How To Create a PTO Policy in 8 Steps

A paid time off (PTO) policy explains how employees accrue, manage, and utilize paid time off. Instead of traditional PTO systems that have separate categories for each type of leave, such as vacation, sick, and personal leave, bank PTO policies, also known as consolidated PTO, combine these types of leave into one category. Employees have the flexibility to take time off without needing to provide a reason. While the details of policies vary among companies, all policies should be implemented fairly and consistently, while adhering to federal, state, and local laws

With high rates of employee burnout and turnover, offering a competitive PTO policy serves as an effective strategy to attract top talent, boost employee wellness, and increase retention. After you have read our first article, PTO explained, it is time to dive in now to part two to create your PTO policy.

1. Determine the Type and Amount of PTO To Offer

As you determine how much and what type of PTO you want to offer, keep in mind that most employees do not use all their leave. “Three in four, especially younger workers, do not use the maximum amount of paid time off,” according to The Harris Poll.

How much time do you want to allocate for employees to take time off, travel, and attend to personal needs? These stats can help guide your decision. The U.S. Chamber of Commerce recommends starting with 10 days of PTO, not including sick days and holidays.  The U.S. Bureau of Labor Statistics reported that U.S. civilian workers and private industry workers with consolidated PTO plans had the following average leave in 2022: 14 days of leave after one year, 18 days after five years, and 20 days after ten years. Clockify stated, “Employees who are most satisfied with their jobs took 15 days of PTO in 2023.”

What additional types of leave will you offer that are not part of PTO, such as paid holidays and floating holidays? What are the federal, state, and local laws for additional leave types, including bereavement, family and medical leave, parental leave, and jury duty?

2. Select a PTO System

Determine what type of PTO system you will use: lump sum, accrual, or unlimited. Consider the pros and cons of each system and what is best for your company’s needs. While an unlimited PTO system does not require any payout when employees leave the company, it is the riskiest to administer fairly. An accrual system can be the most difficult to administer. A lump sum system can be the most costly to pay out when employees leave the company.

Lump Sum System

In a lump sum system, also known as fixed, front-loaded, flat rate, banked, or allotment, employees receive all days at one time. They may receive them on a specific date, and they may also expire on this same date each year. They could be granted annually on their hire date or at the start of the calendar year.

This system can be costly for employers to pay out if employees leave the company, especially if they leave early in the year. Everyone can receive the same number of days regardless of years worked, or the amount can vary based on years of service.

Accrual System

In an accrual system, employees earn leave in increments based on time worked, set intervals, length of service, or a tiered structure. Employers establish the accrual rate, which dictates how much leave employees accumulate during a given period: hour, day, week, month, or pay period.

This system can be prone to errors and difficult to administer, given the need to precisely track leave earned. It can be a disadvantage to new hires who may need to take unexpected time off before they have accrued the necessary leave.

Unlimited PTO System

Instead of allotting or accruing leave, employees can take as much time off as they want in an unlimited PTO system. There are no caps on how much leave they can use if they meet their work responsibilities. This system can be difficult to manage fairly, as leave requests often need to be approved by managers, and employers may set a stringent approval process. They may require employees to have a certain level of performance to use it.

Employees with unlimited PTO may actually take less time off than those without unlimited PTO, as employees fear using too much and may not feel motivated to use leave. There are no payouts when employees leave the company. It is easy to administer as there is no need to track leave.

3. Create the Specifics

There are many questions to answer when creating a PTO policy. From deciding on when your PTO will reset to tracking PTO, address the following information in your plan.

• Reset date: What will be the annual date when your PTO resets? It could be based on the calendar year, anniversary of hire date, or fiscal year.
• Unused leave: Will unused leave expire or rollover? A use-it-or-lose-it policy encourages employees to take time off before it expires, but it is illegal in four states: California, Colorado, Montana, and Nebraska. If leave rolls over, how much carries over, and how will it impact leave caps?
• Leave caps: Determine your leave cap, which is the maximum amount an employee can accumulate at one time. What will happen when the maximum balance is reached? How much leave will they be forced to use before accumulating more? Capping leave helps employers avoid large payouts when employees leave the company.
• Tenure: Will your PTO policy be the same for all employees, regardless of years of service, or will it increase based on tenure?
• Variabilities by level: Will PTO vary based on position, level, or location? For example, will C-suite executives be given more PTO than other employees?
• Borrowing leave: Can employees borrow leave that has not yet been accrued?
• Using leave: What increments can leave be used in: hourly, half day, or full day? Is there any limit to how much leave can be used consecutively for one absence? Are there blackout dates when scheduled leave is prohibited?
• Viewing PTO: How can employees easily see and track their PTO? Some state and local laws require sick leave balances to be shown on pay stubs or permit it to be shown. Patriot Software explains that the following locations require specific sick leave information on pay stubs: Arizona, California, NYC, and Seattle.

4. Determine Employee Eligibility

Determine who is eligible for PTO. Some PTO policies are only for full-time employees, while others may also apply to part-time employees. For part-time employees, the amount may be prorated. Seasonal employees may or may not be eligible. The most important thing is that your PTO policy is applied consistently and fairly to all employees and that it complies with all laws.

Many companies have a waiting period before new hires are eligible to use leave. This period could range anywhere from 30 days to six months. Having a waiting period helps to ensure new hires are committed to the company and reduces the costs of turnover.

5. Ensure Compliance With Labor Laws

Ensure that your paid time off policy complies with laws and is easy for employees to use. Since there is no national law requiring vacation leave, employers have flexibility in creating their PTO policies to best fit their needs and company culture. However, there are federal, state, and local laws that apply to bereavement leave, jury duty, family and medical leave, sick days, and paying out PTO.

Any paid leave offered must be accessible and administered fairly without discrimination against protected classes. It must comply with the standards set and enforced by the Equal Employment Opportunity Commission (EEOC). Federal law requires you to provide leave to employees who need it for medical or religious reasons, even if you do not have a leave policy or if paid leave has been exhausted. Allowing unpaid leave should be viewed as a reasonable accommodation for employees with disabilities when paid leave has been exhausted or is not offered, in accordance with the Americans with Disabilities Act (ADA).

Since state PTO laws vary significantly, it is essential to know the PTO laws in your state. State laws may impact what you are permitted to offer, what stipulations are attached to it, rollover requirements, and whether you need to pay out unused PTO. Employers are not required to pay out remaining leave when an employee leaves the company unless an employment contract or state law specifies otherwise. If it is required by law, employers will face penalties if they fail to pay out unused leave within a specified time.

The U.S. Department of Labor (DOL) reports that there are laws to create paid family and medical leave programs for eligible workers in 13 states and the District of Columbia. Nearly 20 states have paid sick leave laws.

6. Explain PTO Usage

Establish the guidelines for using PTO and explain how you will encourage PTO to be used. Consider other factors such as donating leave and blackout dates.

How To Request Leave 

Clearly explain the process that employees should use to request leave. Ensure that the system is fair and works for advanced requests, illnesses, and emergency requests that can be made from any location.

The EEOC recommends that a manager consider meeting with an employee to clarify leave requests, prevent misunderstandings, and respond promptly to leave requests. If managers encounter any medical information in leave requests, it should be kept confidential and in separate files.

Encouraging Use

Establish a workplace culture that emphasizes balance and wellness. Encourage employees to fully disconnect when they take time off. Will you require employees to take some days off before accruing more leave when certain limits are reached?

The Harris Poll reports that employees face many barriers to taking time off, with pressure to always be available, heavy workloads, and guilt topping the list. They found that “Almost nine in 10 employed Americans say they would check an email from their boss, even when on PTO or vacation.” Nearly half of all employees do not use all of their PTO in a year and worry about work while they are on vacation, according to Clockify.

Donating Leave

Will you permit employees to donate leave? If so, employees may be able to donate leave to a centralized bank, directly to a coworker, or as a payout to a charitable organization. Set a cap for how much leave employees can donate within a certain timeframe. Employees can help coworkers with serious illnesses by donating leave to them, either publicly or anonymously.

Blackout Dates

Companies can set blackout dates for days when employees cannot plan to use leave. These dates would be during times of high business demand, such as during sales, busy holiday seasons, or product launches. Clearly list any exceptions, such as when an employee is sick during a blackout date.

Returning From Leave

Describe procedures for when employees are returning from leave, especially from long leave for special circumstances, such as parental leave, bereavement, injuries, serious illnesses, or recovering from surgery. Identify the steps for employees to follow if they need to request a longer leave of absence before returning to work. Consider the individual needs of employees and how you can best support their wellness to help them manage stress.

Perhaps returning to work on a part-time schedule would help full-time employees more effectively handle their return without overwhelming them. When they return, schedule a check-in meeting with their manager to collaboratively discuss how to best support their workload and wellness. Continue to check in with returning employees to support them in the coming weeks as they readjust to work while dealing with other issues in their lives. Provide managers with tips for helping a grieving employee.

7. Utilize Software To Track PTO

Manually tracking an accrued PTO system can lead to errors and confusion. Utilize software that tracks leave, handles leave requests, and allows employees to see their leave balance. The software should seamlessly integrate with your payroll system or be part of an all-in-one HR software. Leave management is a feature in some time and attendance software as well as employee scheduling software.

8. Maintain and Review the Policy

Decide who will oversee the maintenance and review of your PTO policy. Seek feedback from employees about your PTO policy, and consider making changes based on the feedback. If you discover that your PTO policy is making it difficult to attract and retain top talent, then update your policy to make it more competitive.

While some companies are introducing innovative categories of leave, such as grandparent leave, adoption leave, and pawternity leave for adopting pets, PTO is a more flexible and inclusive option without the need to categorize leave. “Some experts caution that companies launching new categories of leave could inadvertently create an atmosphere of exclusion among employees with different life circumstances,” reports SHRM. As you create a compliant PTO policy, ensure that employees have the clarity and systems that they need to understand, use, and track PTO.