take time off for Christian holidays but not Jewish holidays and vice versa.
Your leave policies should also adhere to the Federal Family and Medical Leave Act, which requires employers to allow employees to have unpaid and job-protected time off to care for an ill or injured family member, to welcome a newborn or adopted child to the family, etc.
Who Qualifies for PTO and How Much?
First, you'll want to decide who gets PTO. For example, some companies do not offer PTO to part-time employees. Others have a separate PTO policy for part-time or hourly employees that adjusts the allowed PTO hours based on the hours they clock. Independent contractors, freelancers and employees who have been on the payroll for fewer than three months are typically exempt from PTO policies as well.
Next, you need to decide the amount of PTO that you'll offer. For example, some companies allow new employees to have just three paid days off in their first year, with each year at the company adding a couple more days of PTO. Decide how you'll dole out these benefits based on tenure and whether you'll have a maximum amount of PTO as well. On the other hand, you can choose to give everyone the same amount of PTO regardless of tenure to keep things simple.
How Much Advance Notice?
When an employee gets sick and can't make it to work, you usually find out about it the morning of or the night before. There's just no way to predict an illness. Personal days and vacation time, however, should ideally be planned out in advance for logistical purposes.
How much advance notice you would like to receive is up to you. If you'll need time to find someone else to cover the shift or team members need a chance to redistribute tasks, consider asking for at least a week's notice. On the other hand, if your business structure can handle a sudden absenteeism, you can have a much more lenient policy.
Managing Simultaneous Absences
Simultaneous absences — when two or more people in the same department want time off — can throw a wrench in the day-to-day business proceedings if you don't have enough remaining staff to cover the workload. Decide how many people can take off on the same day without burdening the other employees.
Inevitably, this will lead to conflicts when one person asks for PTO but is denied because a co-worker already requested the same day. How will you address the issue if the employee who was denied gets upset? Some companies maintain a "first come, first served" policy for PTO, whereas others are willing to negotiate by asking the first employee if he would like to trade time.
Use It Or Lose It?
Some companies allow employees to have accrued PTO. For example, if an employee took no sick days last year but could have taken up to five PTO days, then next year, the number of PTO days could increase to 10 (five from last year plus five from the new year).
Other companies do not carry over PTO but instead have a "use it or lose it" policy in which all unused PTO is erased at the end of the year. You could also choose to or be legally required by state law to pay employees for their unused vacation rather than erasing it completely.
Tracking Paid Time Off
Your system for tracking PTO will depend on the number of employees you have. A small business can feasibly track PTO on a simple calendar, even a pen-and-paper version. However, businesses with many employees or complicated PTO policies should consider using special PTO software tools, such as CakeHR or Zoho People.
Unlimited PTO Revolution
If you really want to have a competitive PTO policy that can actually save you money, assist with recruitment, boost employee morale and give you a bright red flag that an employee is struggling, try unlimited PTO. Although it sounds ridiculous to many employers at first, others have found it to not be as risky as it seems to be.
In fact, unlimited PTO can end up saving the company money because there's no "use it or lose it" policy that actually encourages people to take paid time off when they don't need it. In addition, abuse of unlimited vacation is rare and generally indicates a larger issue with an employee — an issue you might otherwise not have noticed.
Some employees may actually need encouragement to actually take advantage of the new policy. They'll inevitably feel refreshed and happier when they come back to work, which boosts morale in the office. Finally, if you're trying to recruit a highly experienced individual to join your team, she'll be weighing the pros and cons of the decision. One con could be losing the PTO she has accumulated at her current company thanks to a long tenure and having to start with far more limited PTO at your company, but unlimited PTO makes this a nonissue.
You'll still need to develop some policies if you decide to go the unlimited route. For example, consider capping the number of days that can be taken off in a row (such as two weeks). Advance notice also helps the entire team to prepare for a co-worker's absence, and you'll also want to limit the number of people who take time off at the same time to avoid overwhelming the remaining employees.