Small business owners who oversee a growing team know that one task that can disrupt workflow and hurt morale is managing employee time off requests.

This task only grows more crucial, and more complicated, when you decide to implement a paid time off policy.

Although there are no federal laws surrounding paid time off (as in businesses are not federally required to offer it), in a strong economy, paid time off becomes more than one of many perks—it’s seen as a requirement by prospective employees.

Unfortunately, business owners can’t just announce a paid time off policy and let the chips fall where they may.

They must consider questions of time off management, fair vacation scheduling, a part-time employee vacation policy, accrual, and other factors.

Let’s run through the ins and outs of establishing and managing your business’s paid time off policy.

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What is a PTO policy?

Paid time off, or PTO for short, is a voluntary benefit offered by businesses to their employees, with the goal of keeping them engaged and happy.

You’ll find it difficult to attract, not to mention retain, high-quality talent these days without a PTO policy.

The basic tenet of PTO is that you give employees time off each calendar or financial year — 40 hours, or two weeks, or longer — and pay them for that time, as well.

Paid time off can encompass different kinds of “days off.”

It might mean vacation days, sick days, and personal days. It’s up to you whether you want to group all of these days off into a collective PTO leave policy or PTO “bank.”

This is different from an unpaid time off policy.

Unpaid time off policy

Unpaid time off is what it sounds like: Employees can take the time off if they’re sick, or have a personal emergency, or need a break, but employers won’t pay them for it.

In a competitive economy like the one the U.S. is experiencing, top-flight talent can expect to choose from multiple offers.

If your business doesn’t offer time off, or only unpaid time off, expect another company to hire away the best employees.

If you’ve already hired a team and want to keep them engaged, paid time off is an excellent tool to help ensure that.

Happiness at work is linked with productivity, and low satisfaction is linked with high turnover.

To avoid the burnout that comes from a 24/7 work culture, give your employees time off so they can recharge.

This commitment to your employees’ well-being will, in turn, give your company a positive and high-performing workplace culture that boosts not only to your bottom line, but to your reputation — making your business a more attractive to future employees.

This cycle of attracting, retaining, and impressing quality talent is worth the price of PTO alone.

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How to get started with PTO

Now that you understand PTO and see the potential value in it for your business, it’s time to breakdown what you should consider when starting a time off policy for your small business.

Paid time off vs. time off

As mentioned above, the one crucial difference between a paid time off policy and time off policy is, of course, pay. There are several different types of form of time off, however:

Paid time off

PTO leave can include vacation, parental leave, sick leave, a paid leave of absence, a paid military leave, bereavement leave, jury duty, and paid holidays.

Your business might choose to offer vacation and sick leave under the umbrella term “paid time off,” without also offering paid parental leave or allowing for a leave of absence.

The exact details of the policy is up to you as the business owner, or company leadership.

Time off

Unpaid time off can include time off for vacation, parental leave, sick leave, a leave of absence, military leave, and holidays — all without pay.

It also may include unpaid time off, medical leave under the Family Medical and Leave Act (where employees can take up to 12 weeks of unpaid time off work to care for themselves or a family member), or non-FMLA medical leave.

Federal law does not dictate that businesses give their employees any PTO. The United States is an outlier with respect to paid time off, in that it’s the only one of 37 countries in the OECD not to mandate paid vacation policies.

Employers thus have latitude when it comes to implementing their paid time off policies. The only requirements are those via contracts and agreements signed with employees, through collective bargaining or otherwise.

Once you offer paid time off to your employees, there are a few factors you’ll need to consider going forward, including:

  • A written policy: No matter what you decide about PTO — whether or not to offer it, how long you allow for, and under what circumstances it’s allowed — you’ll need to make your policy clear from the beginning. Create a written policy as part of your employee handbook, so there’s no confusion from employees, past or present. The only time a state will hold you to upholding tenets of your time off policy is when you make a promise and then break it.
  • Pay-out regulations by state: Some states consider earned vacation time as wages, and prohibit businesses from a “use it or lose it” policy, which means you’ll have to pay out their PTO in wages if they leave the company. If your business is in California, for example, you’ll follow different regulations than those in New Jersey.
  • Employee classifications: Whether your employees work full-time or part-time, year-round or seasonally, or are paid hourly or annually may affect whether you offer them PTO and how you calculate their time accrued. Whatever you decide, make sure that you write it down ahead of time, rather than come up with it on an as-needed or as-requested basis.

How many paid days should an employee get off?

How much PTO to offer your employees entirely depends on what you can afford, what makes sense for your business, and what your competitors offer.

One of the primary considerations of PTO is how it affects recruitment and retention.

With that in mind, offer what you think will appeal to your employees and prospective employees.

The average American worker gets about 10 paid vacation days each year, or about two work weeks.

It’s up to you whether to improve upon that number. Some companies do just that, even going to the point of offering “unlimited” PTO.

Keep in mind that most businesses give employees time off on federal holidays when possible — such as Labor Day and Christmas Day — without counting it against their official PTO balance.

What is unlimited PTO?

Unlimited PTO is an increasingly popular method of giving employees time off.

Employers tell their workers they can take as much time off — for vacation, sick days, personal reasons, etc. — as they need throughout the year. Provided they get their work done, of course.

There are two benefits to the employer:
Offering unlimited time off is an attractive perk to many people, especially young workers who prize autonomy and flexibility.
It also means the employer does not have to pay out time off once the employee leaves, if so required in their state.

Unlimited PTO requires both trust and diligence from both sides of the equation.

The employer has to trust that the employee won’t abuse the perk, and the employee has to trust the employer to not hold it against them if they do take the time.

Some research shows employees actually take off less time under an unlimited vacation model than they would otherwise. You don’t want your policy to lead to burnout in the long run.

How to manage time off requests

Whether you give employees a set amount of time they can take off, require them to earn the time off with time worked, or grant them unlimited PTO, you’ll need a system for managing their requests.

Many businesses use a human resources management system or information system to process all HR activities (such as payroll, onboarding, and scheduling time off). Some third-party services cover all aspects of employee time management. You should also consider how you deliver this information, as the way the new process is shared with your team can help with learning retention and making sure policies stick.

1. Create a policy and document it

Your first step should be to outline your time off request policy in your employee handbook, and include all the steps expected and necessary when requesting vacation or calling in sick.

This might include notifying a supervisor by email, or making your request in advance.

Add provisions that you think may come up, such as why a manager might deny a time off request.

2. Find a tool that tracks time off for you

Time off requests scribbled on post-its or lost in your email are a thing of the past.

Especially when there are tools such as Hubstaff that track time off requests, approvals, and balances for you.

The beauty of using a cloud-based solution for tracking employee time off, sick days, and vacation requests is that there will be transparency, as well as a digital record of requests (alongside approvals or, if necessary, denials).

You’ll see who requested time off, how this time fits into their allotted PTO, whether it conflicts with existing approved requests, and what reasons managers gave for denying requests.

The app even lets you customize your policy on a per-user basis, which is helpful as businesses grow and continue to add staff.

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For employees, it’s easy to see how much time off they have left without having to check with HR or keep track themselves.

How to handle when employees ask for too much time off

What should you do when employees request too much time off?

If you have an unlimited vacation policy, compare your employee’s output to their time off.
If they aren’t meeting their expectations in their role, you have a perfectly good reason to deny their request and explain why.

If you have a set amount of PTO and your employee goes over that amount by missing work, you can “debt” them a day (that they’ll lose next accrual period), or you can dock their pay — even if they are salaried and exempt.

Be careful with deductions, as you can stumble into owing that employee overtime pay if you improperly make deductions from their salary.

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How to calculate PTO

So how is PTO time calculated? There are several methods.

You can do some calculations on your own, or you can have your time tracking software do it for you.

Yearly allotment

This is the simplest method: When an employee’s year starts, you give them a set amount of PTO: 40 hours, 80 hours, etc.

They draw from that pool of time off throughout the year.

When the next year starts, you give them another block of PTO. You may or may not utilize a “use it or lose it” policy here, if allowed by state law.

Hourly accrual

The hourly accrual rate means PTO depends on how many hours an employee works.

The calculation is simple:

  1. Divide the hours in one work week by the amount of expected hours worked in one year.
  2. That could be 40 hours in one work week, divided by 2,000 hours in a year, equaling .02 hours.

That means employees will earn .02 hours of PTO for each hour they work. They can use these hours (perhaps after accruing a certain minimum) any way they’d like.

Daily accrual

A similar accrual method that depends on an employee working an 8-hour shift.

  1. Divide the number of days worked in a year by the number of vacation days you allot.
  2. There are typically 260 work days in a year, but you’d subtract the amount of days off you give an employee.
  3. So if they take 10 days off, they’ll only have 250 work days.

This method is best for part-time workers, who may only work a few days a week.

Bi-weekly, monthly, and bi-monthly accrual

These methods pertain to your pay period and remain consistent across each paycheck.

Calculate bi-weekly accrual by dividing your allocated PTO (say, 40 hours) by each pay period (in this case, every two weeks, or 26 in total).

In this calculation, 40 ÷ 26 = 1.54 hours PTO accrued. The same goes for monthly (40 ÷ 12) and bi-monthly (40 ÷ 24).

Your digital time tracking solutions should be able to keep track of employees’ time accrued and PTO spent.

This will help you manage employee requests and create a record that prevents a potential FLSA lawsuit.

Your next steps

Now that we’ve gone over each aspect of a solid PTO policy — how it works, why it’s important, and how to calculate it so your employees can use it without issue — it’s time to put your plan into action.

Work with your HR team, a business attorney, or consultant to create a policy that’s right for your business’s bottom line and goals.

Whether your policy is unlimited or average, whether it accrues hourly or bi-monthly, and whether you separate out your PTO among vacations and sick days or leave it under the same umbrella, the most important aspect of your policy is that it’s available for any employee to consult as needed.

You should never make up your rules for requesting time off on the fly, or apply your standards arbitrarily.

If you offer 10 or so days of PTO to your employees, you’re giving them a perk worth about 4% of their yearly wages.

That’s a small price to pay for ensuring greater productivity, happiness, engagement, and loyalty among your growing team.

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About the author

Eric Goldschein is the partnerships editor at Fundera, a marketplace for small business financial solutions. Eric has nearly a decade of experience in digital media and writes extensively on finance, HR, marketing, and small business trends.

Category: Time Management