Small Business Hiring Guide

19. How Does PTO Work?

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Running A Business

How Does PTO Work?

Jun 16, 2023 • 9 min read
Small business owner enjoying a vacation
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      As you grow your small business, it’s important to build foundations that attract and retain the best employees. One way to do this is to create an attractive paid time off (PTO) policy. While it may sound simple, there are actually several types of PTO with different structures, based on the types of employees you hire.

      Here’s everything you need to know about PTO, so you can create a policy that works for both you and your team members.

      PTO explained

      Paid time off (PTO) is a type of fringe benefit employees may receive when they work for certain employers. While it does not increase their yearly salary, it is a form of compensation in that, if they need to take off from work, they are still paid as if they had worked. This way they can attend to their personal life without it affecting their income.

      The specific rules for PTO generally fluctuate company to company and can vary employee to employee. For example, senior employees may receive more paid time off within a given year, and some companies may or may not allow their employees to roll over any unused PTO from one year to the next. Alternatively, not all employees may be eligible for PTO within a specific company.

      Types of PTO.

      There are various types of PTO that employers may offer, some of which include: 

      • Holidays – On public holidays many businesses are often closed. On those days, many companies will often still pay their employees as if they had worked. 
      • Vacation – Some companies offer paid vacation for qualifying employees. Whether the employee uses the time to rest or travel is entirely up to them. To take time off, they often must request PTO vacation days in advance and get it approved by a superior.  
      • Sick leave/medical leave – Should an employee need to take time off because of an illness or injury, or because they need to attend a medical appointment, they may do so without any affect to their wages. It can also be used to care for a loved one who is sick or injured. Sick leave/medical leave PTO can help prevent the spread of contagious diseases within an organization, but it is often used by parents who need to care for their children or elderly parents.
      • Parental leave – Parents can take parental leave PTO after the birth of their child or after they have adopted a child. It is intended to give parents time to bond with their new baby or child without any impact to their salary or hourly wages. 
      • Bereavement – Bereavement PTO is sometimes offered by companies to employees that experience the death of a family member or loved one. However, many companies may expect employees to use personal PTO days instead of offering bereavement PTO.   
      • Personal days Some companies offer personal days PTO for events or occasions that are purely personal and not related to holidays, vacations, illnesses, parenthood, death, etc. Company policies revolving around personal PTO days can vary, but many companies request advanced notice. 

      Benefits of offering PTO.

      As a fringe benefit, PTO is intended to help attract top-tier talent to companies and aid in employee retention. Overall, happier employees can foster a better work environment, which in turn may help create a better customer experience.

      As was briefly mentioned above, medical leave or sick leave PTO can also help prevent the spread of illnesses within a company. While the sick employee may appreciate time off to recuperate, the greater benefit for the organization is that daily operations are not affected by a highly contagious disease such as the flu or COVID.

      How does PTO work for hourly employees?

      It depends on the organization, as there is not a nationwide mandate on how companies are expected to handle PTO for hourly employees. However, here are some things employers must consider:

      Is PTO earned or given? Some organizations, for example, only offer PTO after a certain amount of hours have been worked. Accruing time off prevents new employees from accepting a job offer and then immediately taking PTO—perhaps to never be seen again!

      Next, how much advance notice is needed? Many companies require advance notice of PTO use. An hourly employee, for example, would likely not be able to decide to use vacation PTO the morning he or she is expected to work. Management generally needs a head’s up to ensure another worker is able to step in and perform that employee’s duties.

      Additionally, how many employees are able to use PTO at the same time? To prevent a halt in operations, only so many employees may be able to use PTO at the same time.

      Lastly, what happens when an employee hasn’t earned enough hours to take off an entire day? With accrual PTO, it’s possible for this scenario to happen. While one of the purposes of PTO is to prevent wage loss, the employer would have to subtract any wages that were not yet earned.

      How does PTO work for salaried employees?

      As with hourly employees, there isn’t a universal policy revolving around PTO for salaried employees. Therefore, each company must establish its own policies. However, here are some things each employer must think about and address before offering PTO fringe benefits.

      First, how long must an employee work before they can use PTO? Must an employee work for three months before they can use personal or vacation PTO? Depending on the position, some companies may allow employees to use PTO right away, while others mandate that a certain amount of time must pass before PTO is available. 

      Next, do all employees receive the same amount of PTO? Do employees earn more PTO the longer they have stayed with the company? Do higher positions automatically receive more PTO? 

      Will unused PTO rollover? Some companies have a ‘use it or lose it’ policy, while others allow their employees to save their PTO from one year to the next. 

      Lastly, how far in advance must a salaried employee request PTO not related to sick or medical leave? Also, how many salaried employees can use PTO at the same time?

      How to set up a PTO policy as a small business.

      A standard PTO policy can be found online, so it’s unnecessary for employers to recreate the wheel. Before rolling out any PTO policy to employees, it’s essential you understand your state’s PTO laws and that you determine the following:

      • What types of PTO will you offer?
      • Who is eligible?
      • How is it accrued?
      • Will it rollover?
      • What happens to PTO when the employee leaves the company?
      • How far in advance must an employee request PTO? 

      PTO policy examples.

      Here are some common PTO policies dictated by employers:

      • “Employees must work a minimum of 40 hours a week to accrue PTO.”
      • “PTO rates are regular hourly rates; employees are not able to earn overtime rates when using PTO.”
      • “PTO requests are subject to manager’s approval.”
      • “Vacation PTO must be scheduled 30 days in advance.”
      • “Employees must work a minimum of 90 days before submitting any PTO requests.”
      • “PTO can only be used on standard workdays.”
      • “All PTO is forfeited if the employee decides to leave the company or retire.” 

      Establishing a PTO policy for your employees sets you up for long-term success by attracting and retaining top talent. Business financing to support growth opportunities, such as hiring new team members can also help your company. Explore all of your small business financing options with Lendio.

      About the author
      Lauren Ward

      Lauren Ward is a personal finance and tech writer with a passion to help consumers make smart financial decisions. Her work has appeared in a variety of publications, including Time and MSN. When she's not writing, she loves gardening and playing board games with her family.

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