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Developing a good PTO policy starts with defining your business's needs and researching some common PTO policy options. — Getty Images/Westend61

There are many options to consider when you design a paid time off (PTO) policy for your business. You want a policy that attracts top quality talent and develops a positive company culture, but it also has to be sustainable and affordable.

Before you create a PTO policy for your business, you must consider local jurisdiction requirements (usually at the city or state level) and understand the most common types of PTO.

[Read: Tailor-Made Benefits: Keeping Employees Happy Means Customizing Benefits]

Do companies have to offer paid leave?

Businesses are not required to offer paid leave at the federal level. The Family and Medical Leave Act (FMLA) does require employers to provide unpaid, job-protected leave for family and medical reasons. If an employee takes FMLA-qualified leave, their employer must continue their group health insurance coverage as though the employee had not taken leave.

Under FMLA, eligible employees are entitled to 12 workweeks of leave in a 12-month period under the following conditions:

  • The birth and care of a newborn child within one year of birth.
  • The placement of a child for adoption or foster care with the employee within one year of placement.
  • The care of a spouse, child or parent with a serious medical condition.
  • A serious health condition that prevents the employee from performing the essential functions of their job.
  • A qualifying exigency arising because the employee’s spouse, child or parent is a covered military member or “covered active duty.”

Alternatively, employees are entitled to 26 workweeks of leave within a 12-month period to care for a covered service member (spouse, child, parent or next of kin) with a serious injury or illness.

However, many cities and states do require businesses to provide a minimum amount of PTO. Some states regulate whether a company is required to payout unused paid leave upon termination of the employee. If you’re not sure if your state or city has PTO payout laws or regulations, consult an attorney or your legal team.

Common PTO policies to consider

There are many different ways businesses can offer paid time off to employees. These are some of the most common policies offered today:

Traditional leave

When companies offer traditional leave, they distinguish the specific reason an employee is taking time off. These are usually categorized as vacations, holidays, sick days, and personal days. Some companies will add additional days off including bereavement, jury duty, or volunteer days.

This system may become complex as employees and employers must account for the different types of leave. While traditional leave is the most common leave plan in the U.S., many modern businesses have shifted away from categorized, traditional leave and instead offer an uncategorized PTO policy.

Sabbaticals

Sabbatical leaves are longer periods of time off, commonly gifted by an employer after an employee reaches a certain milestone or tenure. Different from paid time off, sabbaticals can range anywhere from a few months to a year long. Though many sabbatical leaves are paid, an employer must consider hiring a replacement or extending job duties to other team members due to the length of absence.

Sabbaticals can be a positive experience for an employee, especially if they are battling burnout. Taking time away from work to recharge, learn new skills, and focus on personal experiences allows for a better working relationship once the employee is back. In addition, sabbatical options are a unique perk to offer prospective employees.

While traditional leave is the most common leave plan in the U.S., many modern businesses have shifted away from categorized, traditional leave and instead offer an uncategorized PTO policy.

Banked PTO

When employers offer a banked PTO policy, employees receive a certain number of annual paid days off to use at their leisure. By giving employees the freedom to choose how they want to use their PTO, you’re encouraging your team to find an optimal work-life balance. Similar to traditional time off, employees can use their banked PTO (also called combined PTO) as a sick leave, a vacation, personal days, etc.

According to the Society for Human Resource Management, 54% of employers who adopted a combined PTO program saw unscheduled absences decline up to 10%. Another 4% of employers found those absences decrease by 20%.

Earned PTO

Similar to banked PTO, earned or accrued PTO policies provide employees with a set number of leave days per year to use for vacation days, sick days, etc. However, under this policy, employees accrue time off throughout the year based on the amount of time worked, usually in hourly increments. For example, an employee with 12 days of paid time off will earn three days of PTO each quarter.

[Read: Expert Advice on How to Support Your Employees During a Crisis]

Unlimited PTO

This form of PTO allows employees to take time off for as many days as they’d like throughout the year. Employees are usually required to provide advanced notice and receive a manager’s approval before taking time off. Because employees don’t earn a set number of PTO days (which are considered a payroll liability), companies are not required to pay out unused PTO days when an employee leaves the company.

Though unlimited PTO may seem attractive, 37% of employees on these plans do not use their time off at all. Employers that do offer unlimited PTO options may wish to consider ways to better incentivize employees to take time off and recharge.

Seniority bonuses

HR departments can choose to increase paid time off based on the length of time or tenure the individual has been at an organization. For example, employees who have worked for a company for more than three years could receive five additional paid time off days per year. This can be a positive incentive for employees to stay with a company longer.

Flexible PTO

Instead of having sick leave, vacation leave, or personal leave allocated by the employer, employees with flexible paid time off can choose how they would like to use their PTO. This type of PTO is helpful for those who are parents or caregivers, people who celebrate holidays not on the federal holiday calendar, or those who need to travel for personal reasons. One thing employers must consider when offering flexible PTO is how they will find coverage, such as by asking employees to provide notice before they use their flexible PTO.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published November 15, 2022