PTO vs. Vacation Time: What’s Right For Your Company?

Summary

• Under a PTO policy, all leave time is lumped together into a paid time off bank. Vacation, on the other hand, is simply a specific type of leave categorized under a traditional leave policy. 

• The pros of a PTO policy include fewer administration/accruals to manage, more flexibility for employees, and a more transparent relationship between employers and employees.

• The cons of a PTO policy are that it may turn out to be more expensive, employees may work when they’re sick, and they may take a fewer number of actual days off.

• While no perfect policy exists, creating the best one for you means you’ll have to evaluate state laws, consider your work environment (remote or on-site), and assess your software solutions.

Do you need to know why your employees are taking time off, or are you fine with them having autonomy over it?

Evaluating which leave policy suits your business requires careful consideration. Scheduling managers need to weigh the pros and cons of each type of leave policy, consider the nature of the business, take employee preferences into account, and pay attention to current trends. Only then can they make a decision on a leave policy that boosts employee productivity and optimizes payroll costs.

PTO vs. vacation time: What’s the difference?

PTO is standardized leave that covers all types of paid time off (sick leave, personal time, etc.) with no labels. Vacation time is leave specifically for vacation purposes. So, vacation is a type of PTO, but PTO may not necessarily be for a vacation.

Employers can find ways to retain employees by offering more flexibility around their leave. With PTO, employees don’t need to explain how they’re using their time off. Along with vacation days, employers may decide to offer other types of leave, which means employees have to take different types of leave for certain purposes, which can be restrictive.

The trend is definitely moving toward PTO banks. 63% of employees said they’d turn down a job offer if it didn’t include PTO. So it’s clear that a majority of employees would rather work for a company where they’re free to take personal days without having to state the reason why. Pandemic stress resulting in job reshuffling has only served to further highlight the importance of effective company policies for paid time off, as the workforce is prioritizing mental health now more than ever.

Kerry Wekelo, managing director of HR at Actualize Consulting in Reston, Virginia, switched to the banked PTO policy. She says, “We made the switch because our people were not using their sick time and were complaining about not having enough time off. So we combined to a total of four weeks’ paid time off versus two weeks’ vacation and two weeks’ sick time. Our people love this, and, even as we hire new recruits, they rave about starting at a firm with four weeks’ vacation.”

The pros and cons of a PTO policy

HR managers must consider the pros and cons of a paid time off policy to determine whether or not their business should offer one. Each type of policy involves costs and benefits to the business and its employees, and a thorough analysis can be insightful in determining which one is right for your company. Here are some pros and cons of a PTO policy:

Pros:

• Less administration required/accruals to manage: Under the traditional leave policy, the employer needs to manage different types of leave, which involves administration costs. Under the PTO policy, none of this admin is required since all of the leave is lumped together. A PTO policy is easier to manage.
• Offers more flexibility to employees: Employees can use PTO however they want, without explaining how they’re using it. More flexibility could keep employees engaged, and also reduce unscheduled absences. 54 percent of employers that implemented a combined PTO program said unscheduled absences dropped by up to 10 percent when they started the new policy.
• Creates a more transparent relationship between employers and employees: Employees need not lie about being sick under the PTO policy since they can just state they need time off. Under traditional leave policies, employees may feel forced to use their sick days, so they might lie.

Cons:

• It may turn out to be more expensive when the employee leaves: A company may have to pay more if the employee leaves, depending on state laws. This is because they may have to pay out all accrued paid time off if the state law mandates it, but under the traditional paid leave policy, they may not have to pay out sick leave to an outgoing employee.
• Employees may show up to work while they’re sick: Since there’s no distinction made between the two types of leave, employees may show up to work when they’re sick in order to earn more PTO. This can infect other employees, which can ruin the overall productivity of the company.
• Employees might get fewer days off: Depending on the accrual rate for PTO at your company, new employees may accumulate PTO more slowly than longer-term employees. Research also suggests that employers who adopt PTO may give employees fewer overall days than they had previously. According to SHRM, employers with PTO policies give employees an average of only 18 days, which is fewer than the number of days employees get under a traditional leave policy.

How to create a leave policy that works for you

If you pick the right leave policy, your employees will be happy and productive, and your company will optimize its resources. That’s why, for creating an effective leave policy, you need to take the following steps:

• Review your state mandates regarding unused time off: Most states don’t require you to pay an employee for unused sick time when they leave the company, unlike PTO policies where payment is required for all time accrued. So, if your state requires you to pay unused PTO, a PTO policy may be more expensive. Review this, and evaluate if bearing the costs of a PTO policy is worthwhile for your business.
• Consider whether you’re a remote company or an on-site company: A PTO policy is better suited to remote companies where employers cannot scrutinize the reasons behind every leave an employee takes. It’s impossible to know if someone is actually sick in a remotely distributed company, so there’s no point in having separate sick leave. Therefore, choose the leave policy depending on the type of company you are.
• Evaluate your resources to see if you can administer your leave policy: Under the traditional leave policy, your company will have to maintain two accounting systems — one for sick leave and one for vacation time. Choose the traditional policy if you can make the time to administer the policy, and choose the PTO policy if you want lower administration costs and more efficiency. A good PTO policy should prioritize employee self-service, meaning it should be accessible via mobile app and should sync fluidly with your scheduling and time tracking systems. Requesting, viewing, and approving PTO should be seamless, quick, and integrated with your workforce management.
• Ensure your policy covers the basics: Make sure you cover some basics in whichever leave policy you choose such as how an employee can request time off or how far in advance employees must request vacation time or planned PTO. Also, consider whether or not employees can carry over their PTO hours at the end of the year. Think about whether you’re going to send home employees who are sick under the PTO policy. Decide how much time off can be taken at one time and how the time off accrues. Finally, choose whether or not employees can carry over unused PTO at the end of the year.

Unlimited PTO: A possible solution

Another option is to switch to an ‘unlimited PTO’ policy. The unlimited PTO plan gives employees the freedom to take off as much time as they need, as long as it’s approved by their managers. But critics say that with unlimited PTO, employees actually take less time off since they rely on company culture to determine the right amount of time to take away. So clearly, there’s no one-size-fits-all leave policy, and you must decide the best policy based on your unique situation.

Making leave management easy

No matter the type of leave policy you choose, it needs to be easy to utilize. Luckily, recording things like PTO, vacation, and sick time on schedules and timesheets, is becoming easier thanks to recent advances in workforce management. Learn more about it by contacting us today – we’ll help make leave management a breeze for you and your staff.