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Not sure how to create a paid time off policy for your small business? This guide will help you build the right one for your team — and your bottom line.

How to create a paid time off policy

As much as your employees may enjoy working for you, chances are they’d like some time off now and then — preferably with pay. And enough employers offer various forms of paid leave that they’re an expected benefit in most industries. According to the T-Sheets 2019 PTO Report, 69% of employees at small businesses receive paid vacation, and 81% of employers offer paid sick leave.

 

If you want to attract and retain the best talent for your business, your time off policies must be competitive. Employees in a recent Glassdoor survey ranked PTO as the second most popular benefit (tied with retirement benefits, and just behind health insurance).

 

Time off policies can take a number of forms, including vacation, paid leave, sick pay, and paid holidays. Offering time off of any sort will cost your business money and can lead to scheduling issues, so you need to think about it carefully. At the same time, employees will be happier, more engaged, and less likely to bring the flu to work, so there are big potential benefits, too.

 

This guide will help you figure out the right combination of policies to take care of your business and your team. Let’s start off by looking at the types of policies:

 

Vacation Policies

Writing a vacation policy isn’t complicated, and there are several templates available online. But before you start, you’ll want to nail down a few basics:

 

  • Eligibility. How long will employees be required to work before they begin to earn time off? Is vacation just for full-time employees or will you offer vacation time for part-timers, too?
  • Accrual. Some companies reward loyalty by tying the number of vacation days to years of service — say, two weeks for the first five years, three weeks for 6 – 10 years, and four weeks for 11+ years. Some companies also offer different accrual rates for different types of employees. Other companies choose a simpler approach such as three weeks for everyone.
  • Rules and administration. Use-it-or-lose-it vacation encourages employees to take all their vacation each year, while carry-over policies allow more flexibility — but can lead to very long vacations or a large payout if an employee with accrued vacation leaves your company. Requiring that employees request vacation a week or more in advance allows you to accommodate the absence of employees more economically, while day-before notice provisions give employees maximum flexibility.

Remember, state law may require you to pay employees for unused accrued vacation time if they quit or are terminated, so it’s a good idea to do your research so you’re ready when it happens.

 

Holidays

Observing holidays can be an economical way to offer paid time off, especially if you have a business that can close down without incurring significant costs or lost sales. The average American worker enjoys seven or eight paid holidays, according to a recent SHRM study. While no federal law requires you to pay employees for unworked holidays, paid holidays have become one of the most widely offered employee benefits. You are free to observe whichever holidays you wish.

More than 75 percent of companies of all sizes and industries observe these seven holidays by closing their business:

 

  • New Year’s Day
  • Memorial Day
  • Independence Day
  • Labor Day
  • Thanksgiving Day
  • Day after Thanksgiving
  • Christmas

But if you’re in industries like retail, hospitality, healthcare, or manufacturing, chances are you’re at least partially open for business on those days. It can be tricky to balance staffing with most employees’ desire to spend holidays decompressing and being with family. “We have a policy that nobody can take more than two days off in a row from the day after Thanksgiving through the day after Christmas,” says long-time retail store owner Jane Gomez. “But, we make sure that our managers save some PTO time for January so they can recover from the busy season.”

 

It’s also common to pay a premium to hourly employees who work on a holiday. Time-and-a-half or double-time are both common rates. Most companies pay salaried employees their normal rate but may offer them a comp day later.

 

Pro tip: If you want to acknowledge — and even increase — the diversity of your workforce, consider including one or two floating holidays. That way employees of various religious and cultural backgrounds can observe their own celebrations and memorials.

 

Almost all larger companies provide paid sick days for employees to recover from illness or care for family members. In fact, the Family and Medical Leave Act (FMLA), which applies to companies with 50 or more employees, mandates that job-protected time off be provided for personal or family sickness, though it doesn’t require that employers pay their workers for that time off. The U.S. Bureau of Labor Statistics reports that 71 percent of employers offer paid sick days, so you should give it serious consideration if you want to stay competitive.

 

Here are some things to think about when writing your sick time policy. You’ll see some parallels here to vacation policies.

 

  • Eligibility. How long do new employees need to work before they qualify for sick days? Do part-time or temporary employees qualify? Should your policy include family illness as well as a personal illness? Remember, each of these decisions sends a signal to employees about what you value as an employer.
  • Accrual. One option is to have employees earn sick days gradually, such as four hours per pay period. Another is to start each year by giving employees a fixed number of sick days. Both have advantages. The Bureau of Labor Statistics says that most employers offer five to nine sick days per year. Many allow employees to carry over sick days from one year to the next, but often cap how many days may be accrued.
  • Admin. You’ll want to spell out how employees can request sick time including who, when, and how they should contact. Do they have to call and speak with someone, or is a text ok? And how will you keep track of accruals and sick days used?
  • State law. New laws have been put in place in the last few years to offer paid sick leave to employees in a few states and municipalities. It’s important to know if your business is in one of these locations so you can withhold any required payroll deductions or pay into the funds.
  • Time: Is there a minimum number of hours that must be used if an employee comes in late or goes home early? Typically, the default is a half-day or a day of time.
  • Notes. Is a doctor’s note required? This requirement is most often used for absences of three days or longer.

 

With sick leave, it’s critical to track time off precisely. Why? At some point, an employee’s use of sick time may seem excessive or may transition to a disability status. Having the data to review with them may help open up a bigger conversation about their absenteeism, their need to take a leave of absence, or request an ADA accommodation.

 

The cons to offering paid time off

For all the benefits of offering a generous PTO policy for your employees, there are some downsides to consider. Giving your employees more free time isn’t free: each week of paid time off that you add will increase your gross pay responsibility by about 2 percent.

 

Many of your staffers may want to take time off around the same time (spring break, summer holidays, the week Thanksgiving). How will you fairly manage these overlapping requests and continue to operate your business — is there an option to shut down, for example, between Christmas Day and New Year’s Day so everyone has time off?

 

You also need to keep track of how many PTO days your employees have accrued and used. As a best practice, that means calculating the accruals each time you run payroll, then setting up a system for employees to request time off. If the paper chase sounds like a pain, your payroll service or your HR software probably offer a way to do it automatically.

 

Accruing and calculating time off hours

If you decide to calculate accruals yourself, the formula for paid time off is pretty simple. Here’s what a few sample PTO policies look like, and how to do the math. If you have different policies for vacation and sick days (rather than one blanket PTO policy), you may need to perform two separate calculations:

 

PTO Policy Offered

Based on 250 workdays or 2000 hours in a year

Number of PTO hours accrued for each hour worked Full days that must be worked to earn a PTO day
10 days per year (80 hours) 0.04 25
15 days per year (120 hours) 0.06 16.67
20 days per year (160 hours) 0.08 12.5
Formula Number of vacation hours /

2000 hours in a year

250 days in a year /

Number of vacation days

 

Medical and parental leave

It’s also a good idea to think about how you want to frame your policies for parental leave or family medical leave. The federal Family and Medical Leave Act (FMLA) requires, with some restrictions, that companies with more than 50 employees allow their employees to take up to 12 workweeks of unpaid leave time for:

 

  • a serious health condition that makes the employee unable to perform the essential functions of his or her job
  • to care for the employee’s spouse, child, or parent who has a serious health condition
  • the birth of a child and to care for the newborn child within one year of birth
  • the placement with the employee of a child for adoption or foster care and to care for the newly placed child within one year of placement
  • any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on “covered active duty”

OR

 

  • Twenty-six workweeks of leave during a single 12-month period to care for a covered servicemember with a serious injury or illness if the eligible employee is the servicemember’s spouse, son, daughter, parent, or next of kin (military caregiver leave).

 

Some states have also recently enacted laws around paid leave.

 

Many companies allow employees to use vacation, paid holiday, or sick time towards longer absences to deal with an illness or to care for a sick family member. Some companies require that employees use this time before using any other paid or unpaid time or their disability benefits. As you think about developing your policies, ensure you’re compliant with state and federal laws and design a policy that works for your company and your employees — knowing that you can change it as your team and business evolve.

 

Time off policies are an opportunity to add another element to your company culture: how you’ll look out for your employees and keep them from getting burned out. Health and work-life balance are important, as is offering time for employees to pursue their interests outside of work.

In competitive times, a generous PTO policy might be the thing that helps land an outstanding candidate or keeps a key employee around. But, the best time off policies are only as good as your ability to administer them, so it’s worth looking at a variety of solutions to track and approve PTO once you’ve established your policies.

 

Howard Winkler writes and consults on HR and Ethics. He has led for more than 30 years in talent management, employee relations, HR strategy, ethics, and compliance. His board-level service includes the HR Certification Institute, the SHRM Foundation, and the Council of Better Business Bureaus.

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