Types of paid leave and PTO
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, for example. 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 coworkerings by donating leave to those experiencing an illness or caring for a family member or loved one who is sick.