Writing a Paid Time Off Policy? Read This.

When considering a potential job offer, if your eyes jump to paid time off (PTO) right after salary and healthcare, you’re not alone. 

PTO consistently ranks as the second most important benefit, after health insurance. And as a benefit that increases productivity, lowers stress, leads to better performance, and boosts mental health, it’s unsurprising why employees place so much importance on an attractive PTO policy. 

But this can amp up the pressure to “get it right” for HR teams faced with writing a policy from scratch or updating an existing one. Below we cover exactly what human resources teams need to know when crafting their own PTO policy and include a sample for inspiration.

PTO Terms to Know

Like much of HR, paid time off programs come with their own lexicon. Here are some of the most common words and phrases you’ll hear in PTO discussions.

• PTO: Paid time off. The acronym PTO is sometimes used to refer to any paid time off policy, while other professional resources use it to refer to a PTO bank policy. For the sake of brevity in this article, we’ll use PTO to refer to all paid leave and use PTO bank when referring to the combined allotment for vacation days, sick days, and paid holidays.
• PTO Bank: An employee benefit in which all paid time off — including vacation days, sick days, and holidays — is compiled in a single “bank.” 
• Carryover: Refers to a company policy that allows employees to roll over unused PTO from one year to the next rather than losing it. 
• Use-it-or-lose-it: Policy that requires employees to use all their PTO within a designated time frame or else forfeit it. Some states, including California, Nebraska, and Montana, prohibit use-it-or-lose-it PTO policies.
• Accrual: Policy in which employees earn, or accrue, PTO in increments alongside time worked or pay period. 
• Lump sum: Rather than requiring employees to accrue time off, lump-sum PTO policies give employees a specified amount of PTO at the beginning of the calendar year. 
• Payout: A payment to employees when they leave the company that reflects their unused PTO. Payouts are only possible in organizations that allow employees to carry over PTO, and not possible in companies with a use-it-or-lose-it policy or an unlimited PTO policy. This may also be referred to as a PTO cash-out. In many states, organizations are required by law to pay out unused PTO. 

Establishing the Right Policy For Your Business 

From settling on the “right” number of days to establishing an accrual process, we’ll go through everything you need to know about writing a PTO policy, including: 

• PTO bank versus traditional paid leave.
• The number of days to offer.
• Accrual versus lump sum policies.
• Unlimited PTO.

PTO Bank Versus Traditional Paid Leave

While the US is the only advanced economy in the world without any mandated paid leave (including parental leave) as of May 2023, most companies offer full-time employees some paid time off each year. 

Most commonly, paid leave is offered as a single bank of PTO, where employees get a collective pool of days to use for time off, or traditional paid leave, where employees are granted separate allotments for vacation, sick, and personal days. 

There is no one-size-fits-all policy. Deciding what’s best is specific to each organization, but here’s an idea of how they stack up. 

PTO Bank Plans

• May be easier to track: HR teams and employees only have to keep track of a single allotment of PTO hours for each employee. 
• Encourage openness: Rather than employees calling in sick on the Friday before Labor Day, for example, team members can be transparent about taking time off. 
• Allow for autonomy: PTO gives employees the autonomy to use their paid days off how and when they’d like, without having to provide an explanation.

Traditional Paid Leave Program

• Fewer sick employees on the clock: Employees are more likely to take advantage of their sick time when feeling under the weather since those days are separate from vacation time.
• Fewer payouts: Employers don’t typically have to reimburse employees for unused vacation days or sick days, so traditional paid leave programs can mean lower-cost payouts for businesses. 
• Better data: HR teams can better track and project employee time off when they know what the days are being used for.

According to the Society for Human Resource Management (SHRM), PTO banks grew in popularity pre-pandemic but some US companies have since returned to separate allotments for sick leave, with use of PTO banks dropping from 44% in 2020 to 41% in 2021.

“Some larger employers not only have increased their number of sick days to adhere to new federal requirements but also have started tracking days more diligently to better understand how employees are using them,” human resources manager Lisa Frydenlund told The Wall Street Journal, as reported by SHRM in an article on traditional and PTO bank plans. 

How Much PTO to Offer 

Whether you’re an HR professional writing a policy or a job applicant sitting in an interview, questions about vacation days usually start with “how many.” While the answer should ultimately reflect your company’s values and norms, experts generally agreed on the same sweet spot: 15 to 20 days, excluding paid holidays.

{{rich-highlight-1}}

How much PTO your company offers will depend on whether you opt for a PTO bank or traditional paid leave program. Generally speaking, PTO banks tend to offer less time (by a day or two) than traditional leave policies — but employees are more likely to use all their time off, as the benefit is often viewed as a perk to take advantage of. The workforce may be more likely to reserve some sick or personal days with traditional leave programs and are therefore more likely to carry over PTO hours or days. 

SHRM research on paid leave programs found that companies with PTO bank plans typically offer 13 to 26 days of leave. For policies that allot separate categories for vacation, sick, and personal leave, the averages for full-time employees were 8 to 22 days for vacation, 7 to 19 for sick leave, and 4 personal days. 

Accruals Versus Lump Sum 

Accrual

Most companies that offer paid leave use an accrual system. Employees gradually earn their time alongside hours or days worked — one hour of PTO for every 20 hours worked, for example. Since some HR tech platforms handle these calculations for you, accruals may require less number crunching than expected. These systems also support compliance, since some jurisdictions require accruals to be included on pay stubs.

Since employees must earn their PTO through time worked, accruals encourage retention and discourage employees from using their PTO all at once. At some companies, this means new employees aren’t eligible for any days at all. In other, more flexible arrangements, companies allow employees to “borrow” unearned time and go into the red to encourage team members to take vacations. 

But accruals come into play in other ways, too. Here’s what else HR teams should consider when it comes to accrual arrangements:

• Some companies opt for a use-it-or-lose-it policy to encourage employees to take PTO and to prevent large employee payouts upon their exit. But this approach can be limiting, since vacations don’t always align with the calendar year, and some states, like California, Montana, and Nebraska, prohibit use-it-or-lose-it policies.
• An alternative is to impose a carryover or accrual cap, which limits the number of hours that can be in a PTO balance at a given time. Companies opt for this approach to incentivize employees to take their time off while avoiding hefty PTO payouts. Be sure to check state laws when it comes to carryover caps. For example, California permits “reasonable” accrual caps by organizations.

Lastly, some teams scale up accruals or PTO limits based on tenure. Tenure-based vesting schedules have been applied to other forms of compensation, like 401(k) matching and equity for decades to boost retention and reward employees for their service. Why should vacation days be any different? HR experts generally favor the approach, within reason.

“It’s extremely important that you do it so it’s manageable. You don’t want someone in the company having four times as much as someone who just joined. It could cause other types of challenges and friction within the team when there are peaks of workload,” said Carlota Montoro, an international talent consultant.

Lump Sum

Other organizations choose to grant employees all their PTO at once, as a lump sum or annual allotment. Employees gain access to all of the paid leave at one time, most often at the beginning of the calendar year. 

Proponents say the simple system makes it easier for employees to keep track of their time off and provides a greater degree of autonomy for the workforce. Critics of this approach point out that it can encourage employees to take long stretches off at times, which can increase the workload across a team. New hires could use all their PTO early in their new employment, then quit.

While accrual policies are generally favored by most companies, a lump-sum PTO arrangement may better reflect your company’s values — especially if your organization emphasizes flexibility and transparency.

Unlimited PTO

When unlimited PTO first gained popularity, it was considered a cushy perk offered by top employers. In theory, employees were encouraged to take as much time off as they needed — within reason, and at a manager’s discretion. But today, unlimited PTO remains one of the most hotly contested perks among HR leaders, labor law experts, and employees. Here’s why. 

• Company culture determines a lot. A 2022 article on unlimited PTO policies published in the journal Frontiers in Psychology found that social pressures “turn the freedom of taking leave into an obligation of not taking (too much) leave.”
• Lack of guidelines makes it difficult to judge what’s appropriate. The same Frontiers in Psychology article found that “An endless number of vacation days means that employees have no guidance on how much leave is appropriate. When no formal rules exist, employees will look for informal rules communicated by their supervisor or team members.” 
• Employees may end up taking less time off. It’s believed that employees with unlimited PTO policies may actually take less time off than those with traditional leave policies. A 2022 Joblist study found that individuals with unlimited PTO took an average of just 10 days off per year, compared with the US average of 17.
  

Lawyers in some states have gone as far as accusing tech companies of implementing the benefit solely to avoid costly payouts for departing employees.

Even so, there are a few perks that make unlimited PTO an attractive offering, especially at smaller companies or for businesses eager to attract top talent. They’re easier to administer, a benefit for lean HR teams without the time or budget to implement time off software, and flexible time off can also be a powerful lure for attracting job applicants. 

If your org is set on offering an unlimited PTO policy, make sure you design and manage it well. Following these pointers can make all the difference: 

• Mandate “minimum time off” and track it. To reiterate commitment to work-life balance while offering a flexible PTO policy, social media management company Buffer has a “minimum time off” policy of 15 days for employees. Beyond that, employees are encouraged to take whatever additional time they need.
• Pay employees to take time off. Some companies, like Evernote, BambooHR, and Expedia reimburse employees a set dollar amount for taking vacations. Doing so with an unlimited PTO policy encourages employees to actually take time off. 
• Re-brand the PTO plan. Name your policy carefully, and consider alternatives like a “Take What You Need” PTO policy or “Minimum PTO.”
• Request employee feedback. Use engagement surveys to keep a pulse on how employees feel about a newly deployed unlimited PTO policy. If you get indications that employees feel pressure to take less time away, consider switching back to a traditional policy.
  

Communicating Your PTO Policy

While you’ll share the PTO policy with new hires, include it in the employee handbook, too, so your team can refer to it when needed. When drafting your paid-leave policy with employees, be sure to define: 

• What type of PTO you offer.
• PTO accrual rate or amount of time for lump sum arrangements.
• Which employees are eligible. 
• When to use PTO. 
• Policy on rollovers and cash-outs. 

Here’s a sample policy for a company that opts for a PTO bank with an accrual system. For further guidance on writing your policy, check out our time-off policy template.

Leveraging Feedback and Encouraging Employees to Take Time Off 

It’s not always easy to get paid time off policies right the first time. Much like any other aspect of people strategy, HR teams should take a data-driven, iterative approach to paid leave. 

{{rich-highlight-2}}

Employee engagement surveys simplify the process of collecting and analyzing employee feedback at scale. With Lattice’s engagement surveys, HR can identify challenges with burnout, balance, and whether teams have enough time to disconnect. Fine-tuning your PTO policy is vital to getting employees to take advantage of their time off. According to a 2023 report by the Pew Research Center, 46% of surveyed US employees said they take less paid time off than their employer offers — a number that could translate to significant employee burnout. 

While employees cite a number of reasons for not taking time off, the most significant might be team norms and manager expectations. Leverage engagement surveys to inquire about more than just the details of the policy by asking about workplace and team beliefs and expectations around PTO.

—

While hardly a cutting-edge perk, the right PTO policy can go a long way in maintaining a healthy and high-performing team, all while supporting retention. With so many paid leave options out there, direcft employee feedback via engagement surveys can go a long way in shaping the best policy for your business. For more in-depth strategies on how to combat employee burnout, check out Lattice’s ebook How to Prevent and Treat Workplace Burnout. For further guidance on writing your policy, check out our time-off policy template.