What Does Paid Time Off Cost the Employer?

Paid Time Off (PTO) benefits have been growing in popularity over recent years. Offering more vacation time is becoming the ultimate recruitment tool and will keep employees happy-- but what does paid time off cost the employer?

Before making the decision to whether or not your company will offer PTO, dig into the costs and make a thoughtful choice if it’s right for your business. When determining your PTO policy, keep two things at the center of your decision - the employees and the real costs associated with the policy you create.

In September 2018, the United States Bureau of Labor Statistics reported that wages and salaries averaged $25.03 per hour worked, accounting for 68.3 percent of the employee compensation costs. The remaining 31.7 percent of employee compensation is attributed to benefits, bumping the total cost for employee compensation to an average of $36.63. Comprised under benefits is paid supplement pay, insurance, retirement, legally required benefits, and paid leave. Paid leave includes vacation, holiday, sick, and personal time off.

Paid leave accounts for $2.59 of the average cost of an employee an hour. Doesn’t seem like a lot, right? When you zoom out and look at the entire equation, you’ll see that paid leave accounts for 7.1 percent of your employee costs. After wages and insurance, it’s the highest costs. Something to keep in mind when asking, “what does paid time off cost?”

When planning if a PTO policy is right for your company, use data-backed statistics to guide your decision making. It's not enough to just follow the trends. Ensure what you’re going to choose is right for your business, not someone else's.

There are a lot of ways you can use data to calculate your PTO. Some companies decide to go for annual allotment and others determine it based on the number of hours worked. There’s no one-size-fits-all formula. With that said, according to TriNet, often PTO is based on the number of hours worked in a pay period or month.

A handy method to calculate the rate of vacation accrual is to focus on the period. Divide an employee’s total hours of vacation pay per year by total number of hours they can expect to work in a year. You should get a percentage that turns out to be the percentage of the vacation accrual they earn in a year. Once you know this, you can apply the data down to the day and determine exactly what amount of their compensation is going towards vacation pay.

Using the accrual method combined with the U.S. Bureau of Statistics, you can determine the amount of PTO you can and want to offer to employees. PTO is an important benefit to many employees but ultimately it’s your choice to implement the policy. While it’s not federally required to offer, some states do require PTO. Be sure to check with your state to see if you have any predefined policies you’re required to follow.  

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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