Time-Off Policies: Leave Well Enough Alone or Go PTO?

Switching from a traditional leave program (sick time and vacation) to a paid-time-off system can have numerous advantages for employers and employees alike. PTO is a bank of days from which employees can draw for vacation, sick leave, doctors’ appointments and personal days off from work.

In contrast, traditional leave programs allocate a specific number of days for vacation and for sick time. A survey conducted by WorldatWork, an association of human resources professionals, shows that PTO use grew by 43 percent from 2002 to 2010, while traditional programs declined by 24 percent during the same period. The WorldatWork survey, titled “Paid Time Off Programs and Practices,” also notes that while the vast majority of PTO programs include vacation, sick and personal days, 3 out of 4 employers who offer PTO continue to offer separate programs for holidays, bereavement and jury duty.

Using a PTO system, organizations can significantly reduce unscheduled absences. Employers seeking a competitive advantage in attracting and retaining high-caliber employees at all levels should consider transitioning to a PTO design if their corporate cultures and financial means allow them to do so.

Moving from a traditional leave program to a PTO system has many advantages, including: reducing unscheduled absences, and the costs and productivity losses associated with them; making an employer more attractive to current and potential employees, especially those who value discretionary time off; reducing administrative/compliance costs, as PTO use no longer requires validation in most instances; and empowering employees to make their own decisions regarding the amount of vacation and personal time spent away from work — a sharp contrast with employer-controlled sick time and vacation programs.

According to a 2013 report from the U.S. Bureau of Labor Statistics, although 77 percent of private-sector workers had access to paid vacations in 2012, down from 82 percent in 1992-93, more workers had access to sick leave (61 percent compared with 50 percent), personal leave (37 percent compared with 15 percent) and family leave (11 percent, up from 2 percent 20 years ago). What’s more, the study revealed that 26 percent of employers now offer “consolidated-leave” packages, including PTO. Benefits specialists agree that the future lies in paid-leave packages rather than with the traditional sick-time/vacation model.

That PTO “is an effort for companies to save money and also [to] offer employees some flexibility with their leave time and usage,” said Lisa Mullins, director of employee relations for the Kentucky Community & Technical College System told the Society for Human Resource Management’s online newsletter last September. “It’s due to the flexibility demands of today’s workforce.”

There are also employer benefits to consolidated leave because PTO plans have the potential to encourage workers to use more vacation time and rely less on the occasional sick day as a means of staying out of the office. “The trend seems to be [leading] toward PTO,” said Robert Micera an adjunct professor at SUNY Stony Brook and St. Joseph’s College. “The reasons are to drive associates toward managing their time off to their desires and to decrease the number of unplanned absences that the employer has to deal with.” Micera said in the same SHRM article.

To help ensure that PTO programs are equitable to employees, employers typically increase leave time in bands of two to five years as employees’ seniority increases.

Putting a PTO Program Into Play

After an employer has established that a paid-time-off plan is the right type of leave policy for the company to offer, the employer should take the necessary steps to ensure that the program’s implementation and maintenance are flawless.

First, there should be clear directivesfor employees prior to plan implementation. Such directives include requiring employees to give a specific amount of notice (e.g., three days) before using a PTO day unless the employee is sick or has an emergency. In that vein, the employer must define what constitutes an emergency situation and use that definition consistently to avoid perceptions of giving some employees “preferential treatment.”

For instance, does having a sick child count as an emergency? What about a flat tire? A hangover? Waking up on the wrong side of the bed? If the policy is straightforward and outlined clearly, employees will be unlikely to take advantage of their new-found freedom.

Secondly, a clear-cut program should define the types of absences an employer includes in the PTO bank. The program also states explicitly how many PTO days will be available to employees based on job level, seniority or other factors. Additionally, the program makes clear whether PTO replaces all forms of paid absence or if the employer has separate policies for typically unanticipated leaves such as bereavement or jury duty.

Thirdly, a successful PTO program should also specify whether employees are allowed to carry over unused days from one year to the next, and if not, whether the account must be paid out by year’s end, and what the formula is for calculating unused PTO days. For example, will the employee get 100 percent of the cash value of unused PTO days or a lesser percentage? Another part of the program that should be explicit is whether employees leaving the company receive in cash the value of their PTO account, or if they forfeit unused days.

Fourthly, the program should be administered by, and coordinated with, the company’s payroll functionand should be reviewed on a regular basis (e.g., annually or every two years) by top and senior management, and HR department staff.

Developing and implementing a program that is clearly defined in all of its aspects, and mutually beneficial to the employer and employees, minimizes the probability of “hard feelings” creating challenges related to morale or productivity.

—Marisa Warford

According to the WorldatWork study referenced previously, on average, a PTO system gives an employee with less than one year of service 15 days off, compared with eight vacation days and seven sick days under a traditional system. After one to two years of services, the PTO days increase to 19 compared with 12 vacation days and nine sick days. After five to six years of service, the numbers are 23 vs. 25, and after a decade of service the differential is 24 vs. 26.

Although a PTO system may provide employees with fewer total days of paid leave, it gives them more flexibility in how they use their time away from the office.

As for how employees are treating increased autonomy, “Most people don’t abuse the privilege,” said Jess Clayton, a spokeswoman at outdoor clothing retailer Patagonia Inc. who started in the HR department, told Experience Life magazine in the October 2012 issue. “In fact, it makes you work harder because you’re trusted to get your job done. You want to do a better job. And when you’re burned out and need to go for a big run or go surfing, you do it, and then you come back the next day even more energized.”

Potential Challenges of PTO

The transition from a sick time and vacation model to PTO is, at best, cost-neutral to employers in the short-term, and can encounter resistance from employees with an entitlement mentality toward sick leave.

Among employees receptive to PTO, such plans can pose problems for employers because employees have more control over when they take time off. Some employees take advantage of their new-found freedom and are gone more frequently than they would be if they had specific days off for

certain purposes.

Additionally, because many employees view PTO as a lump of vacation time, they come to work when they are ill because they do not want to use time to stay home and rest. As a result, other employees get sick and productivity decreases.

Furthermore, new employees tend to accrue time off faster than employees who have been with the company for longer periods of time, and when employees leave the company, employers generally (and some state laws mandate them to) pay out PTO days because they are considered a vacation benefit. In contrast, sick days are not typically paid out under a traditional plan.

Upon implementing a PTO plan, some employers may feel compelled to pay longtime employees for their accrued vacation and sick time to prevent them from banking a tremendous number of paid days off and hampering productivity throughout the year. This aspect of transitioning to PTO can have serious financial implications for the employer. It is, therefore, important for employers to thoughtfully evaluate how to handle existing vacation and sick accruals when transitioning to a PTO program.

Other drawbacks include employees using their PTO time early in the year, giving them no safety net if they get sick later on. To address this issue, PTO is usually accrued rather than credited all at once and employers can implement policies regarding whether any amount of PTO may be used in advance of actual accrual.

PTO plans can also breed resentment among employees as some workers use them to care for sick children or elderly parents while others with fewer personal responsibilities use them for recreation or vacation

Before implementing PTO, employers should make certain that this benefit option fits with the company’s culture, which should accept or encourage flexible work schedules and locations, such as flex-time or flex-place arrangements.

The Value of Communication

Successful implementation of a PTO program depends largely on communication. HR professionals can help employees fully understand their options and the precise value of their benefits packages to eliminate any “disconnect” between the dollar amount employers spend on benefits and the employees’ perceptions of the value of their benefits packages.

Tools such as rewards statements; benefits workshops/fairs; employee meetings; intranet tools; printed materials; phone numbers and email addresses for answering employees’ questions; and mobile apps are effective in helping organizations to ensure that employees value, understand and use their benefits programs. Typically, insurance carriers or brokers/consultants provide, or assist with developing, those kinds of services and work with corporate HR professionals to explain to employees the finer points of the various programs.

With support from HR professionals inside and outside of the organization, management should make certain that the organization is committed to the chosen course of action. Management should also ensure that there is no equivocating about changing to a PTO program, or about the merits of the program and the rationale for making the switch.

PTO is an innovative benefits plan that can offer many tangible and intangible rewards to employees and employers. Determining if PTO is right for a particular organization requires deep reflection and number-crunching by the leadership team on whether the organization’s environment, culture and financial health can support such a program. Such reflection and transition may also require assistance from outside advisers throughout the development and implementation phases of the initiative.

Marisa Warford is director of HR consulting for Sagewell Partners, an Alliant Co. Sagewell is a benefits consulting firm. Comment below or email editors@workforce.com. Follow Workforce on Twitter at @workforcenews.