What is paid time off (PTO)? How does it differ from vacation?

PTO is an essential component of a competitive total rewards package that allows employees to recharge and maintain a healthy work-life balance. Although local laws might guarantee certain leave entitlements, every organization is free to develop the fine print of its PTO policy. 

A clear PTO policy outlines available PTO types and how they’re earned, requested, and used. This guide will cover everything you need to know about building comprehensive (and attractive) PTO policies. 

What is PTO? 

PTO is a workplace benefit that allows employees to take time away from work while still receiving their regular paycheck. This time off can cover a variety of scenarios, including vacation time, personal leave, sick days, or paid holidays.

The terms “vacation days” and “PTO” are often used interchangeably, but the differences are significant. PTO encompasses all types of paid leave, offering employees the flexibility to use their time off as needed. In contrast, vacation days are specifically designated for rest and leisure. 

The PTO structure you choose will determine how employees use their time off and interact with workplace culture. Organizations must decide whether to bundle all types of PTO together or define separate allotments for each category. For example, your organization might allow 15 days off regardless of the reason or offer unlimited PTO for sick leave, with 10 days for vacation time and personal days.

How does PTO work?

The amount of PTO an employee receives depends on the company’s specific PTO policy and any local labor laws or PTO regulations. Your PTO policy should stipulate how PTO is earned, including: 

• Accrued PTO: Accrued PTO is earned over time based on how much an employee works. For example, a worker may accrue eight hours of paid time off every four weeks or one hour for every 20 hours worked. This common strategy for hourly workers facilitates easy calculation of PTO accrual and ensures that time off is distributed fairly among employees with varying schedules.
• Allotted PTO: Allotted PTO is usually given as a lump sum at the start of each year. For example, a company might provide each employee 25 days of paid time off each year and refresh this amount on January 1. This is a common strategy for salaried workers who don’t track work hours.
• Unlimited PTO: A flexible time off approach captures the attention of top talent, allowing employees to take as many days off as they need for any reason. 

To track PTO effectively, payroll departments often use a dedicated platform or database that tracks accrual balances. The chosen platform should be accessible to both employees and employers, helping each properly track and plan PTO requests. Additionally, many companies include PTO on individual payslips for easy tracking. 

Making PTO requests should be a simple, straightforward process. An employee checks their available PTO time and sends a request to their direct or supervisor. Requests clearly state the amount of PTO days, specific dates, and reason. Once PTO is approved, the employee’s PTO balance will show the deducted PTO.

Common PTO types

Categorizing different types of PTO helps employees make the most of their PTO benefits. Here are some PTO categories to consider when crafting your paid time off policy: 

1. Vacation days: Designated time for leisure, whether lounging at home, taking a trip with family, or catching up on a hobby. Vacation days allow employees to recharge and enjoy themselves.
2. Sick leave: Time specifically allotted for health-related absences, ensuring that employees can recover from illness without the added stress of losing pay. Dedicated sick days encourage employees to stay home when they’re sick (rather than saving up PTO for vacation) so everyone in the office stays happy and healthy. 
3. Personal days: Flexible days off that employees can use for personal matters, including mental health days, jury duty, or family obligations. 
4. Holidays: Paid time off that allows employees to celebrate or observe recognized public holidays. Floating holidays are additional days off to celebrate holidays that may not be officially recognized. 
5. Paid parental leave: Time off for new parents to bond with and care for a new addition to the family, ensuring they can support their family during an important (and expensive) life transition. 
6. Bereavement: Days off to let employees mourn and deal with crucial family matters without the pressure of work obligations. 
7. Volunteer time off: VTO, or volunteer time off, is when companies pay employees regular compensation for volunteering with eligible charitable organizations. 

Advantages of a PTO policy

Successful organizations understand that employees’ lives don’t start and end at the office. Innovation and success begin with happy employees, so a well-defined PTO policy is vital to creating a positive employee experience.

Here are three advantages of nurturing a workplace culture that places equal value on work and personal well-being:

Boosts employee engagement

Responsibility is a two-way street. Employees are responsible for performing their jobs, and employers are responsible for supporting their employees. A thoughtful PTO policy demonstrates mutual respect and support, which employees will likely mirror with deeper motivation, commitment, and loyalty. 

Improves mental health

Your workforce is human. Team members need time to spend with family and friends, dedicate to a fun hobby, or have new experiences. Employees who enjoy regular paid time away from work can fully recharge without stressing about take-home pay.

It’s a win-win for employees and employers. Workers are less likely to burn out, and organizations benefit from a workforce that returns to the office with renewed energy and focus. 

Attracts and retains good talent

Your organization might not be required to offer PTO. But that doesn’t mean your employees won’t demand it. Today’s workforce wants more than a good paycheck. They want to work for organizations that pay for hard work with comprehensive benefits and rewards.

A robust PTO policy is a big draw for potential employees in any job market. When employees feel they can take the time off they need, they’ll be more inclined to stay with a company long-term, reducing the high cost of turnover. 

PTO policy challenges

PTO policies can quickly get complicated. Here are three common roadblocks to prepare for: 

Payouts for unused PTO

In some states or countries, employers are required to compensate workers for unused PTO if they leave the company. Payroll may face unexpected financial liabilities, especially during layoffs of employees who have accrued significant time off or reside in countries that require large PTO allotments. 

Complex tracking

Employers need strict oversight to manage rollover policies, various types of PTO, and different earning systems for hourly and salaried employees. Tracking PTO and usage will quickly lead to errors without proper software or a dedicated payroll provider. 

Inadequate PTO policies

A one-size-fits-all PTO allotment or accrual system won’t meet your employees’ diverse needs. Different job roles, workloads, and personal circumstances influence how employees use their time off. A policy that works well for one group may not be effective or fair for others, leading to dissatisfaction, low team morale, and poor engagement. 

How to define a PTO policy

When employees take PTO, it impacts team members, managers, payroll, and HR departments. Well-designed guidelines ensure that everyone is covered. 

Consider the following when building a comprehensive PTO policy: 

1. Personalize your plan: Your workforce has diverse needs. Although a flexible policy is more complex to design, execute, and track, the extra investment will ensure that every team member feels like a valuable member of the organization. Consider how PTO policies will impact different employment types (e.g., full-time, part-time, or contract), seniority levels, regional regulations, and motivations for taking time off. 
2. Define the fine print: Address every detail, including how much PTO an employee can take each year, how hours are accrued or allotted, and how overtime impacts PTO. 
3. Distribute the plan: Employers should take a proactive approach when educating their workforce about their PTO policy. Include the policy in employee handbooks and add it to the onboarding and training processes. Ensure that employees genuinely understand the policy. Some workers might be apprehensive to request time off for mourning, mental health, or family responsibilities unless you clarify that these are valid reasons. 
4. Regularly review PTO policies: The only way to gauge whether your PTO policy is impactful is by asking the people it impacts most: your employees. Ask for feedback and conduct surveys to identify changes that will make your employees happier and more engaged while at work. 

Empower your global team with tailored PTO policies

Effective PTO policies cater to globally distributed employees, promoting well-being and work-life balance. Better yet, they strengthen your company’s reputation in the process.

By aligning your PTO offerings with local regulations and cultural expectations, you can attract and retain top talent across borders, whether hiring in Sweden, France, Spain, or the United States. Build your total rewards package with Oyster today.