How to Automate Time and Attendance
Automating time and attendance can save your People team headaches and immediately save your business thousands of dollars.
82 million workers in the United States are paid hourly, representing nearly 60% of all wage and salary workers, according to the Bureau of Labor Statistics. With such a large portion of the workforce paid hourly, the time spent manually scheduling employees is costing your business. Big time.
- Managers waste 140 hours a year manually creating schedules for their employees.
- Employees admit to wasting 50% of their time at work when they have an inconsistent schedule.
- 35% of employees between the ages of 18 and 25 think they have inconsistent work schedules, and half of them leave their jobs for this reason.
- When you don’t have enough people to cover a shift, you put pressure on your employees to do more with less, which is a recipe for burnout.
- You don’t have the right people with the right skillset when you need them, which slows down productivity.
Most industries have a natural ebb and flow, so it’s hard to outsource scheduling to anyone outside of your organization: How do they know what the busy times are to schedule more employees? How can they identify the skills needed to complete various tasks? Can they determine an employee’s availability? Can they account for unexpected and last-minute schedule changes?
Manually scheduling also makes it hard to scale. As your company grows and hires new employees, opens new locations, or expands in other ways, scheduling gets more complicated.
The solution? You guessed it — automating scheduling by introducing a cloud-based system allows you to offer employee self-service, set schedule rules, track potential compliance issues, and automatically generate schedules.
If you’re trying to decide which HR function to automate first, take it from us — make it time and attendance. Not only does it save your People team the headache of tracking down timecards, manually calculating pay, and trying to stitch together a cohesive employee schedule, it will immediately save your business thousands of dollars.
The errors with manual scheduling
Many small businesses are still tracking employee time the old HR way — by relying on paper timesheets. If employees self-report their time, experience has shown that most employees don’t bother with clocking in and out, and instead write in their time at the end of the day — or worse — at the end of the week when they need to submit their timesheets to HR.
While some employees may fudge the number of hours they actually worked, even the most truthful employees can make a mistake using this system. Do you remember how many hours you worked last Monday, and the exact time — down to the minute — you took a break and finished work for the day? It’s nearly impossible to remember those details after the fact.
When timecards make it to HR, there’s more opportunity to introduce errors: hard-to-read handwriting leaves you guessing what hours were worked, mistakenly typing in the wrong hours in your payroll software, or mixing up employees’ names.
And what about the day you post the employee schedule in the breakroom, or email it to your workers? How many messages do you get about swapping shifts, last-minute PTO requests, or realizing you scheduled someone to work 7 days in a row?
You need an entire team to ensure time is recorded accurately, data is entered correctly, and you’re not violating any labor laws.
Quantifying how automation will save your business time and money
An automated time-keeping tracker and scheduler can make it easy to reduce these types of data errors. Hourly employees can clock-in and clock-out online, allowing managers to easily view and approve their hours worked. Automating scheduling rules helps ensure you’re not violating any labor laws.
Since labor costs are the largest line item in most business’ budgets, keeping careful track of your workers’ attendance and productivity will just add to your bottom line.
Let’s do some quick math to explore this idea further.
Clocking in and out, and how you’re losing money
The American Payroll Association found 75% of businesses are affected by “time theft,” costing up to 7% of their gross annual payroll. That means if your business pays $1 million in payroll, you’re probably losing $70,000 in stolen time.
But don’t be quick to shift blame to employees. A manual timekeeping system is cumbersome not only to managers, but to your workers as well. Without an accurate and reliable way for employees to keep track of their time, breakdowns are bound to occur.
Time theft: 3 things to know
How prevalent is timecard fraud?
It’s estimated the average worker steals about 4.5 hours weekly from their employer — about 6 weeks per year.
Furthermore, the APA found 43% of employees admit they exaggerated the number of hours worked at least once. Of these, 25% say they do so for 76% to 100% of the shifts they work.
Another survey found 43% of employees admit they conduct personal business while on the clock; 42% admit to taking frequent breaks.
You may not think timecard fraud is happening in your company, but the chances are, it is.
Types of timecard fraud
There are a variety of ways employees receive payment for not working. They range from the blatant to the subtle. Here are some examples:
- Buddy punching: Asking a coworker to clock in or out for you, whether to get you in on time or allow you to leave early. This can range from a few minutes to an entire shift.
- Starting late: Employees who don’t clock in but come to work late without reporting.
- Finishing early: Employees who leave early without asking for permission or signing off their shift.
- Taking or frequent long breaks: Taking longer than the allotted break time or taking unauthorized breaks during the shift.
- Working unauthorized overtime: Many companies find they pay time-and-a-half without prior permission to work overtime hours.
- Handling personal activities during work hours: This is potentially the most common — employees may be conducting personal business, online gaming, checking personal email and social media while on the clock.
What you can do about time theft
This is where your People team comes in. There are a number of ways you can prevent time theft in your company.
- Have your People team work on your company culture to boost employee morale. Engaged employees are more productive, so employees who feel they are listened to and respected are more likely to observe workplace rules.
- Then, choose the right time and attendance software. If you opt for a SaaS (Software as a Service) solution, employees can track their time through a tablet or smartphone. You can use geofencing to see if an employee is at the appropriate jobsite when they clock in or clock out. Some will alert workers with notifications of when their breaks are over and need to click back in. You can also opt for software to track employee’s computer activity, to see what websites they visit or take periodic screenshots of their computer if you feel that you need to monitor how employees are spending their time. Note that this approach may create backlash if employees feel like they are being spied on and not respected, which would decrease employee morale, and lead to turnover.
- Finally, develop clear policies surrounding time and attendance and consequences (verbal warning, written warning, followed by suspension) if these are violated. You can document these policies in an employee handbook.
Compliance and risk mitigation: Don’t be on the wrong side of the law
There’s one thing you need to know about scheduling rules and labor laws: THERE ARE SO MANY OF THEM!
Keeping up with compliance is no easy task, and the stress of managing various rules across different jurisdictions can quickly bog down an HR team. A software solution helps your business avoid the stress of manually handling paid leave compliance with fully compliant, pre-configured policies designed to meet your locality’s specific regulations and requirements. And with time and attendance tracking, the software gives your HR teams at-a-glance visibility into types of leave, like parental leave or sick leave, in order to stay federally compliant with FMLA.
An automated system will help you avoid the missteps of over-scheduling employees and paying for unplanned overtime. Plus, it can take into consideration rule types, which include meal breaks, rest periods, and maximum shift lengths.
When the rules you set up have to be overridden (for example, you need an employee to work overtime), an automated time and attendance system will keep records of the incident along with any manager’s comments to make auditing and tracking easier.
Putting it together: How to automate time and attendance
You want to identify a solution that 100% automates your pay and work rules, while providing self-serve options accessible via an Internet browser or mobile device. The software should also be easy-to-use and intuitive, so employees will embrace the technology as well.
As you evaluate software solutions and vendors, put together a roadmap to determine what long-term success looks like, and steps to achieve it. Due to budget or lack of support, you may not be able to get all the features you want. Instead, you should focus on building a solid foundation you can build upon later. And the software solution you choose should be able to accommodate your business’ growth.
To help you, assemble a project team of key stakeholders within your business. This will help gain cross-departmental support while ensuring the solution you pick will support the needs of various departments. This also helps move the project forward, making sure it gets buy-in from the decision makers at your business.
Consider forming a team that has representatives from:
- Human Resources / The People team: To determine how the solution simplifies data management and workforce compliance
- Finance: Can help evaluate and measure ROI of the software solution
- Payroll: To ensure the software integrates into payroll systems (more on that in Chapter 9)
- IT: Make sure that they will support the software chosen
- Managers: To ensure the solution streamlines scheduling and is easy-to-use for employees
Once you have assembled a team, you want to take a critical look at the current state of your HR Department and how they administer time and attendance.
What is the state of your HR department?
Check in: What is the state of your HR department? Here are some questions to ask:
- What is the current state of your timekeeping processes?
- How does your HR department track employees’ hours? Can they batch edit hours? Do you have capabilities to round hours worked, differentiate pay between overtime, holidays worked, or weekend hours?
- Are managers or supervisors alerted if an employee clocked in late, missed a day of work, or started their work day at a different location
- Can employees enter and submit their hours for approval using a web browser or a digital app on their phone?
- How is time approved?
- Do you think time theft is an issue at your business?
- Does time automatically sync to your payroll system?
- How is paid time off managed? Can employees and supervisors track PTO hours and requests (whether pending, approved, or denied) in one place?
- Have you ever missed a payroll run?
- How often do you have to run payroll corrections?
- Where are there opportunities for time- and cost-savings?
As you take a critical look at your existing processes, also think about how automation can solve some of the issues your project team brings to light, such as time-consuming data entry, payroll errors, high administrative costs, and employee disengagement. We found that creating a document outlining the current time and attendance practices will bring to light problem areas.
We also suggest talking to hourly employees and managers who have to approve time cards to see what they dislike about your business’ current implementation. You may unearth some issues you never thought about, like if they are able to record their hours easily, or if they often find mistakes in their paychecks. This has the added benefit of getting them invested in whatever solution you choose, and make implementation a smoother process.
Digital time tracking (geo-location and biometrics): What’s right for you?
There are a few different automated time clocks that capture time attendance, including cloud services, biometric systems, and apps for a mobile workforce.
Web-based time-keeping trackers: These have grown in popularity in recent years due to their ease of use. You can access time data anywhere that has an Internet connection, whether it’s through a desktop, cell phone, or tablet.
Geo-location trackers: Many web-based applications allow workers to clock in and out through a mobile device or app. They have geo-location capabilities so you can see if your remote employees start and end their day where they are supposed to be.
Biometrics: This system manages workers by identifying employees by their fingerprint or the pattern of their iris. This takes the place of using other verification methods, like swiping a badge. Employers who implement a biometric system use it to restrict access to workers and cut down on “buddy punching” — you can’t have an employee clock in and out for a friend.
But if you take it a step further and incorporate an HR software that allows employees to request time off, supervisors can easily manage time-off requests, including reviewing and approving PTO, sick leave, personal leave, and more.
HR timekeeping software can also minimize any liability. It allows you to maintain time-keeping records in a way that can be audited, which means that records must reflect the time actually worked.
Automate employees’ shifts and schedules
If you run your business in the retail, restaurant, construction, healthcare, transportation, logistics, or any other industry that relies on hourly workers, you’ll want to look for a time and attendance system that includes shift scheduling, or an integration that meet’s your business’ needs.
With a shift scheduling system, you can track employee-to-manager transactions, such as time off requests, shift scheduling preferences, requests to fill any open shifts, and employee availability.
You can also track employee-to-employee transactions, including requests to swap shifts or asking a coworker to cover a shift.
Depending on the size and complexity of your business (How many hourly employees do you have? Do you operate across multiple locations?), you’ll have to evaluate if you need a basic or advanced employee scheduling software.
As you evaluate different shift scheduling integrations and software solutions, here are the most needed tools to look for:
It probably goes without saying that you want a platform that is able to house employee information so it’s easy to review your list of employees, what locations they work at, and availability.
A sophisticated employee scheduling system will help manage work times for your entire operation and build schedules that predict how many employees you’ll need per shift. Schedule management should also take the guesswork out of who is on vacation, who is teetering on the edge of overtime, and any other conflicts you can forecast.
An advanced system would be able to allow employees to pick up open shifts or swap with their colleagues. It can also help match employees’ skill sets to shifts (for example, having your best restaurant servers working during the dinner rush). You can also track who is absent from a shift.
Payroll and budget management
Since schedules and payroll are so closely linked, it’s important to have a system that can export data to a payroll system while alerting managers about overtime and forecasting budgets.
Reporting and data analytics
You’ll have access to a lot of information, so it’s important that you can easily pull data points to get a view of how your scheduling process impacts your overall business performance. Many platforms have real-time updates, where you can look at time off summaries, labor costs, employee trends, and more.
Overtime and wage calculations: Regulations to know
It’s important to highlight a few important points about the Fair Labor Standards Act (FLSA).
FLSA sets minimum wage, overtime pay, recordkeeping, and youth employment standards for employees in the private sector and in federal, state, and local governments.
The federal law applies to employers whose annual sales total $500,000 or more or who are engaged in interstate commerce. Most workplaces are covered by the federal law because courts have widely interpreted the term “interstate commerce,” ruling, for example, that companies that regularly use the U.S. mail to send or receive letters to and from other states are engaged in interstate commerce.
The FLSA requires that covered employers pay employees an overtime rate of at least 1 and 1.5 times their regular rate of pay for all hours worked over 40 hours in a workweek unless the workers are exempt.
For most employees, whether they are exempt — which means they don’t have to be paid overtime — or nonexempt depends on 3 things:
- How much they are paid
- How they are paid
- What kind of work they do
Workers are exempt from overtime pay requirements if:
- They were paid at least $684 a week, or $35,568 a year.
- Paid on a salary basis rather than on the number of hours they work, and
- Perform “white collar” work
“White collar” work means work that is either executive, administrative, professional, outside sales, or computer-related as defined by the Labor Department.
Some states have stricter exemption standards than federal law; the FLSA does not preempt stricter state standards. In fact, under the FLSA, if a state establishes a higher standard than that provided by the federal law, the higher standard applies in that state.
For example, New York and California have salary thresholds that are either higher or more complex than the new federal threshold and experts say several states are moving in that direction.
While more employers are expected to be on the hook for overtime pay, there is a workaround. Experts recommend that employers who have employees whose pay is close to the $35,568 threshold and who regularly work overtime, be given a raise. The increase in pay might be cheaper than paying overtime rates or hiring another employee to take on the overtime workload.
Meal and rest breaks
Workplace breaks can be deceptive. Have a worker who eats lunch at their desk while still working, or takes a rest break but is still responsible to answer the phone if it happens to ring?
Sounds like trivial stuff. But beneath the harmless surface lay a slew of payroll implications.
Employee breaks are subject to labor laws and company policies, making time-tracking and payroll a nuanced affair. But by knowing the different types of employee breaks and applying best practices, you can make payroll a breeze.
Let’s dig in.
Under FLSA, you do not have to give your employees bonafide meal breaks. But if you choose to provide meal breaks, the time is unpaid.
Per the Code of Federal Regulations, Part 785, bona fide meal periods typically last 30 minutes or more. For the meal period to be unpaid, the employee must be fully relieved of their duties. If you require that they do any work — whether active or inactive — during their meal period, then the break must be paid.
Many states have meal period laws. If your employees work in any of those states, you’ll need to analyze both state law and the FLSA, then use the standard most generous to your employees. For example, employees in California are entitled to an unpaid meal period if they work over 5 hours for the day.
The Department of Labor categorizes smoke breaks as “short breaks,” which generally last 5 to 20 minutes. FLSA regulations do not require that you provide short breaks, but if you do, the time is paid.
Smoke breaks can be tricky.
Let’s say you offer 2 paid 10-minute breaks per workday, but in rapid succession, a certain employee keeps heading outside for a quick smoke. The allotted minutes will add up in no time. Moral of the story? Be vigilant about smoke breaks.
Also, smoke breaks are not a protected disability that requires reasonable accommodations under the Americans with Disabilities Act (ADA).
Coffee and snack breaks
Coffee and snack breaks are part of the “short breaks” crew, which means they’re paid. Note that you do not have to pay for unauthorized short breaks — such as the employee returning from coffee or snack breaks late without your consent — if you clearly communicated your break rules to the employee.
Rest breaks lasting up to 20 minutes are compensable under federal regulations. If you choose not to give rest breaks, be mindful of applicable state requirements. Employers in a few states, including California and Colorado, must provide rest breaks throughout employees’ work shift. These states typically mandate a paid 10-minute rest break for every 4 hours worked.
1 day of rest in 7
States such as California, Illinois, New York, and Wisconsin have “one day of rest in seven” laws, requiring that employers give employees 1 day of (unpaid) rest every 7 days. Certain employees may be exempt from this rule.
According to the Equal Employment Opportunity Commission, you may have to provide reasonable accommodation to employees who need to engage in religious practices, unless the accommodation will cause undue hardship to your business.
You can permit employees to use their unpaid lunch or paid short breaks for religious purposes. Just be sure to inform them of the pay details surrounding the breaks.
In an opinion letter, the DOL responded to a query asking whether a nonexempt employee who takes 15-minute breaks every hour because of an FMLA-qualifying illness should be paid for the breaks.
The DOL asserted that short breaks are usually compensable because they generally “primarily benefit the employer.” However, in limited circumstances, short breaks “primarily benefit the employee and are therefore not compensable.”
The agency determined that the FMLA-protected breaks described in the query primarily benefit the employee and are therefore unpaid.
Pursuant to the FLSA, employers must give nursing mothers a reasonable break time for them to express milk for their nursing child for up to 1 year after the child’s birth. The break must be provided each time the employee needs to express milk. Though you do not have to pay employees for breastfeeding or pumping breaks, you can allow them to use their paid breaks for those reasons.
The federal regulations do not state the number of short breaks that employees can take in a day, only that they commonly last between 5 and 20 minutes. So, you have a lot of leeway when it comes to restricting the number and length of breaks your employees can take.
However, bathroom breaks can be a slippery slope. Limiting bathroom breaks may not go over well with your employees and might be illegal in some cases. On the flip side, unethical employees may abuse unlimited bathroom breaks by constantly and unnecessarily taking trips to the restroom.
The bottom line is that you generally do not have to pay for bathroom breaks that exceed 20 minutes unless you allow a longer period of time for paid short breaks.
In a nutshell, sleeping time is compensable if you require employees to remain on duty for less than 24 hours and allow them to sleep when not busy.
Breaks for minors
The FLSA’s youth employment provisions do not regulate or mandate breaks or meal periods for minors, but many states do. In most states, minors must receive at least a 30-minute meal break after working consecutively for a specific length of time. Some states mandate short rest breaks only for minors in certain industries.
Whether these breaks are paid or unpaid is up to the state. Further, the definition of “minor” may vary from state to state.
Breaks for nonexempt and exempt employees
Breaks subject to federal law typically apply only to nonexempt employees, who are paid according to hours worked. So, if the break is paid, you must include it in nonexempt employees’ wages. Conversely, if the break is unpaid, exclude it from their wages.
As for exempt employees, most of them receive a fixed salary, which accounts for paid breaks offered by the employer.
However, exempt employees might be excluded from certain federal break laws. For instance, you do not have to provide lactation breaks to nursing mothers who are exempt from Section 7 of the FLSA, which is the section that regulates overtime pay. Also, some states have break requirements for exempt workers.
Keeping an eye on compliance
To accurately administer employee breaks, you must know which laws pertain to your small business. This may depend on your business’ location, size, and industry plus other factors such as types of employees.
It’s also important to establish break procedures that your employees can easily follow. An easy-to-follow rule would be 1 hour of unpaid lunch and 2 paid 15-minute breaks for each workday. Remember to include any special requirements under federal or state law.
Make sure your nonexempt employees clock in and out for designated meal and break periods, and that your timekeeping system simplifies management of paid and unpaid breaks.
Lastly, retain immaculate records of employee breaks. This is vital to complying with payroll recordkeeping laws and emerging unscathed from a DOL audit.
From family emergencies to medical situations, there are many reasons why your employee may need to take a leave of absence. As an employer, knowing when these periods of leave qualify as paid or unpaid can be difficult. Here’s everything you need to know so you can be sure you’re giving your employees the correct paid and unpaid leaves.
Paid leave of absence
Vacation is the most popular type of paid absence. This type of time off is usually earned by working a certain number of days or hours throughout the year. Similarly, sick leave is another form of accumulated paid time off based on the number of days the employee works. Sick leave is defined as time an employee takes off to care for either themselves or a sick family member.
Jury duty, voting, and military obligations also qualify for paid time off. Employers are legally obligated to set aside time for employees who participate in these events and to return said employees to their position afterward.
These types of paid leave are commonly referred to as “PTO” which stands for paid time off.
Family Medical Leave Act
Understanding the different types of medical leave will make it easier for you to support your employee’s needs.
The Family Medical Leave Act allows employees to take up to 12 weeks of unpaid leave of absence off in order to care for themselves or someone else. However, there are a number of circumstances that must be met in order for an employee to qualify for this type of time off. An employee must have been at the job for at least one year, for example, and must have worked at least 2,040 hours during that one year period.
Events that qualify under FMLA paid leave include childbirth, adoption, foster care, serious health conditions, caring for a family member with a serious health condition, or military-related reasons.
Employers are only required to pay FMLA employees on leave if they still have PTO available. Many companies have begun adding extensions for employers in these situations as a way to boost company culture. Additionally, employees on paid leave can continue receiving health benefits for up to 12 weeks, as long as they continue paying contribution amounts.
Unpaid leave of absence
As you can see, there are many regulations that govern which types of absences are considered paid and which ones are not. Moreover, employees have substantial influence on how they structure the company policies to provide paid time off.
When an absence doesn’t qualify for paid leave legally or by contract, employers are not required to offer compensation or benefits, nor must they return employees in this situation to their positions.
Common types of leave
Vacation or PTO
Paid time off (also referred to as PTO), is a combination of vacation days, sick leave, and personal time that an employee can use at their discretion. Rather than give separate vacation days or sick days, PTO serves as a catch-all where employees can use it to take care of a sick child, to go on vacation, or take a day to Netflix and chill.
Extended sick leave, sick time off or even sick pay is not required by federal law unless the employee is eligible under the Family and Medical Leave Act. Employees who utilize leave for their or a family member’s illness must provide documentation of the request and the medical need for time off work, light duty or other potential medical accommodations.
Although not required by federal law, many states and cities (with more legislation coming in many parts of the country) have mandated business provide minimums of sick time off, sick day payments, and sick time accruals.
The laws range in the amount of days per year that employees earn, what employees are eligible to utilize as sick days, and how they receive sick pay.
Many companies choose to offer additional leave to new parents as well. A 2019 WorldatWork study shows 51% of respondents provide separate parental leave on top of PTO banks. Federal law under FMLA requires job-protected leave for qualifying conditions or illnesses, like parental leave, but your state may have parental leave-specific laws as well. For example, California, New York, and Rhode Island all have laws that require paid family leave for new parents to bond with their child.
It’s important to note that jury duty is the only civic activity companies are required, by federal law, to allow their employees to engage in. The federal government doesn’t require that employers pay employees for the time they take off to participate in jury duty, but many states mandate it on the local level, so be sure to check your state’s regulations.
Civic time off
Civic time off is a form of paid time off which allows employees to engage in a variety of civic activities and duties. While CTO is a relatively new fringe benefit, companies are taking to it quickly. Many companies, especially Silicon Valley tech companies, are opting to give their employees the entire day off on voting days, as many chose to do during the last presidential election.
Companies don’t generally pay employees for time taken for bereavement, but employees can often access it outside of their PTO allotment. A typical bereavement policy may grant employees 2 to 5 days of unpaid time off, after which they’re required to tap into their banked PTO for additional time.
Types of policies
When trying to put together the best policy for your business, consider these types of policies.
Traditional leave policies
Traditional paid leave policies give employees specific allotments for vacation time, sick days, personal days, plus holidays. Employees usually earn additional time based on tenure, with increases at 3, 5, and 10 years.
HR teams at companies that offer traditional paid leave have access to a treasure trove of data. They can understand why employees are taking time off and spot trends to create HR strategy and plan staffing accordingly. For example, if a call center is experiencing high rates of absenteeism on the Tuesday after Memorial Day, HR can schedule additional employees for coverage. At the same time, traditional leave policies create more tactical, administrative work, which can feel burdensome to HR departments more focused on higher-level strategy.
A PTO bank is a single pool of paid time off employees earn and can access. It’s what most people are referring to when they say “PTO.” Employees can “bank” time to be used as they like, free of the distinct buckets between vacation, sick, and personal leave. This lump sum of days gives employees the authority to decide how they’d like to use their paid leave. PTO policies look different at every company and can be influenced by state law. Some policies allow employees to rollover unused days, while others permit employees to buy or sell additional time, like under a cafeteria plan.
Unlimited PTO plan gives employees the freedom to take off as much time as they need or would like, as long as it’s approved by their managers. What started as a perk at top tech employers has steadily grown in popularity: A 2018 survey by Employers Council showed that unlimited PTO is on the rise, up 25% from 2016 to 2018.
But critics say it’s a marketing ploy to attract top talent, and that underuse is a bigger problem than overuse; with unlimited PTO, employees take less time off. That’s because there’s no template by which to judge an appropriate amount of time away from the office, so employees rely on workplace culture to inform their decisions. If you work for a high-growth startup, there might not be many people taking vacations. Yet, when done right, unlimited PTO can give your employer brand a boost and strengthen relationships between managers and employees, as unlimited PTO concentrates the conversation around time off on output rather than availability.
Cafeteria plan and PTO buying
Some companies provide employer-sponsored benefits through a cafeteria, or Section 125 plan, which allows employees to take advantage of pre-tax savings on benefits like health insurance or the purchase of additional time off. Cafeteria plans are not a type of PTO, but rather a way companies organize their benefits plans. As part of a company’s cafeteria plan, they may elect to offer a PTO buying plan which lets employees purchase additional PTO for the forthcoming year during open enrollment. Employees “pay” for their additional PTO through salary reductions or flex credits.
Cafeteria plans tend to be complex, and so are the rules governing the purchase of additional, “elective PTO,” as the IRS refers to it. But the two most important rules to understand are:
- No deferred compensation: Requires employees use the “elective” PTO for the year it was purchased. The IRS doesn’t allow this time to rollover to the next year.
- Ordering rule: Mandates that employees use their non-elective PTO before their elective PTO.
Together, these two laws essentially require employees to use all of their PTO, elective and nonelective, before the year’s end.
PTO donation plans
As an add-on, some organizations are including a donation feature as part of their PTO plans. A PTO donation plan allows employees to support coworkers by donating leave to those experiencing an illness or caring for a family member or loved one who is sick.
Accruing, accounting, and reporting
The PTO policy you select will determine how often employees earn PTO and when they’re able to access it. Some companies like employees to accrue PTO as they work, while others are happy to grant all PTO to the employee on a specific date, like the beginning of the calendar year.
Common accrual rates include by the year, hour, day or pay period.
This is the easiest rate to calculate. It also makes sense for employees who have already been with the company for at least a year. Simply subtract the number of hours an employee wants to take off from the number they receive each year. But most companies don’t want employees to have to wait a year to take time off, nor are they eager to give new hires all their PTO as the first day, so they use one of the methods below or a combination.
Hourly or daily
These accrual rates make the most sense for part time employees or hourly employees, as the method accurately reflects the number of hours an employee has put in with the company.
Per pay period
According to SHRM, PTO accrual by pay period is the most common accrual rate with 37% of companies using this rate. Employees start accruing PTO upon their date of hire, but they still must wait a year until they’re able to access all of it.
Calculating PTO accrual
The calculations all depend on how much PTO employees receive. For example, say a full-time employee receives 80 hours of PTO per year, and they work a total of 2,000 hours per year. Divide the PTO by number of hours worked to calculate your accrual multiplier.
Then multiply the accrual multiplier by number of hours worked.
The easiest way to calculate PTO accruals is with an HRIS system that does the work for you.
Sample PTO policy
A well-articulated and carefully planned PTO policy will help you provide your employees with the flexibility to better manage their time off. Use the following policy as a guideline. Contact an employment lawyer in your state to ensure your business complies with all the relevant state and local laws governing PTO.
This example policy is not intended as legal guidance.
Sample Paid Time Off (PTO) Policy for Small Businesses
The purpose of PTO is to provide you with paid time off to use as you’d like. We think flexibility is the key to work-life balance, and we’ve selected PTO as our paid leave program because we want you to have the autonomy to manage your time away from the workplace as you see fit.?
PTO is offered in place of vacation days, sick days, and personal days. Rather than separate categories like you may have had with previous employers, PTO provides a single pool of paid time off to use for all of your personal needs — vacation time; child, pet, and elder care; medical and dental appointments; personal business or emergencies; etc.?
We give all our employees a minimum of [20 days of PTO per year]. You may earn additional PTO based on your tenure with the company [insert specific company policy on tenure here].?
PTO does not need to be used for parental leave or sick leave, which are offered separately and in compliance with FMLA. Additional leave for bereavement and civil duty is considered on a case-by-case basis. PTO does not need to be used for the company’s holiday schedule.?
You earn PTO for every hour you work. This PTO is added to, or accrues, [bi-weekly when your paycheck is issued]. You’re able to use PTO by the hour, day, or for a stretch of time off. Please provide at least 2 weeks notice for requests longer than [3 days]. You can enter your request for PTO through our HRIS.?
Please do your best to manage PTO for your personal needs throughout the year. Additional paid time off will not be granted, although unpaid leave may be granted depending on the circumstance. Unused PTO from one year [may/may not] be rolled over into the next. Upon leaving the company, employees [will/will not] be compensated for unused PTO.?
Lastly, please use your PTO. We provide it for a reason. We understand the importance of time away from the workplace to disconnect, as well as to manage the demands of life outside the office. We will certainly be using ours!