The Payroll Blog

News, tips, and advice for small business owners

How to Create a Paid Time Off Policy

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Stephanie Davis

Today there are many benefits that employees are looking for during their job search. They are looking for flexible work environments, and schedules, casual dress codes, fun perks like snacks or office pets, and more traditional employee benefits like paid time off. As a small business owner with employees, you might be wondering how best to create a paid time off policy. To get you started, we break down what paid time off is, what you need to consider when creating a policy, and the tips to get it implemented successfully in your small business. Additionally, if you have questions about COVID-19 and paid leave legislation, we have the answers below. 

What Is Paid Time Off?

In short, paid time off (PTO) is a bank of days given to employees to take days off of work while still getting paid. There are several types of paid time, with the most common being sick days, personal days, and vacation days. Additionally, there are no formal rules regarding paid time off, and businesses can create a policy that works best for them. While this flexibility is great, it can be overwhelming for a new small business to determine what PTO looks like for their business.

How to Create a PTO Policy

When creating a PTO policy, there are a few things you’ll have to consider:

  • The number of days. As mentioned above, there aren’t any laws around how much sick time or vacation time you should offer employees, which means you can make that decision. Typically, the more years of employment an employee has, the more days they can take off of work. So it’s common for new employees to increase a little each year to match more senior employees. Another growing trend to consider is unlimited PTO. This benefit is popping up more at companies, and it gives employees the freedom to take days when they need them and not worry about how much time they have available. Certain considerations should be in place, such as whether or not the employee is performing well and they aren’t leaving during a busy time, but it could be a perk worth implementing.
  • How PTO is earned. Will you give employees all of their days at the beginning of each calendar year, or have them accrue PTO throughout the year? You may also decide to make changes based on an employee’s work anniversary and have time off start then. Even if it works out to the same amount of days off, employees may appreciate having all of their time off available at the beginning of the year so they can make plans and not have to worry about lacking days when they need them.
  • How long can employees use the days? Do employees only have the calendar year to use their days or would you let some rollover into the next year? Some PTO policies follow a strict “use it or lose it” mentality. However, there may be times when employees don’t need much PTO one year but have big plans for the next year.
  • Approval process. How should employees request their PTO? Do you need to know several weeks in advance, is there a formal system to use, or should employees just have a conversation with you/their manager?

How to Implement a PTO Policy

Once you have all of the details for a PTO policy mapped out, it’s time to share with your employees. If this is your first PTO policy, that will make the process a little easier. You should include the policy in your employee handbook and also share it during the onboarding process. If you already have an existing policy in place, it’s important to have a meeting with employees and share any changes to your employees to ensure that everyone is on the same page.

For success with your new PTO policy, you’ll need everything clearly outlined, including answers to all of the options above. Be prepared to answer any questions about PTO and set clear expectations. If you have other managers on your team, you’ll want to ensure they are all on the same page about how to handle requests from their direct reports to ensure cohesion.

The Benefits of a PTO Policy

This all might sound like a lot of work, and you may start to wonder what the true benefits of a formal PTO policy are for your business. A PTO policy will give your employees a chance to take time off when they need it to avoid burnout and overall boost employee engagement. Company culture is essential for attracting and retaining talent, and allowing employees to take a vacation day, or not have to worry about coming into the office when they are sick can improve the company culture.

COVID-19 and Paid Leave

The coronavirus pandemic has impacted small businesses in many ways, including interruptions to business models and operations due to the need to close physical locations, potentially furlough or lay off staff, and accommodate employees impacted by COVID-19. For many small businesses, offering expanded PTO during an economically challenging period is not always possible. Luckily, legislation was passed to help.

The Families First Coronavirus Act (FFCRA) is one of several pieces of COVID-19 related legislation aimed at providing billions of dollars in relief to small business employers. Part of FFCRA is employer credits aimed at helping employers support employees with paid sick and family leave, unemployment insurance, free COVID-19 testing, and other health measures—read our FFCRA blog post to learn more. Additionally, the Federal Family Leave and Medical Act (FMLA) has been expanded to offer further coverage for employees who can’t work due to caring for sick children. Many states also enacted COVID-19 response regulations that may impact paid leave as well—check out our interactive state resources map to learn about your state’s requirements.

Bottom Line

A formal PTO policy will help keep you and your small business employees on the same page. For new policies, check-in with your employees to get their feedback and learn of any changes you can make to improve the process moving forward. Again, the beauty of PTO is there are no hard rules for vacation time and sick days, so you can create a policy that truly benefits your small business.

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