Employees works while on paid time off.
Developing a good PTO policy starts with defining your business's needs and researching some common PTO policy options. — Getty Images / Bernard Bodo

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.

Fifty-four percent of employers who adopted a combined PTO program saw unscheduled absences decline up to 10%.

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 takes time off. These are usually categorized as vacation, holidays, sick days and personal days. This system is usually a bit more complicated because employees and employers must account for the different types of leave. Today, businesses have shifted away from categorized, traditional leave, and instead offer an uncategorized PTO policy.

Banked PTO

Under this policy, employees are given a certain number of annual paid days off that they can use however they like. They can use their PTO as sick leave, vacation, personal days, etc. This type of uncategorized paid time off is also known as combined PTO.

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 a set number of leave days per year. However, under this policy, employees accrue time off throughout the year, 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

Unlimited PTO is a relatively new type of paid time off in which employees can decide to take time off for as many days throughout the year as they want. Under this policy, employees are usually required to provide advance notice and receive a manager’s approval before taking time off. However, because employees don’t have or earn a set number of PTO days, companies are not required to pay out unused PTO days when an employee leaves the company.

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 May 13, 2020