Best practices to create a good paid time off policy

Organizations with a sound paid time off policy are likely to see happier and more productive employees with a good work-life balance than those that don’t. In line with growing trends, a 2022 SHRM survey indicates that 82% of employees believe their company’s paid time off is a deciding factor for them to stay or leave an organization. 

While there’s no single approach to offering PTO, businesses can choose what works best by ensuring feasibility and optimal enforcement. Here are the top 8 best practices while crafting a paid time off (PTO) policy that benefits both your company and your employees. 


1. Identify and comply with legal requirements for PTO


Currently, no laws require companies to dole out paid vacation days, but you’re still legally required to provide paid annual, sick, and medical leave, depending on your local laws. The first step to drafting a PTO policy is identifying what kind of time off regulations your organization needs to comply with and whether you need to compensate for unused PTO. Employment laws and paid time off policy requirements vary based on geography. 

Then, ensure an attorney drafts your PTO policy; if that’s not possible, at least get it reviewed by one. This is important as it looks out for both the employer as well as the employee — you do not want to get into a legal altercation if an employee mistakes your PTO policy for a binding contract. And the policy also ensures that employees get the entitled time off. 

2. Decide the PTO policy you would like to implement

The best way to choose a PTO policy suitable for your business is one that promotes work-life balance for your employees while also letting you have control over absenteeism. Your organizational demands, strategies, and earnings need to align with the type of policy you want to implement. 

There are four main types of PTO policies:


3. Define clear limits to your PTO policy


Once you’ve decided which type of PTO policy best suits your organization and why the next step is to allocate and set limits on the time off.  Typically, a traditional PTO policy calls for 30 days off, including sick, vacation, and personal leave. If you choose a flexible PTO policy, you can set the cap depending on your current time off data trends. 

Clearly define the maximum allowance no matter the type of time off and ensure that the rule book or handbook is easily accessible by employees.  By doing so, employees can precisely know how much time they can take off from work — paid and unpaid. An easy-to-read policy guide enables transparency for time off and compensation for employers and employees. 


4. Implement an approval and tracking process for accountability


After outlining your policy, you need to figure out a way to manage the paid time off. Historically, companies tracked paid time manually using spreadsheets and emails. Organizations can leverage technology to manage PTO, and realize accountability and greater productivity.

With time off management software, you can easily manage your PTO approvals while tracking the time-off data. It’s automated, accurate, error-free, and completely online. 



5. Set a time frame to call in sick or for planned leave


How sooner or later is it okay for employees to raise PTO requests? Whether it’s a planned vacation, illness, or an emergency, each type of PTO requires different ranges of advance notice. Setting a time frame to apply for PTO is crucial so managers and teams can plan work with enough information. 

Employees also need to know how often they can use their PTO within a specific month, quarter, or year. Organizations need to decide the frequency and limits and communicate the same across the company through an online platform or the handbook. Additionally, organizations should plan for holiday seasons, school vacations, or long weekends when several employees tend to club their PTO — specify the number of people in a team that can take time off together. 

6. Determine PTO policy based on different roles

Some companies have role-based or hierarchy-based PTO allowances — like providing different employee groups with different PTO. Also known as a tiered structure, it gives senior employees more time off or faster time off accrual than new hires, or even based on job titles and departments. 

Offering PTO based on roles can also mean tweaking time frames to give advance notice for their time off. Companies also benefit from planning for backup staff based on the PTO policies they define for each role. Employees may even find replacements for their time off. This helps ensure that persons performing critical functions in an org can continue to do so seamlessly.

7. Decide on PTO roll-over policy


Depending on employment legislation, organizations must decide whether their employees can roll over unused time off or if they need compensation through a cash-out at the end of each cycle. Some companies prefer that their employees take the accrued time off for the calendar year as this will prevent hoarding time-off or employees taking PTO in bulk — meaning they could be gone for a long period, and it will, in turn, affect business. 

To tackle this, organizations can enforce a roll-over policy such that employees have a limit on rolling over unused PTO to the next year. Another standard option is that eligible employees can cash out unused PTO.

If you are enforcing flexible PTO, your employees get to decide how they want to use their PTO. Organizations can craft the PTO policy to allow employees to roll over unused days or even let them buy or sell PTO in exchange for compensation. 

And with unlimited PTO, there is no limit on the amount of time off your employees can take. Since PTO does not accrue with the unlimited policy, companies do not have to worry about rollover plans or compensating an employee at the time of exiting. 

8. Encourage employees to use their PTO


In view of the stress brought on by the pandemic and general work overload, employees must be encouraged to use their PTO. By incentivizing workers to take time off, businesses will see increased employee retention, higher productivity, and better quality of work since their employees will be well-recharged. 

Managers must approve PTO requests with no interrogation (within reason), and the company culture must show that it’s healthy and even vital for employees to take time off. Organization leaders should model the same behavior to prevent burnout and promote employee well-being.  

FAQs on Paid time off best practices

1. What happens if I don’t use a PTO policy for my small business?

Local laws decide if your small business needs a PTO policy in place or not. And if laws don’t require you to have PTO, having a PTO policy for your employees is worthwhile. If you are a small business and haven’t implemented a PTO policy, you may notice a higher turnover rate, and your employees could be overworked. Enforcing a PTO policy is a one-time effort, and you will see significant savings on cost, time, and resources as an employer. Using time off management software to enforce PTO policy for your small business can hassle-free manage employees’ paid time off affordably.