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4 Tips for Business Paid Time Off Plans

Four Tips for Implementing a Paid Time Off Plan

Paid time off plans, or PTO banks, give employees flexibility in using their paid leave and are generally easy to implement. Use these guidelines to determine if a PTO business plan is right for your organization and find out four tips for putting a PTO plan to work for you.

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What happens under your vacation or sick leave policy if an employee needs to stay home with a sick child? Or, what do you do if an employee wants to take two days off to attend a nonwork-related seminar? Under a traditional policy that separates vacation and sick days, employees often feel as if they are forced to fake an illness to avoid using their vacation allowance. With a paid time off bank, or paid leave bank, you can give employees a set number of paid days a year and then let them choose how the days will be used.

(Download free Short-Term Absences model policy including HR best practices and legal background.)

PTO Defined: What Are Paid Leave Banks?

Under the typical PTO business plan, employees are given a certain number of days per year for all types of paid absences (including vacation, sick days, or other approved reasons). Some plans also include holidays as part of the PTO bank. Employees then use the days as their personal needs dictate. For example, an employee may choose to use most of his PTO days to care for a sick child or other family member.

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Like traditional vacation policies, employees generally must get advance approval to take planned days off. Most employers also reserve the right to deny or reschedule leave according to business needs. Unlike separate vacation and sick leave policies, most PTO plans do not require employees to give a reason for the leave. As a result, these PTO plans generally do not require any medical verification of the need for a day off for illness.

Advantages of Paid Time Off Plans

Many employers find this system easier to administer because they only have to track the total number of days off and do not have to deal with as many employee excuses. Employees like the flexibility and the control it gives them since they generally do not have to justify or explain the need to take a paid day off. This way, they are not forced to misrepresent the reason for their absence and may be more inclined to give you advance notice. Furthermore, employees who rarely use sick days appreciate the additional time available to meet other needs.

But, PTO plans do have some disadvantages. For example, because the distinction between vacation and sick days is obscured, employees may take more time off as vacation and not save sufficient time for illnesses later in the year. Consequently, you may end up granting all the paid time off under the plan and then face requests for unpaid sick time not properly banked for the end of the year.

In addition, since employees typically do not have to designate which days are sick days, you may not know when the worker’s absence qualifies for Family and Medical Leave Act (FMLA) coverage. Thus, you may miss securing proper FMLA medical certification or the right to count the days already used as part of the employee’s 12-week FMLA entitlement. Finally, any unused time under a PTO plan may have to be paid out at termination in states that require payment for unused vacation and personal time as part of final wages (such as California and Illinois).

Four Paid Time Off Plan Considerations

To determine if a PTO plan is right for your organization, consider these four factors.

1. Attendance patterns and costs. If employees are missing days for reasons not covered by separate vacation and sick leave policies (such as for child or elder care), a PTO plan may help.

2. Organization culture and attitudes. PTO banks work well in flexible organizations that regularly delegate to employees the power to make decisions. On the other hand, managers who seek to retain tight control often will be uncomfortable and resist PTO plans.

3. FMLA compliance. If your organization already has difficulty tracking FMLA absences because supervisors have trouble identifying which absences to count, a PTO plan may make the problem worse.

4. State laws on pay at termination. If you have employees in states that require the payment of unused vacation at termination, and you do not want to pay this, a PTO plan may not be appropriate.

(Download free Short-Term Absences model policy including HR best practices and legal background.)

Four Tips for Implementing PTO Plans

Many employers that have adopted PTO plans feel they provide flexibility, reduce headaches, and give employees desired control over their time. If you decide to switch to a PTO bank, here are four tips for implementing the plan that should help with the transition and improve your chances of success:

1. Determine what types of absences should be covered and then set the total number of days.

2. Clarify how unused days will be handled. Specify whether they can be carried forward and paid at termination or used exclusively as sick days. When employees carryover the unused time as sick days, they have an incentive to build reserves for future illnesses. At the same time, you may be relieved of the potential obligation to pay out the unused days at termination, since most states that regulate the issue only require the payment of unused vacation or personal days, not sick days.

3. Establish procedures to identify and properly certify absences that qualify for FMLA. One way would be to establish a system to flag all absences over three days to determine if FMLA issues are involved.

4. Educate both employees and supervisors about how the PTO works and its advantages. Plan to spend extra time with any supervisors who may be concerned about giving up some of their direct control over time-off decisions.


Robin Thomas, J.D.
Personnel Policy Service, Inc.

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Chiquita Brown
Chiquita Brown

I am trying to learn how to set up a new PTO plan!

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