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Guidelines to a Good Paid Time Off Policy (PTO)


Paid Time off Policy

A paid time off policy provides a bank of hours in the employee’s work record. Employers pool the hours. They include sick days, vacation and other personal days. Therefore, employees have the opportunity of using them when the need arises.

Creating such policies poses challenges and complications. Also, there are no federal laws in the US that guide their provision. Consequently, options of structuring and accounting for leave are unlimited and lie on the employer’s discretion.


Paid Leave

Categories of Paid Leave

There are two classes of paid leave for employees.

– First Category

This allows employees to take leave occasionally. Employees will take it once or twice through their tenure. Parental leave, disability leave, jury duty and death are examples of such leave.

– Second Category

This allows employees to take leave on an annual basis. Therefore, permits utilization of all the time allocated. Vacation, personal, holiday, sick days and PTO are examples in this category.

Factors to consider when creating a PTO Plan

For an excellent paid time off scheme, several factors are essential. These include;


Types of Paid Time Off

1. Multiple PTO Day type vs. One PTO Bank

Offering one time paid off policy is a common trend. It is beneficial as opposed to a collection of particular leave i.e. vacation, sick, floating holidays or personal days. Some of the benefits include:

  • Determination of leave necessity is not needed. If an employee needs some time off, a trip to some place, religious holidays, appointments, all are covered by the same policy and drawn from the same bank of days.
  • It’s fair as all employees are subject to the same number of leave days to use.
  • For health employees, it reduces the number of patient calls. When you have a separate sick day policy; Employees tend to treat these days as owed to them.
  • Multiple Day types

Some employers prefer maintaining specific leave policies. Benefits accrued from this type of policy are:

  • Classification of accrued paid leaves as wages. Accrued paid leave is classified as wages in some states. It is paid to departing employees. It differs from state to state. Some leave types are exempted while others are considered as wages. On the other hand, the same treatment on vacation policy would be a violation of state law.
  • It complies with some municipality legislation. Some municipalities have passed laws requiring employers to provide paid sick leave separately from vacation.


2. Calendar year vs. Anniversary date

An employer should establish the period for the policy. Paid time off period can be based on calendar year or employees hire date otherwise called anniversary year.


It gives employers an opportunity not to pro-rate employees in their first year. Furthermore, if you choose to take your policy based on tenure, it makes it easy for employees to understand where they fall. However, management can be difficult with staff having unique dates and anniversaries. This challenge can be overcome by implementing a paid time off tracking system.


Basing your policy in a calendar year is another option. However, it poses the challenge of everyone being on the same schedule. Additionally, calculating the number of leave days for an employee who starts mid-year is tricky. If your policy is based on use it or lose it principle, you may have employees scrambling for it at the end of the year.


Time off accruals

3. Accrued vs. Granted

Structuring your policy so that the whole bank of days can be granted on day one of the year is another option. Also, you can create a system where all days are accrued. It can be done by pay cycle or monthly.


It is mathematically simple. If the employee works in a state that requires pay-out of earned days upon termination, you may be required to pay the value of the entire year. It is done irrespective of when the employee departs the company.


These will allow the employees to borrow days from the future to take a vacation early. It may result in an employee leaving with a negative balance of vacation days. Consequently, you may not be able to collect the value of those days from the employee. Also, some states prohibit deductions from final paychecks.

4. Flat vs. Tiered

A company may decide to create different allotments for the various groups of employees. It is done by creating levels of leave allotments based on tenure. It leverages your policy and encourages employee retention. Also, some grouping is based on job title with senior staff getting more paid leave.

5. Unused days: caps payouts Carryover.

Carrying over PTO to the next year is at the employer’s discretion. When designing your policy, you can allow days to carry over. However, it has to be limited to some days.

Employers must allow employees to take unused days from year to year. Make sure what your policy state is compliant with all state jurisdictions. It includes paying out your employees their accrued wages as stated in the policy.



This content was provided by Neches FCU, an Equal Employment Opportunity Employer Credit Union.
Neches FCU is one of the top Texas credit unions and has a courteous and attentive team of professionals ready to service it’s wide base of members. When the doors open at any of the nine service outlets, our core objective of “Ultimate Member Satisfaction” becomes the sole focus for every representative.

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