By: Andrew Klein, Ph.D., Principal
When creating an internal leave structure for their companies, employers are faced with the decision to choose an option that best fits their environment. Employers can either offer their employees a traditional leave program, which separates leave into different categories (vacation, holiday or sick time); a single leave bank of hours, called Paid Time-Off (PTO); or not offer any paid time off at all. Selecting one of these options is at the employers’ discretion, since the law does not require employers to provide paid time off for personal use at all. However, 94 percent of employers choose to offer their employees some type of paid time-off benefits because of the value that providing these kinds of benefits brings in terms of attracting and retaining employees, and remaining competitive in the marketplace. Employers are faced with deciding how much leave they will provide, and how that leave will be structured.
Traditional Time Off
The ‘traditional’ time off model separates leave hours into different categories, identified in Table 1. Category 1 leave is only taken occasionally and most employees will only use it once or twice during their tenure at a company. Each type of Category 1 leave is individually specified (number of days, approvals, governing law, pay impact during the leave, etc.). Typically these leave categories are not included in a Paid Time-Off (PTO) program.
Category 2 leave is granted on an annual basis with the expectation that most employees will use at least some of the time provided during the course of a year (e.g., vacation).
Paid Leave Types
|Category 1||Category 2|
Paid Time-Off (PTO)
PTO is a “bank” of hours from which an employee can draw, depending on his/her needs. PTO is a generally a flexible arrangement that provides the employee with a set number of days off per year to be used at the employee’s discretion. These days can be used for sick time, personal days, vacations, or for whatever reason the employee may need time off.
The annual number of PTO days may increase based on years of service and/or the employee’s position within the organization.
According to the 2015 Gallagher Benefits Survey (and supported by other surveys, such as the 2015 SHRM survey of benefits) about 2/3 of employers used a traditional leave program and 1/3 used PTO. (See Table 2, below.) This ratio has been stable for several years, but there are indicators in the data of an increased move to PTO programs.
PTO vs Traditional Practice
|Category||# reporting participants||Separate days for vacation, illness, holidays, etc. (Traditional Time Off)||Combined bank of days (PTO)|
|Not for Profit||876||75%||25%|
|Under 100 FTEs||899||65%||35%|
|100 to 499 FTEs||774||66%||34%|
|500 to 999 FTEs||214||76%||24%|
|1,000 or more FTEs||298||71%||29%|
PTO Leave Practices
68% of employers allow your employees to carry over PTO leave to the next year. Often times there is a maximum PTO leave amount that employees are allowed to accumulate in their leave banks.
- Unlimited: 21%
- 31 days (248 hours) : 21%
- 21-30 days (168-240): 31%
- 11-20 days (88-160): 16%
- < 10 days : 11%
The Law and Virginia Practice
While paid vacations and PTO aren’t legally required benefits, once you offer such benefits the situation is changed. There are a host of laws – mostly at the state level – that address what happens with unused time. In many cases, courts are ruling vacation time is a vested benefit (earned) and must be paid. PTO blends together vacation, sick, personal, and holiday pay and, therefore, all PTO may be seen as “vacation” pay.
An employer must pay an employee for accrued vacation upon separation from employment if its policy or contract provides for such payment.
The Virginia Department of Human Resources Management states that State employees receive family and personal leave based on the number of months of state service as follows: Employees with less than 120 months of state service receive 32 hours of paid leave per year; employees with 120 or more months of state service receive 40 hours of paid leave per year. Unused balances of family and personal leave are not carried forward from year to year.
Advantages and Disadvantages of a Paid Time-Off Policy
|PTO plans can make your company more attractive to prospective employees and make it easier to retain current employees by increasing the control that employees have over how they use their leave.||Employees are treated as adults who are entitled to use PTO at their discretion without oversight.|
|When employees are given ownership of paid time off, they are less likely to abuse the leave and cause disruptions at work.||Employees value the flexibility in scheduling time off from work, whether it is for vacation or other purposes and tend to be more careful with its use when it is in their control.|
|PTO can be easier to administer by eliminating the need to track different classifications of leave.||Traditional plans can have problematic “incentives”. They often lead to employees taking sick leave to do other things (e.g. go fishing). Hunting season leads to a spate of “illnesses” for many southwest Virginia employers. Employers often turn a blind eye or try to enforce the rules. Either sets up an undesirable dynamic. PTO eliminates this dynamic.|
|PTO promotes a more equitable workplace by allowing employees to meet diverse needs such as observing non-Christian holidays||Employees do not have a need to determine why the leave is necessary. If an employee needs time off for a trip to Tahiti, a doctor’s appointment, religious holidays, or wait for the cable guy, all are covered by the same policy and are drawn from the same bank of days.|
|Employees tend to view PTO as a benefit and use all of the time off, whereas they may not have in the past.||Some research shows that employers who adopt PTO may give employees fewer overall days than they had previously, and/or new employees accumulate PTO banks more slowly than longer-term employees who had time grandfathered.|
|Employees tend to reserve all PTO time as vacation and come to work when they are sick.||Employees may come to work sick and jeopardize their health, the health of others, and even the ability of the business to get the work done. Employees may be exposed to more workplace illness if co-workers come to work sick.|
|With the freedom of not having to explain their reasons, employees may be absent more frequently without notice. This can be controlled somewhat by requiring prior approval for most PTO.||Many firms seek to reduce paid leave costs. The total days of leave are usually less under PTO than traditional plans. Employees figure this out quickly and are resentful, causing deterioration in a culture built on trust.|
|Companies may experience higher benefits costs. Employees who never used their full allotment of sick leave may use all of their PTO every year. If policy allows for the accrual of days, one challenge may be that the employee will need to borrow days from the future to take a vacation early in the year. The issue with this approach occurs when an employee departs with a negative balance of vacation days, as you may not be able to collect the value of those days from the employee.||Employees may not manage leave well and not have the protection of paid time off when most needed like a family or heath emergency.|
|With PTO, sometimes employers must payout more leave at termination. Keeping vacation, personal, and sick leave separate can cut down on the amount of time that needs to be paid out.||It may breed resentment inside an organization: Each employee’s personal circumstances will differ throughout the year. Some will find that they need to use PTO days for items such as caring for children or elderly parents, while others are able to use them for recreational activities and vacation getaways. This may often cause resentment and complaints to arise within the workplace.|
|PTO programs tend to address the basic needs for employers and employees in that they meet a common need for employees to strike a better work/life balance, which results in more productivity for the employer.||PTO programs tend to address the basic needs for employers and employees in that they meet a common need for employees to strike a better work/life balance, which results in more productivity for the employer.|
How to Make the Right Decision
It is all about philosophy and culture. While the leave practices of others are instructive, what matters the most is the culture and intent (what problem are we trying to solve?).
Leave program design is flexible. Ultimately, the program should be built to achieve the unique goals that are a combination of organization financials, the company culture, the “problem” you are trying to solve, and support of the employment “brand” that keeps people attached, motivated, and productive.