Time Off

How to Create an Effective Time Off Policy for a Small Business

PTO. Paid Time Off. Time of Absence. Vacation. Holiday. Time off work with pay. Personal day. Floating holiday. They all mean one thing: Fun.

Or, at least, not being at work.

When setting up the policy for how employees get away from the office, however, there are many different styles and several regulations that must be taken into account if you want to find the right balance for your employees’ work and time off. Should there be separate pools for vacation and sick time or one big pool of days for everything? Does everything start on Jan. 1 or does it start on the employee hiring date? What is the correct amount of days per year? Should there be a “use it or lose it” policy or a carryover system? What are the legal issues? What are the paid time off laws? How does PTO or time off tracking work? Should the system be based on days or hours?

The fundamental question is: How do you keep your business moving forward efficiently and not burn out your employees?


The Basics

There are basically two types of paid leave. The first is infrequent and includes maternity/paternity leave, bereavement, jury duty, and disability leave. These are specific cases which need more attention than a general-overview blog.

The second type of paid leave includes the more common occurrences, including vacation and sick leave. This category can get more complicated and requires some sort of paid time off policy.

From a legal standpoint, there is no federal law in the United States that requires employers to provide paid leave. Of course, from a free market point of view, the companies that don’t provide personal time off or paid vacation do not attract the best employees and have an extra obstacle to success. Some individual states also have workplace legislation that must be considered.

Many companies consider professional services, such as Administrative Services Organizations or Human Resources Outsourcing, to help with the complicated set up. And, more recently, mathematical computing power has enabled companies to use more complicated systems for time keeping and accrual calculations. Company management software like Worklio.com, for example, has proven to allow for more freedom and efficiency.

Here are five things to consider while creating policies for paid leave.


1 What is the Overall System?

Traditionally, companies have multiple categories for days off: vacation days, sick days, and perhaps a couple of personal days or floating holidays. This system makes sense when paid leave has to be paid out as part of a departing employee’s final pay package. Each state has different regulations for how paid leave is calculated — or even if it is calculated as part of the normal wage; separated paid leave and sick leave may help with compliance issues as well in some municipalities.

The recent trend has been to offer one big pool of days that employees can use without having to designate the reason. In other words, vacation days and sick days have the same value. Perhaps employees will not call in sick so easily when they know that it will count against their overall total. This system may feel more fair overall — particularly when some employees are rarely ill — but it is more complicated to calculate the final pay for a departing employee, particularly if they had been employed for only a short time. Part-time employees can follow the same system, just with proportionally less days off.

For the more adventurous companies (read: technology startups), an unlimited time off program may be an option. Though it may seem naïve at first blush, Netflix and Virgin are large companies that have experimented and enjoyed the success of unlimited time off. If the company culture is such that employees are trusted, if there is an overall pride of ownership, and if the company has firm goals and results, then giving employees absolute freedom may make sense. Of course, this would not work for hourly employees.


2 When Does the Time Off System Start?

Most companies use Jan. 1 as the universal start for the time off calculation. Ideally, Dec. 31 is when employees should have used all of their time off for that given year and Jan. 1 is when the total is refreshed for the following year.

Since not all employees are hired on Jan. 1, this requires some massaging. Most companies partition out days in small amounts, for example three days for the first three months, three more days are added for the next three months, then a week for the rest of the year. Just make sure that everybody doesn’t try to take time off at the end of the year because that could create Holiday Season staffing issues.

Using the date of hire for each employee makes it a bit complicated because, in essence, every employee operates from a unique calendar. Nowadays, though, there is no need for mathematics if you have a company management program that uses a paid leave tracking system. (See www.worklio.com)


3 Is Time Off Granted Or Accrued

When does the employee get the allocation of days: in a lump sum on the first day of work or is the time off built up over the first year of employment.

If you grant the entire amount right away then there could be some problems. The new employee may have a slow and awkward integration into the company if they are often gone in the first couple of months. And, an employee could use up all of their vacation and then leave the company. This could be costly if you must pay out for unused days when the employee leaves or is fired. The boss has the final say on when time off is approved, but there could still be abuse of this system.

Accrual can be done by hour, by day, by week, by pay period, and by year. A good company management system can set it all up. There may even be a need for negative accrual if you want to allow employees to use more than their allotted amount on credit.

A tiered system is common because it provides time off according to the amount of time worked. You have to work for a company for a few months before you earn your time off. Beyond the first year of employment, a tiered system also installs a regular reward for long-time employees. When you reach a milestone you get more time off, for example five extra days a year after you have been with the company for two years, a total of five weeks when you have been with the company for five years. This style may be more fair but the calculations can be time-consuming.


4 How Are the Number of Days Calculated?

Just how many vacation days an employee gets usually depends on the position and the title. More senior employees generally get more time off. It is a question that management must decide because it is integral to the definition of company culture. On average, most U.S. employers offer 12 to 15 days of PTO to start.

The length of employment, as mentioned above, is another way that the allocation of days off increases. And, because this employee-specific system may become complicated, a company management system may help. (See www.worklio.com).

This traditional system, however, may not make a lot of sense in new technology companies where everybody starts more or less at the same time. If the company culture is such that everybody is on the same team, then a more egalitarian style where everybody gets the same amount of days off may be the better choice.


5 What Happens If I Don’t Use It All?

If you don’t use all of your vacation in a given year, then you are working too much. Take a break! Live a little. The more complicated reality is that sometimes you have to put in more time than you would like and the luxury of a vacation is not available.

“Use it or Lose It”

There are some companies who follow a “use it or lose it” policy. This is clean and easy to follow on a calendar, but it often results in an empty and inefficient office in late December as everybody scrambles to use up all of their remaining time. It may create resentment, too.


Most companies allow for the carryover of some time off. If you have two weeks per year but you only use one week because of a new product launch, then carrying over 50 percent of the allocation into the following calendar year makes sense. Be careful about allowing too much carryover lest employees work through the entire year and take a couple of months off the following year, potentially weakening the department during their absence. Some local laws, however, require such carrying over: California allows one to carry over 1.5 times of their days off from one year to the next.


Though different from state to state, employees are generally entitled to being paid for their unused days off. Thus, the accrual of days off is important for the final calculation.


Additional Questions

Besides this general structure, there are additional aspects that should be considered when creating a paid time off system:

  • * Does the boss need a good reason to deny a request?
  • * Are half-days treated as half of a full day of time off or are they a different category all together?
  • * Can I request to have tomorrow as a day off? Or must I request time off a week in advance?
  • * Who has the power to approve days off? Only my immediate supervisor or can I go to someone else?
  • * What happens when multiple employees want to have the same day off? Who gets priority?

Worklio uses its own cloud-based company management platform to help companies deal with these types of problems. The company policy can be established and maintained on each employee dashboard. Accrual rates can be customized. Carryover amounts can be automated. Management is notified of each request, and approval (or rejection) are a click of the button.


Visit our site at www.worklio.com or give us a call at 1-844-996-7554.

Did you like it? Share it!

Make your HR more efficient!


FREE ebook:

The All-In-One
HR Outsourcing Solution.