PTO Meaning: What It Is & How It Works

PTO Meaning: What It Is & How It Works

As an employer, productivity is the one thing you just can’t get enough of. While it may be tempting to push your employees to go the extra mile, you have to remember that people need to recharge, rejuvenate, and unwind – preferably without having to trade their pay for it. For this reason, the concept of PTO policies came into existence (with PTO meaning “paid time off”).

Offering paid time off can boost employee morale, raise satisfaction levels, and make your workforce more productive in the long run.

However, there’s more to PTO than simply allotting a certain number of paid leaves to your employees.

Continue reading to learn more about paid time off – the PTO meaning, how it’s different from regular sick days and vacation, and much more.

PTO Meaning: What is it?

PTO stands for both “paid time off” and “personal time off.” It’s a workplace policy under which employees of a company are allotted a specified number of days per year that they can take off – for vacation, holidays, personal reasons, and/or illnesses – and still get paid for them.

The aim of a PTO policy is to offer a unified pool of paid days off (sometimes referred to as a “bank”), to every employee, instead of having a separate policy for vacation time, sick days, and others.

Despite being a progressive economy, the US is still eons behind countries like France, Germany, and Sweden, where PTO is mandated by law. As of now, only a few US states have laws that address PTO.

In fact, according to the Center for Economic and Policy Research, only 1 in 4 US workers get paid holidays.

As a result, it’s up to the employer in most cases whether they want to throw PTO in their list of employee benefits, or not.

Is PTO Different from Sick Days, Vacation Time?

People often use PTO, sick days, and vacation time interchangeably.

While doing so may be right in some companies, it’s not always accurate.

As implied earlier, PTO can encompass anything, including, but not limited to:

  • Vacation time
  • Sick days
  • Personal days
  • Bereavement leaves
  • Mental health leaves

In a company with an extensive PTO policy, they all mean the same thing, as long as the policy doesn’t discriminate.

On the other hand, in a company that doesn’t have a PTO policy in place (and has a different definition and policy for each time off “type”), it’s important to distinguish between sick days, vacation time, and others.

How Does PTO Work?

To understand how a typical PTO policy works, you have to break it down into how the leaves are calculated and offered, along with what procedures the employees should follow to use them.

That being said, here are the two main aspects of a typical PTO policy:

Leave Calculation and Offering

Different companies have different policies for how leaves are allocated.

Usually, this is done in one of the following two ways:

  • Offering one lump sum of annual leaves – in some companies, the number of annual PTO leaves are fixed and renewed each year. PTO days are usually offered on the basis of seniority i.e. the number of years spent within the organization. For example, during the first 5 years, an employee may be offered 20 leaves per year, which increase to 25 annual leaves after the fifth year.
  • Having a leave accrual system – another common way of offering leaves is by having employees accrue PTO time (apart from a small number allotted at the beginning of the year for emergencies and sicknesses). Leaves are accrued on the basis of the hours an employee puts in. For example, a company could offer 1 paid leave for every 80 hours worked (i.e. 2 weeks). As a result, if, hypothetically, an employee were to work for 2,000 hours a year (8 hours X 250 working days), they’d accrue 25 PTO days for the year.

In both cases, most companies cap leave offerings at a specified amount. For example, in the first case, the company can slap a limit on the annual PTO growth i.e. after a specific number of years, the annual leaves stop increasing.

Similarly, with an accrual-based system, companies could place a limit on how many leaves their employees can accrue per year. At the end of the year, a company could also allow employees to cash their remaining number of paid leaves, or roll them over to the next year.

A company can also specify what holidays it wants to include in its PTO policy.

Leave Tracking & Approval Procedure

The other aspect of the PTO policy includes figuring out a procedure through which:

  • Both the employer and the employees can track the PTO bank
  • Employees can request leaves
  • Employers can approve leave requests

To keep track of everything, and make the processes easier, companies use an HCM software.

Each company has different rules for putting in leave requests.

Employees are usually expected to notify their employer for vacation time and holidays, at least a few weeks in advance.

In the case of sick days, bereavement leaves, and mental health leaves (i.e. unexpected circumstances), employees should either inform their employer a day in advance, if possible, or at least send out an email during early in the day.

3 Steps to Create the Perfect PTO Policy

Now that you’ve understood the PTO meaning, let’s talk about how to create a policy for yourself.

However, before anything else, the first thing that you should do is to check your state laws (click here to see the PTO payout laws of all US states).

Keeping regulations in mind, follow these easy steps to create your PTO policy:

Step 1: Decide the Format of PTO (i.e. Set the Basis of Your “PTO Meaning”)

First, you have to figure out the format of the PTO bank. You can either:

  • Offer a bank with a single bucket for all leaves – this means that you won’t distinguish between sick days, vacation time, holidays, mental leaves, and others. This is what a PTO policy is supposed to be, and is the format that most companies follow. The employees are free to utilize their PTO however they like, and may not even have to specify a reason for taking a day off.
  • Offer a bank with separate buckets for leaves – in contrast, you can have separate, mini-policies for vacation time, sick days, and other personal days, within your broader PTO policy. This could mean many things, such as allowing employees to use only a specific percentage of their PTO for vacation time (or even allowing them to use days from other “sub-buckets” for unrelated reasons).

Here are some tips to help you decide:

  • Ask your employees what they want (and increase employee engagement in the process).
  • Look towards your competitors/industry and see what they’re doing.
  • Consult with your finance department to determine feasibility.
  • Determine what type of leaves you want to include in PTO.

You can modify your company’s PTO bank however you want, as long as it’s feasible and benefits both you and your employees.

Step 2: Decide How You Want to Calculate the PTO

As discussed earlier, a company can either offer PTO as one lump sum of leaves, or use an accrual system.

However, the first option, i.e. having a fixed number of leaves every year, is better, since it’s easier to track a fixed number of leaves, as opposed to calculating how much each employee has accrued using a formula.

To determine how many leaves you should be offering, see where your industry stands.

You can even try to experiment with unlimited PTO, however, it could be a slippery slope.

Remember – this is a good opportunity to get a competitive advantage, attract top talent, and increase employee retention.

Step 3: Set Some Ground Rules (i.e. Solidify Your “PTO Meaning”)

With the major things out of the way, it’s time to set some ground rules for your PTO policy.

This involves asking yourself some questions, such as:

  • Where do you want to cap the paid leaves?
  • Will you start offering paid leaves to new employees right away?
  • What will the leave request process be like?
  • How soon do you expect your employees to notify you of leaves?
  • At the end of the year, what do you want to do with the remaining leaves?

Answering these questions will help you perfect your PTO policy.

The Pros of PTO

If you’re having second thoughts about implementing a PTO policy, perhaps these benefits will help straighten your mind:

It’s Easier & More Economical to Track

Having a PTO policy can make your management more productive, as it consolidates sick leaves, vacation time, personal days, and more, into a single bank of paid leaves. To top it off, it cuts down on administration costs.

Leveraging a leave and attendance management software can make things even easier.

PTO Can Increase Autonomy for Employees

With a PTO policy (especially one that doesn’t require specifying a reason for taking a day off), employees gain more autonomy since they’re trusted to schedule their leaves by themselves.

This builds trust, and ultimately, leads to improved performance.

It Can Increase Employee Retention

According to a report by Clutch, 23% of Millennials, 14% of Gen Xers, and 12% of Baby Boomers said that they preferred paid vacation time more than any other benefit.

Considering that, it’s safe to conclude that offering decent PTO can increase your competitive advantage, help you retain your top talent, and reduce hiring costs in the process.

PTO Can Promote Workplace-Diversity

Ideally, a company’s PTO policy shouldn’t discriminate between the reasons why an employee takes off, especially when it comes to holidays. This gives employees the freedom to engage in festivities that matter to them, with no questions asked, helping to promote workplace-diversity.

The Cons of PTO

While offering PTO has a ton of benefits, it has its downsides as well, some of which include:

It May Increase Absenteeism

One of the main potential downsides of having a flexible PTO policy is that it may increase workplace absenteeism, as employees would have greater control over their leaves – leading to staffing problems.

It Could Create Problems for Employees

When offered a lump sum of leaves, some employees tend to use them all at once. For example, if an employee gets 20 paid leaves per year, they might end up spending all of them on vacation in the middle of the year, leaving them with no days left in the bank for illnesses or emergency situations.

This can put the employer in an awkward position and their relationship with the employee to the test.

PTO Could Jeopardize the Health of Your Employees

At times, employees who are saving PTO for vacation time tend to soldier through their illnesses, and not use their sick days. Not only is it unsafe to do so, it also puts other employees at risk, especially if they have a contagious illness.

3 Companies Redefining the PTO Meaning

Some companies go above and beyond when it comes to offering flexible benefits plans to their employees.

According to Glassdoor, the following 3 US companies had the best vacation and PTO time in 2018:

1.     Amgen Inc.

Headquartered in Thousand Oaks, California, Amgen Inc. is a company that specializes in biotechnology, and has revolutionized the PTO meaning.

According to reviews on Glassdoor, the company offers 5 weeks of PTO – a competitive figure in the US.

2.     Memorial Sloan Kettering Cancer Center

The Memorial Sloan Kettering Cancer Center is based in New York, NY, and is currently one of the oldest cancer centers in the country.

According to employee reviews, the company offers up to 20 days of vacation time, in addition to sick days, personal days, and more. The best part, however, is that the employees are never questioned about why they’re taking a day off.

3.     Google

Outranked by IKEA – a Swedish company – the search giant, Google, ranks at number 4 in the list of companies changing what PTO means.

According to employee reviews, Google is the best when it comes to offering PTO. Employees start with 3 weeks of PTO per year, which can increase to 5 weeks.

Wrapping it Up

Even if it’s not mandated by your state laws, you should still consider offering generous PTO to your employees.

As discussed above, doing so cannot only help you raise workplace productivity and morale, but also help your business scale financially by cutting down on administration costs.

Remember – while it’s a good idea to use your competitors as a yardstick, the PTO for your company is what you make it. Consider the workplace culture, competitive advantage, and feasibility to create the perfect policy.

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