PTO Policy Considerations for Small Business Owners

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Ninety percent of employers offer some version of paid time off (PTO) to full-time employees, the Bureau of Labor Statistics reports. Although offering PTO plans to employees is not required by law, these benefits can drastically improve the quality of company life. Because small businesses have no shortage of options when it comes to structuring their PTO policy, it’s important for owners to decide on their programs based on the unique needs of their operations and workforce.

When building a PTO program, small businesses must take a number of factors into consideration. Below are some common issues regarding PTO policies for small businesses.

One PTO Bank vs. Multiple PTO Days

This issue refers to the allocation of time off. Employers can label PTO for specific uses, such as sick days, vacation time or bereavement. They may also put PTO in a “bank,” designated for employees to use however they see fit.

When considering which allocation to use, companies should consider the following:

PTO Banks:
  • Are easier to track
  • Create feelings of equity among staff
  • May reduce the number of unscheduled absences
  • Offer a good selling point for employee recruitment
Multiple PTO Days:
  • Help companies clearly demonstrate their compliance with labor laws
  • Discourage employees from taking additional days off when they are not needed for their intended purpose (such as not being sick)
  • Lower a company’s financial liability

Accrued vs. Granted Time

This issue refers to how employees obtain their PTO. Accrued policies require employees to earn their PTO throughout the year, either every pay cycle or every month. Granted policies give employees all their PTO at once, at the beginning of the year. If an employee starts work in the middle of the year, granted PTO is prorated accordingly.

Accrued Policies:
  • Can make it easier for employers to stay fair to employees who enter the company mid-year
  • Can be more difficult to track
  • May cause problems if an employee needs to “borrow” future PTO days and then decides to leave the company. It may prove difficult for companies to reclaim the time or compensation.
Granted Policies:
  • Are simpler to calculate
  • May contribute to higher employee morale because of less boundaries on PTO
  • May be exploited if an employee enters and exits the company quickly
  • May cost the company money, either because an employee enters and exits the payroll quickly or leaves early in the year (and thus requires the company to pay his or her PTO balance)

Rollover vs. “Use It or Lose It”

This issue refers to the way employers handle unused PTO. In rollover plans, any PTO that remains unused at the end of the year carries over into the next year’s plan. “Use it or lose it” policies only allow employees to use their allotted PTO within the year it is issued.

Rollover Plans:
  • Are a nice way to accrue large amounts vacation time and can thus improve employee morale
  • Run the risk of getting out of control (in other words, employees can accrue too much time)
  • Can discourage employees from taking enough vacation time, thus contributing to decreased work outcomes
Use It or Lose It Plans:
  • Are easier to distribute
  • May promote widespread employee absence toward the end of the year
  • Are illegal in certain states, so employers must use caution

Flat vs. Tiered

This refers to how much PTO employees receive. Flat systems give every employee the same amount of PTO. Tiered systems give more time off to employees who have worked at the company longer or who have increased levels of responsibility.

Flat Systems:
  • Promote feelings of fairness and equality
  • Are easier to manage
Tiered Systems:
  • Promote employee retention and loyalty
  • Can become increasingly complicated to operate as a business grows

Ultimately, all small business owners must decide for themselves which PTO plan is right for them. There is no right answer when it comes to building a PTO policy — base decisions on each company’s unique size, culture and resources.

Sources: TriNet, FitSmallBusiness, Insperity, ADP

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