Paid Time Off Policies: 5 Things Small Business Owners Need to Know

As a small business owner, you may wonder about your rights and obligations when it comes to paid time off policies (or PTO). Here’s the skinny.


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best paid time off policies

As a small business owner, you may wonder about your rights and obligations as well as popular trends when it comes to paid time off policies (or PTO).  Am I required to offer it? And if so, just how much paid time off are my employees entitled to? What are other companies of my size offering?

“I opted for a PTO system with my law firm,” says Jesse Harrison, founder and CEO of the Employee Justice Legal Team, a law firm that practices employment law and labor law matters. “Worthwhile PTO policies and a healthy relationship with your employees is the key to a positive workplace.”

When it comes to the crossroads of small businesses and paid time off policies, here’s what you need to know.

What is paid time off (PTO)?

Paid time off is exactly what it sounds like — time for employees to be out of the office and focus on their personal lives while still receiving a paycheck.

“PTO is an amalgamation of all personal days, whether they include vacation time or sick time — the days have been bunched together under the same moniker,” explains Harrison.

What’s the difference between paid time off policies and vacation policies?

It’s important to understand that a paid time off policy is different from a vacation policy and that your small business will likely use one policy or the other, but probably not both at the same time.

“The term ‘PTO’ is often used when companies have only one bank of time employees can charge against,” says Robin Schwartz, managing partner at the online jobs website MFG Jobs.

“PTO would then cover everything, including personal days, vacation days, and sick days,” Schwartz says. “Alternatively, vacation time can only be used for vacation or personal time when requested. It would not cover sick days, bereavement, etc.”

Though these two categories aren’t the extent of it: there are different types of both PTO and vacation policies, such as unlimited, flexible, floating, and more.

Is it mandatory to offer paid time off?

In one word — maybe.

According to the United States Department of Labor, there’s no federally mandated requirement for small businesses (or large) to offer paid time off policies. However, it could be a requirement in your state.

“Worthwhile PTO policies and a healthy relationship with your employees is the key to a positive workplace.”

“The laws regarding offering paid time off vary from state to state,” says Schwartz. “It’s important for small businesses to look into their specific state requirements if there are any.”

Different states have different requirements, and average PTO offerings vary between industries, locations, and more. It’s worth it to check out vacation and PTO benchmarking data before crafting your policy.

As of 2016, the National Conference of State Legislatures offered a chart showing paid time off requirements by state. For the most current legislation impacting the paid time off policy and vacation policy in your state, visit your state Department of Labor website.

Yet even if your state doesn’t require that you offer PTO, it may still be a good idea.

“Should a company reside in a state where offering paid time off isn’t required, they should still considering offering the benefit,” Schwartz says. “It’s not attractive to employees to work for a company that can’t offer them vacation days, sick days, or PTO.”

Why should my small business offer PTO?

If you’re thinking that paid time off policies sound great for the employee but not so great for the employer, think again.

“Offering paid time off will help small businesses retain their employees,” says Schwartz.

“While the cost of offering time off work may seem high, it’s nothing compared to the cost of having to rehire and onboard new employees.”

Harrison says that moving to a paid time off policy may save time and work for busy small businesses.

“There is no reason for the businesses to track different types of absences with a simple umbrella system like PTO,” she says.

Offering paid time off is beneficial to small businesses in several other ways, including:

  • Allowing employees who don’t use up all their sick days to enjoy more vacation time, demonstrating the value of work-life balance
  • As a recruitment and retention tool to attract and keep top talent who want flexibility
  • Easier to track and record for your human resources manager/worker

Offering paid time off can also promote good behavior, says Harrison.

“Perhaps the most important part of PTO from an employee perspective is the fact that it does not breed dishonesty. You do not have to call in sick to take a vacation and you do not have to use specific days if you won’t be in,” she says.

“The ability to be truthful without having to worry about repercussions is a benefit for employees and it leads to a more positive workplace.”

How is PTO calculated?

Calculating paid time off varies, but as a small business, it’s important to ensure you have adequate staffing when creating a paid time off policy.

“PTO can be calculated a few different ways, and ultimately, it’s up the discretion of the employer to determine it,” says Harrison. “

You may get an annual allotment, or it may be determined by the number of hours worked. There is no specific method.”

Harrison notes small businesses generally tend to stick to yearly awarded days so that they can adequately schedule coverage and stand-ins if necessary.

Yet even if your state doesn’t require that you offer PTO, it may still be a good idea.

Ultimately, as a small business owner, the choice of how to calculate your PTO is yours.

“The calculation of PTO is up to the organization,” says Schwartz. “Small businesses often contract payroll companies who may have their own calculations in place. Often, PTO is calculated based on the number of hours worked in a pay period or a month.”

What to know before introducing a paid time off policy

If you decide to replace your sick days, personal days, and vacation pay policy with a paid time off policy, Schwartz says to be upfront with your staff about the ground rules.

“Many small businesses put parameters around how PTO can be used, and how it needs to be requested. Small businesses have a limited number of employees to start, so it’s problematic if too many are out at the same time.”

Schwartz says that for this reason, many smaller organizations may require that staff request PTO far in advance or may deny PTO if too many staff members are out at the same time.

In this current fast-paced business market, there’s fierce competition for top talent. Consider the fact that the flexibility of a paid time off policy can be an enticing recruiting and retention tool, not to mention a time-saver for overworked business owners juggling human resources responsibilities along with everything else.

Note: this article was originally published in January 2018 and has since been updated.


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