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How to Create a PTO Policy

Understand how to create a Paid Time Off Policy that fits with your organization while staying compliant with government laws & improving employee retention

by Michael Gugel, CPO @ GoCo - December 12, 2019

Paid time off (PTO) is, according to HR Daily Advisor, any time an employee is being paid while away from work and not working. Many confuse PTO with vacation, and although vacation time is a type of paid leave, there are other circumstances that fall under the PTO umbrella, such as personal leave, sick leave, disability leave, Jury Duty, and pregnancy leave.

Access to paid time off can be a tremendous perk for employees. For employers, offering this type of benefit can create goodwill and loyalty among employees, as well as improve their competitive position in recruitment and retention. Some employers are required to provide certain types of leave to employees, yet many go further.

Understanding the requirements and following applicable laws can be confusing and complicated when creating a PTO policy, especially for small businesses. Here’s a look at the different types of leaves your human resources team needs to take into account when creating a PTO policy for your organization.

Family Medical Leave Act (FMLA)

Let’s start with the Family Medical Leave Act (FMLA), which many employers are required to follow. These rules apply to companies with 50 or more employees in 20 or more workweeks in the current or preceding calendar years. The law also applies to most public agencies and public and private school systems. Enacted in 1992, there were updates in 2008 to include provisions for military service.

An employee is eligible for FMLA if he or she:

  1. Works for a covered employer
  2. Has worked for the employer for at least 12 months
  3. Has at least 1,250 hours of service during the 12-month period immediately preceding the leave
  4. Works at a location where the employer has at least 50 employees within 75 miles

The Act provides for unpaid job-protected leave for up to 12 weeks in a 12-month period for the following reasons:

  1. The birth of a son or daughter or placement of a son or daughter with the employee for adoption or foster care
  2. To care for a spouse, son, daughter or parent who has a serious health condition
  3. For a serious health condition that makes the employee unable to perform the essential functions of his or her job
  4. For any qualifying exigency arising out of the fact that a spouse, son, daughter or parent is a military member on covered active duty or call to covered active duty status.

There is another provision for an eligible employee to take up to 26 weeks of unpaid job-protected leave during a single 12-month period: To care for a covered service member with a serious injury or illness when the employee is the spouse, son, daughter, parent or next of kin of the service member.

One key theme to notice in the FMLA is that the mandated leave is unpaid. Family medical leave protects employees’ jobs, but it does not require the time off has to be paid. Employers, however, can require or allow employees to use paid time at the same time as family medical leave. An employee returning to work after taking personal time from FMLA leave is entitled to be restored to the same job or an “equivalent job.”

Military Leave

Whereas the Family Medical Leave Act is widely known, the Uniformed Services Employment and Reemployment Right Act of 1994 (USERRA) is not as well understood. Employers need to understand their responsibilities and the rights of employees under USERRA. The Act covers all public and private employers in the United States. It protects the rights of those who leave employment to serve in uniformed services.

When an employee receives orders to active duty and provides notice to the employer, the employee is entitled to be promptly reemployed in his or her position upon returning to employment. This includes seniority, status, and rate of pay that he or she would have ordinarily attained if the military service had not intervened. USERRA is designed to eliminate discrimination against military members in hiring practices and reemployment. Leaves of absence can generally last up to 5 years. There are exceptions to the 5-year limit.

Health Insurance Benefits

Employers also need to be mindful regarding the handling of employer-provided health insurance during FMLA and military leave. In some cases, the employee cannot be required to pay more than the regular employee share. This is the case when an employee is on FMLA leave, as well as when an employee is on military leave for less than 31 days.

State and Local Requirements

Employers should also understand any specific requirements in their state and locality. Several states and local governments have passed legislation for paid family medical leave and paid sick leave. These laws provide greater benefits to employees. They may also apply to a broader spectrum of employers.

Policy and Procedure Considerations

As organizations grow and mature, more people become affected by their policies. It is important to institute transparent policies and procedures for employees taking PTO, and keep a record on whether the PTO is for vacation time, personal days, sick days, etc. There are aspects of some of these laws where an employer may have to make a policy decision.

One example is the 12-month period mentioned in the FMLA. The employer can recognize any 12-month period or a rolling 12-month period. Many employers also go above and beyond USERRA and provide a set amount of paid leave. Making a clear distinction in policy allows employees to have greater clarity and satisfaction.

As long as you’re exact and deliberate in your record-keeping, leave laws and policies protect both the employer and the employee. But you need to make sure all your I’s are dotted and T’s crossed.

Leave Benefit Options for Employers

Now that we have explored the basics of leave policies, let’s take a closer look at leave benefit options employers may consider. These types of benefits can have a positive impact on employee recruitment and engagement. With so many different strategies out there, what will work best for your organization? Let’s examine some of the current trends pertaining to PTO policies.

When employers have historically offered paid leave, they have often provided sick leave and vacation (or annual) leave. Recently, many companies have taken bold steps to change the way they administer these benefits. Let’s take a look at some of these trends.

PTO and Parental Leave: Changing Expectations

Parental leave has come up a lot recently as companies implement this perk as a paid benefit. While the Family Medical Leave Act (FMLA) provides time off for the birth or adoption of a child, this leave is unpaid, providing up to 12 weeks off during a 12-month period. Companies implementing parental leave typically offer paid leave, in some cases, more than 12 weeks in duration.

Parental leave benefits are typically available to employees for up to a year following the birth or adoption of a child. This arrangement gives employees flexibility, allowing them to spread out their personal time away from work. This also allows them to coordinate with another caregiver and maximize time with their children — A very attractive perk for working mothers.

Technology companies are making many headlines in this arena. In late 2015, Amazon announced significant changes to its parental leave policy. It now provides mothers up to 20 total weeks of paid leave. Fathers and adoptive parents are eligible for up to six weeks of personal time.

Facebook is another early adopter of paid parental leave benefits, providing up to four months of paid leave. In November of 2015, founder and CEO Mark Zuckerberg announced that he planned to take two months of paternity leave when his daughter was born.

The private sector is not the only area of the economy increasing these benefits. Navy Secretary Ray Mabus tripled maternity leave for female sailors in July of 2015. The move to 18 weeks of maternity leave was inspired by a similar move at Google. The online search giant found that the number of moms who left the company after giving birth was halved after it increased its maternity leave from 12 to 18 weeks in 2007.

Paid Time Off As a Healthy Alternative to Sick Leave

Another strategy is to scrap vacation and sick leave balances in favor of paid time off. Employees have historically received separate sick time, as well as vacation time each month. Employees used sick days when they were sick, needed to take personal days to care for a family member or go to a doctor’s appointment. When employees took a vacation or needed vacation days, they took vacation (or annual) leave.

This turned some supervisors into investigators: “Are you sick? You don’t sound sick. Why does it sound like you’re in a casino?” Some employees felt entitled to make full use of the sick leave they received each month. Employees that didn’t abuse the sick days, felt they were not able to use the benefit.

PTO aligns the interests of the employee and employer. The accrual is used for all absences. It removes the incentive for an employee to take sick time for no other reason than because he or she accrued one last month.

Unlimited Paid Time Off: Putting Employees in Control

Though parental leave has not been the trendiest leave policy as of late, unlimited paid time off has been. Companies like LinkedIn and Netflix, (and GoCo) have moved away from tracking employees’ time off. Instead, employees decide how much time to take off. This policy is built on a mutual understanding between staff and management.

Unlimited PTO is often adopted by organizations that have demanding work schedules. Employees have to consider their projects and workload when scheduling PTO plans. Performance and delivering results is what counts, not days in and out of the office.

The downside to this is a potential overemphasis on performance. Critics of the policy say employees end up taking less vacation time. They point out that there may be disincentives to use needed benefits in competitive work environments, and work-life balance might actually decrease. A Netflix representative countered that argument in a 2011 Wall Street Journal article, stating that employees were taking an estimated three to five weeks off under the new PTO policy – the same or slightly more than under the previous vacation policies.

Another advantage of having an unlimited PTO policy, and a clear explanation of what it entails in your employee handbook, is that it liberates human resources from having conversations about unused vacation, floating holidays, or absenteeism due to sick days, because it is all part of the same policy.

Deciding if Paid Time Off is Right for Your Organization

Employers can adopt traditional leave benefits or offer employees newer plans. This can set them apart from competitors. It can create policies that retain employees through well-managed leave programs. But the existence of a leave policy is rarely enough. Determining what fits and aligns best with the organization may be most important.

Changes in work and the economy are an opportunity to align benefits with goals and culture. Paid time off policies are a step in that direction. Employees become empowered to use their time off to meet their needs and supervisors have less reason to meddle in personal business. Why dictate the amount of time off to high-performing employees? Top employees are unlikely to see unlimited time-off policies as an excuse not to work. These policies recognize that an employee can be responsible for deciding how much is enough while still remaining productive.

Choosing the best leave policies is a balancing act, and employers should be careful to retain productivity while being fair to their employees. Leave benefits come down to employers recognizing and encouraging employees’ needs for balance. Technology and connectedness have blurred the lines when it comes to work-life balance, sometimes resulting in people pursuing demanding careers to the detriment of their families. Making these benefits available and encouraging their use can benefit both employees and employers.

Requesting or approving time off and distributing company policy to employees doesn’t have to be complicated. Discover how GoCo can simplify your HR, paid time off, benefits and payroll so you focus on doing what you do best.

See how GoCo can simplify your HR