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How does PTO work to benefit both employers and employees? Some companies use it to attract job seekers and enhance benefits packages. With the help of PTO tracking software, make it easy for managers to review — and approve — time off requests. For employees, time away from work can mean enjoying well-deserved vacations or being able to take care of hard-to-avoid tasks like doctor appointments or visits to the Department of Motor Vehicles during the work week.
Key takeaways about PTO
- PTO is a valuable tool for employers to attract talent, improve employee satisfaction, and promote work-life balance
- Different PTO structures exist, including accrual, allotment, and unlimited policies
- Calculation methods and approaches vary, including annual work hours, per pay period, and hourly accrual
- Examples include vacation, volunteer time off (VTO), and bereavement leave
For employers that have not offered PTO in the past, it can take time to understand the nuances of this benefit and the most sensible method for offering it. This guide discusses various types of PTO, why some employers make it part of their perks programs, and the different ways to set up a policy.
How does PTO work for?
Put simply, PTO is time away from work that employees get paid for. It can be used for a variety of reasons, and usually requires supervisor approval. In some cases, employees are given a set number of days when they start a job. Others give their employees the opportunity to accrue days off as they work. Depending on the employer, these can be accrual, allotment, and unlimited PTO. We’ll go into more specifics on the different types and ways to provide it a bit further in the article.
Next, let’s discuss some of the specifics of why employers incorporate this into their plans in the first place.
Why do employers offer PTO?
This perk is finding a place in many organizations for a number of reasons.
Workers want it
Simply put, PTO can make your company more attractive to prospective employees because it’s usually one of the most sought-after benefits that job seekers are looking for.
Employee peace of mind (and time)
Furthermore, some staffers may need time to recharge, decompress, or complete personal tasks that they’re unable to take care of outside of work hours.
Energize employees
Additionally, staffers will likely appreciate that you’re providing hours that they can use to take a break or complete personal tasks. The other takeaway is that some data suggests this can potentially impact your bottom line. An Ernst & Young study found that employees increased productivity by nearly 10% for every 10 hours of vacation time they took.
Competition probably offers
Offering PTO is commonplace, and chances are that one of your competitors is using it to take recruiting efforts up a notch. According to the US Bureau of Labor Statistics, around 70% of companies with 1 – 49 employees provide access to vacation time.
To find out more, we spoke with Morgan Williams, Cofounder and CEO at PeakHR, a human resources consulting firm.
“While paid time off (PTO) can sometimes be an afterthought, it’s important to realize most job seekers expect it to be a part of your total compensation package. In a world where everything is moving fast, and individuals are putting in additional effort to complete projects, people need time to take a breather and are actively looking for employers that make PTO part of the equation.”
— Morgan Williams, Cofounder, Peak Human Resources Consulting
Though we briefly touched on it above, let’s get into more detail on how individuals may use downtime.
Is all time off the same?
Volunteer time off (VTO)
Some companies give VTO to employees to support a local cause. For example, if an employee takes off to wrap holiday gifts for a nonprofit or clean a park, they can do this and still receive wages. VTO is generally limited to 1 – 3 days per year, but that amount depends on the company.
Bereavement
Losing a loved one or someone close is always unfortunate. For employees, knowing that they’ll be able to grieve or travel to see friends and family, and not forgo wages to do so, can be reassuring. They will also appreciate that their employer understands that unexpected events can and do happen. Some companies will include a set number of days for bereavement as part of PTO plans.
Jury duty
Employees may groan if a jury summons appears in their mailbox and they happen to be chosen during the selection process. Employees usually get time off from work for jury duty because it’s an Uncle Sam requirement. In some cases, employers will pay their employees for serving jury duty, if called to serve. Though this depends on the business.
Floating holiday
A floating holiday is a flexible paid day off that an employee can choose to use at their discretion, unlike fixed company-wide holidays. Most of the time, this day off is used to observe personal, cultural, or religious holidays without using their regular PTO.
“Employers looking to compete for top talent need to consider the value of PTO and how potential employees expect this perk to be part of the conversation. Most consider it essential to work-life balance.”
— Morgan Williams, cofounder, PeakHR
How do plans get offered?
Unlimited PTO policy
In recent years, unlimited PTO has been a topic that’s made headlines. When time off is unlimited, this policy gives employees the ability to take as much time as they need, as long as they stay on top of their responsibilities.
Front-Loaded PTO
Some companies opt for front-loading PTO, where employees receive their entire allowance at the beginning of the year. This method simplifies tracking. But it requires careful management to prevent employees from using all their PTO early in the year, and leaving the company with a negative balance.
Accrue days
Though unlimited days off or front-loaded plans are options for employers, many will provide new hires with some PTO as part of an offer. Then the new employee accrues (or “earns”) time as they work.
Now let’s look at some of the math behind how these hours get accumulated.
How is PTO time calculated?
Method one: Annual work hours
One way to calculate annual PTO hours is by using the total annual work hours. This method involves determining how many hours employees work in a year and then calculating PTO based on that figure. Let’s look at some examples.
Determine total annual work hours
First, we’ll figure out the total number of hours the employee worked. Priscilla works 40 hours per week for 52 weeks for a total of 2,080 hours. Here’s how we’d calculate that:
- 40 hours a week times x (52 weeks a year) equals = 2,080 hours a year
Next, identify annual PTO hours
From here, we’ll need to know the number of PTO hours the company offers. In our example, let’s say that Priscilla gets 80 hours of PTO per year. If you were to offer 20 or 40 hours (or the number you prefer), you would use that number instead. For this example, we’ll use the 80 hours Priscilla’s employer provides.
Calculate the PTO accrual rate
To find out how much PTO an employee earns per hour worked, divide the total annual PTO hours by the total annual work hours. So, using the example of 80 hours, your numbers would look like this:
- 80 PTO hours divided (÷) by 2,080 work hours (equals) = 0.03846 hours of PTO per work hour
Using this rate, you can determine the amount of PTO an employee accrues over any given period. For example, if Priscilla works 160 hours in a month, she’ll accrue a tad over six hours. Here’s how this would look in this equation:
- 160 work hours (times) x 0.03846 PTO work hours (equals) = 6.1536 PTO hours
Method two: Accrual per pay period
Another common method employers use is calculating PTO based on pay periods.
If Fred receives 80 hours of PTO annually — and the company operates on a biweekly pay schedule — let’s find out what he would earn.
Total hours of PTO
The first step is to determine the annual PTO hours — we’ll use the same 80 hours from our first example as the total annual PTO allocation.
Total pay periods
Next, we’ll figure out the number of pay periods. Since we’re using a biweekly pay schedule in this example, this ends up being a total of 26 pay periods per year.
Now, we need to find out how much PTO Fred earns during each pay period. To do this, we’ll divide the total annual PTO hours by the number of pay periods:
- 80 hours (divided) ÷ by 26 pay periods (equals) = 3.0769 hours of PTO per pay period
Presto! Using this rate, Fred would accrue approximately 3.08 hours of PTO during each biweekly pay period. Annually, this adds up to the full 80 hours of PTO:
- 3.0769 hours (times) x 26 pay periods (equals) = 80 PTO hours annually
And if Fred is curious about his monthly accrual? He can multiply the biweekly accrual by 2.167 (or the average number of biweekly periods in a month):
- 3.0769 hours (times) x 2.167 (equals) = 6.67 PTO hours per month
So, Fred is earning almost seven hours of time off per month.
Method three: Hourly accrual method
PTO can be calculated based on the total number of hours an employee worked. This can come in handy for part-time employees, or those with varying schedules.
The first thing you’ll need to do is establish how much PTO an employee earns per hour that they work. This is typically expressed as a decimal. For example, let’s say Jenny earns one hour of PTO for every 40 hours she works. The accrual rate would be as follows:
- 1 PTO hour (divided) ÷ by 40 work hours (equals) = 0.025 hours per work hour
What next? To determine how much PTO Jenny has earned, we’ll multiply her total hours worked by the accrual rate, or:
- PTO earned = hours worked (times) x accrual rate
Let’s see how the calculations work out with an example. During Jenny’s first week at her new job, she worked 30 hours. However, once she got more training under her belt the following week, she worked 35 hours.
Week one:
- 30 hours worked x (accrual rate of .025) = .75 PTO hours earned
Week two
- 35 hours worked x (accrual rate of .025) = .875 PTO hours earned
Now just add up week one and week two:
- .75 (plus) + .875 (equals) = 1.625 PTO hours earned
This method helps to ensure that PTO is accrued proportionally to the hours worked. There are likely other ways to structure accruals, but these are some of the more common ones.
Do employers have to pay PTO when employees leave?
Though there is no federal law in place that makes this mandatory, be sure to check the PTO payout laws where you do business. For example, states such as Illinois, Kentucky, and New York have rules for employers to understand and follow. On the other hand, states such as Alabama, Florida, and Utah are without regulations on the books.
Put PTO into your plans
There are many reasons why it can make sense to include PTO in the equation when building a benefits program. On one hand, employees appreciate getting the opportunity to reenergize with time away from work and having hours they can use to address life’s to-dos when they come up. For employers, offering this perk can help them attract talented job seekers. With a rested workforce, it’s likely to have a positive impact on a company’s productivity in the long run.
This article is provided for informational purposes only and should not be relied on for tax, legal, human resources or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.