Benefits

How to calculate PTO versus traditional sick leave and vacation policies

By Rick Bell

Apr. 20, 2020

The evolution of paid time off policies has come a long way in a short time. 

For many years it was two weeks vacation, five sick days, maybe a personal day and eight standard, paid  holidays. But that could get messy for recordkeeping.

In the late 1990s, organizations started to move away from that model and began calculating paid time off. Moving to a PTO system has its advantages, including the reduction of unscheduled absences while making an employer more attractive for recruiting. This has led employers to the challenge of how to calculate PTO.paid time off, PTO

The Bureau of Labor Statistics found the greatest use of PTO occurs among full-time employees in companies that pay relatively high wages in service-sector industries. Smaller employers and privately held firms are the most likely to adopt PTO banks, according to a WorldatWork survey titled “Paid Time Off Practices and Programs.”

With a PTO system, there is potential for employees to use up their annual PTO allotments before they ever get sick,  leaving them with no more days in the bank. At a time when employees must use PTO to care for themselves or a loved one, it is important to clarify PTO policies. 

There are several employee situations that may impact how to calculate PTO. 

A sick employee has already used all their days.

Combining sick leave and vacation into one PTO category can lead to unplanned consequences for employees. When a sick employee has used all their PTO days and feels compelled to show up while ill, they may infect co-workers.

Therefore, when considering how to calculate PTO, employers should clarify that they reserve the right to send such employees home and dock their pay accordingly. Offer guidance during onboarding or in posts throughout the year via internal communications about the importance of banking some PTO for sick days.

As an example, advise employees to consider paid time off as five days of vacation, four sick days or an unplanned emergency and perhaps one day for their birthday or another special occasion.

A new employee needs to use PTO days before accruing them.

Companies often hire employees who have previous personal commitments for which they need time off after being hired. Prospective candidates often are honest and up front about this as the hiring process progresses. 

Perhaps there’s a family vacation or they need time off for their wedding, for example. And then there is the unforeseen after being hired, such as a death in the family.

Since most policies establishing how to calculate PTO makes it hard for employees to take time off in the early months of their employment, many employers will allow employees to “borrow” their PTO. Allowing 40 hours of borrowed time gives an employee a full week off. To avoid lump accumulations and to more accurately calculate PTO, companies can implement earning PTO incrementally with each pay period.

An employee leaves after using unearned PTO time.

There also is the risk of granting PTO before the employee earns the total amount for the year, only to have them take the full allocation and leave the company. That seldom happens but it remains a possibility. To safeguard against it and ensure more accurate PTO calculations, companies can allow employees to incrementally earn PTO with each pay period.

Employers also can cap the amount of PTO accrual. Once employees reach the cap, they stop earning new time until using existing time and dip back below the accrual cap.

This helps an organization to calculate PTO time and minimizes financial impacts should an employee leave the organization whether it is voluntarily or through termination, when the employer must pay the employee for the accrued but unused PTO time.

Calculating a PTO system should take into account the payout of accrued but unused time when an employee leaves the organization. PTO can be considered as vacation time in some states, and employers would be required to pay out unused balances upon the employee’s departure.

Calculating PTO by pay period.

Small-business and startup consultancy Bizfluent notes that calculating PTO by pay period allows organizations to evenly distribute an employee’s time off accumulation throughout the year.  Organizations with hourly or part-time employees should consider providing PTO based on the number of hours worked. When an organization calculates PTO hourly, it allows employers to award less PTO for hourly employees who do not report to work (for whatever reason) or for part-time employees who do not always work the same number of hours in a pay period.

One metric that employers can follow to calculate PTO is to divide the annual PTO hours by annual work hours. For example, if an hourly employee earns 80 hours of PTO each year and works 40 hours a week, or 2,080 hours per year, divide 80 by 2,080. That works out to an employee earning 0.038 hours of PTO for each hour worked.

Make sure that your paid time off policies, including examples of how your organization calculates PTO accrual and who is eligible for the PTO program, are clearly defined in your employee handbook.

Leave management is a crucial tool for staffing management as well as recruiting and retention. You can manage your employee leave and availability with our intuitive time and attendance software that makes it easy to manage time off by automatically applying changes to employee schedules and timesheets.

Rick Bell is Workforce’s editorial director. For comments or questions email editors@workforce.com.

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