What Is a PTO Expense?
“PTO” is a business abbreviation for paid time off” which is compensated time an employee spends away from the workplace. This catchall phrase includes the various vacation, sick, personal and reward days an employee earns or gets as part of company policies or a negotiated benefits package. When planning budgets, businesses might classify this benefit as an expense if they want to track actual work hours and better gauge productivity or overhead and production costs.
For many years, employers offered workers paid days off to create a more attractive compensation package. A standard paid time off allotment include 10 vacation days -- often called two weeks' paid vacation -- and any combination of five personal and sick days. Some businesses gave employees a paid day off on or around their birthdays or used a day off as a reward for a contest or a bonus for meeting a work goal. Paid time off has replaced these designations at many businesses as workers asked that restrictions be removed from how they used their paid days off. Some companies award annual PTO based on hours, days or months worked. For example, a company wishing to give employees the standard 15 days of PTO might award workers 1.25 days of PTO for each month worked. This can reduce severance payments.
Before the advent of PTO, employees received vacation days to be used for vacations. Some businesses required the standard allotment of 10 days to be taken consecutively, rather than letting employees take two or more shorter vacations. Employees were required to request their specific vacation dates or notify supervisors of their intended vacation dates to help the company avoid worker shortages. As employees stayed with the company, they received more vacation days. A common formula included awarding a third week after five or 10 years of service, depending on the rank of the employee and the company’s need to retain workers. Some executive packages started top employees at three weeks' vacation time. Many companies institute a use-it-or-lose-it policy that does not allow employees to carry 15 days of PTO forward year after year. This prevents them from losing staff for many weeks during some years and helps employees avoid burnout.
To encourage employees to stay home and not bring colds and flus into the workplace, employers offered workers sick days. These were awarded to all employees because most people get sick one or twice a year. Personal days allowed employees to attend funerals, take time off to have a car fixed, attend their children's school functions or perform other tasks. The line between personal and sick days blurred, with employees taking unused sick days to perform personal tasks and using personal days if they had an extended illness.
To reduce PTO expenses, companies can create a PTO buyback program. This awards employees cash for PTO days they do not take. The employer pays the employee less than the cost of a full day’s work and gets a full day’s work for a discount. For example, if a company offers 15 PTO days per year, it pays an employee who makes $150 per day $2,250 for 15 days of work he doesn’t do. If that employee is paid $75 for each PTO day he doesn’t take, and he does not take all 15 of his PTO days, the employee gets $1,500 for 10 days of no work and $375 for working the five days he does not use, and the company gets $750 worth of work from him. The company's payroll cost does not decrease, because it still pays the employee his $150 per day times the five days he works, but it gets five days' worth of labor it wouldn’t have received for half price, or 2.5 day’s worth of labor for free. Companies should limit the buyback program to decrease gross payroll.