Company Culture

Writing a Paid Time Off (PTO) Policy? Read This.

HR teams know it better than most: We could all use a break. Between the stresses of work life and real life, employees need an opportunity to leave it all behind for a few days.

Offering vacation days or paid time off (PTO) isn’t a perk so much as an employee expectation. PTO consistently ranks as employees’ second-most valued benefit, just behind health insurance. That can make it intimidating for HR teams tasked with drafting or revising their time-off plans to keep everyone engaged and well-rested.

From finding your “magic number” to establishing an accrual process, we’ll go through everything you need to know about PTO.

How Much 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: 15-20 days, excluding paid holidays.

“The magic number for total PTO days allowed is generally 14 to 16 and then scales up based on tenure,” said Adam Gordon, co-founder of PTO Genius. Workforce data shows that over 60% of U.S. employees are actually entitled to fewer days — potentially accounting for why over half report being dissatisfied with their companies’ policies.

Still, expectations can vary depending on industry and employee demographics. In cases like these, looking at HR metrics or running an employee benefits survey can help ascertain what your people need. “When creating or updating their vacation policy, HR should consider the company culture and who the employees are. Are they blue, white, or grey collar? Are they closer to retirement or are they newer to the workforce? It’s important to design a PTO policy that blends a company’s culture and meets the needs of its employees,” Gordon said.

Finally, as you settle on your PTO allotment, consider keeping sick time separate. While combining the two might make back-end administration easier, doing so can discourage employees from using either. “Combining sick days with vacation days can lead to the unfortunate circumstance of employees stockpiling their PTO out of fear they won’t have paid days to use if they do get sick,” said Jon Hill, CEO of The Energists. Conversely, employees might not want to sacrifice hard-earned vacation days because they’re not feeling well.

Accruals and Tenure

Most companies that offer paid time off use accruals. This simply means that employees gradually earn their time after a set number of hours worked — one hour of PTO for every 20 hours worked, for example. While that sounds like it involves a lot of number crunching, most HR information systems and time trackers handle the calculation for you. That’s good news since some jurisdictions actually require accruals to be included on paystubs.

Accruals serve a few purposes. The most obvious ones are to encourage retention and discourage employees from using their PTO all at once. At some companies, this means new hires aren’t eligible for any days at all. In other, more flexible arrangements, employees are able to “borrow” unearned time. That’s the model preferred by Heather Doshay, VP of People at Webflow.

“We do accruals for sick time and vacation time. But to encourage people to take vacations, we allow people to go into the red. If you’re new and you haven’t accrued time yet and you want to take a longer vacation, that’s fine. People can go into the red for up to 80 hours. It’s up to you how you want to use that time,” Doshay said.

There are other accrual arrangements worth considering. To encourage employees to actually take PTO, some businesses employ a “use it or lose it” approach where balances expire on work anniversaries or at the end of the year. But either approach has drawbacks, and vacation plans don’t always align perfectly with employee milestones. As an alternative, consider capping the number of hours that can be on a PTO balance at any given time. In effect, this encourages employees to take time off throughout the year rather than all at once.

Lastly, some teams scale up accruals or PTO limits based on tenure. Doshay’s team, for example, increases the rate at which employees accrue time off after their second and fifth year. 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 favored 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 HR consultant.

Unlimited Vacation

Eschewing the complexity of accruals and vesting schedules, some companies have opted for a different approach: unlimited or “flexible” vacation policies. Under this approach, employees can take whatever time they need, whenever — within reason and at their manager’s discretion.

There are a few perks that make unlimited PTO an attractive offering, especially at smaller companies. First, they’re easier to administer, a benefit for lean HR teams without the time or budget to implement time off software. Flexible time off can also be a powerful lure for attracting job applicants, as some of the world’s most sought-after companies advertise the benefit on their careers pages.

But HR teams should note that not everyone is sold on the benefit. Unlimited vacation remains one of the most hotly-contested perks among HR leaders, labor law experts, and employees. Some states have gone as far as to accuse tech companies of embracing the benefit solely to avoid costly payouts for departing employees. Others say the policies are too ambiguous and don’t do enough to encourage employees to disconnect.

“The juice isn’t typically worth the squeeze. Among the less than 2% of America’s companies utilizing unlimited PTO, employees still complain about work environments where peers compete to show who’s the most loyal by not taking any PTO,” Gordon said. That might be more than a hunch — data from HR software providers also reveals that on average, employees with flexible vacation days actually take less time overall.

Encouraging Time Off

Landing on a policy that everyone agrees with is hard — but usually, the biggest lift comes in encouraging adoption. That’s especially true during a crisis like this year’s COVID-19 outbreak, as employees might be wary of the optics of taking a break. “Getting employees to actually take time off is often the trickiest part,” Gordon said.

The data bears that out, regardless of whether companies used conventional or unlimited PTO. Last year, three out of five employees left some PTO on the table — amounting to as much $172 billion worth in hours, or an average of $1,800 per person. For HR teams, that number doesn’t represent cost savings as much as it means employee burnout and lower engagement survey scores. While employees cite a number of reasons for not taking time off, the most significant might be team norms and manager expectations.

“Many times, employees are scared to take time off because they feel they may be overlooked for a promotion, appear weak, or even replaced…Leadership must promote a culture where it’s okay to take time off and lead by example. More employees will gladly take the time off if they feel safe doing so, and are rewarded for it,” Gordon said.

In addition to offering soft encouragement, some companies go just a bit further. Webflow instituted a program that literally pays employees to take a break. “Once employees go on that first vacation, we pay out a $1,000 first-vacation bonus if it’s for five days or longer,” Doshay said. Considering the high cost of disengagement and turnover, identifying the ROI of R&R wasn’t a challenge when her team first made the case for the perk. “It’s so important to do that. It’s really a low-cost investment,” she said.

While hardly a cutting-edge perk, vacation days are still incredibly important to employees and job seekers alike. Need to compare notes? Ask questions, share your experiences, and learn how other companies are handling PTO by joining our 8,000-strong community, Resources for Humans.