PTO vs. vacation time: Which is right for your company?

You know your employees need (and deserve) time off. Crafting your time-off policy requires some thought. More and more companies are moving away from traditional vacation and sick-time arrangements toward paid-time-off (PTO) packages.

What is PTO?

PTO is an all-inclusive time-off package that gives employees a set number of days a year they can use for vacation, sick time, personal time or other needs. Employees don't have to explain how they use the time. PTO is a growing trend: A survey by Mercer found that 63 percent of employers polled were using PTO in 2015, up 38 percent from 2010.

Most companies don't allow PTO to roll over into the next year. However, some states — such as California, Nebraska and Montana — have laws that prohibit “use it or lose it" policies, so be sure to understand your state laws. A survey by the Society for Human Resource Management (SHRM) found that most employers based the number of PTO days available on the length of employment (on a sliding scale) and gave employees 13 to 26 days per year.

Benefits and drawbacks of PTO

The benefits of a PTO policy include the following:

• Employees are more likely to use their time. Linda J. Guild is CEO of The Guild Associates, a Massachusetts company providing management for professional societies, and her company recently changed to a PTO policy. "We had employees who always used up all of their sick time and others who never took a day off. We didn't feel that was fair."
• Unless your state mandates paying employees who leave for their unused PTO, you control your policy for PTO payout when an employee leaves. Eric Fischgrund, CEO of FischTank Marketing and PR, says, "We do have a payout system for unused PTO, but still, the majority of our team comes close to using all of their PTO, which is what we encourage."
• Employees can't bank vacation time for years and then go away for weeks or months, leaving your company to fill the gap.
• Employees schedule time off in advance, if possible, instead of having to call in sick the day they need off, which may give you advance notice. A study by the Alexander Hamilton Institute found that in 54 percent of companies that instituted a PTO policy, unscheduled absences decreased by up to 10 percent.
• Because you have only one type of leave, tracking time off is easier to manage.
• You and your managers do not have to police time off, and employees do not need to lie, leading to better working relationships. Fischgrund uses PTO because of the trust and flexibility it creates. "What's the use of flexibility if it doesn't work for both parties?" he says. "This trust works both ways and creates a better environment where people don't need to feel pressured to tell us what they're doing or why they need a day off."

Drawbacks of PTO Policies

PTO policies have some disadvantages you should be aware of:

• Employees can be dissatisfied if PTO accumulates slowly, making it hard to get time off at the beginning of the year.
• Employees are more likely to use all of their time, which gives you larger gaps in attendance.
• Some employees view all PTO as vacation time and come into work while sick instead of using some days for illness. Guild and Fischgrund have differing points of view on how to handle this. Guild says, "We have always been very insistent that, if someone is sick, they don't come to work and we will send a person home if he or she is sick." Fischgrund, however, has a work-from-home policy if employees are sick enough to infect others, but well enough to get work done.

Vacation/sick-time policies

Many companies still have time-off policies that give employees set vacation time in addition to designated sick or personal days to be used for illness or family emergencies. An SHRM survey found that eight to 22 days was the average amount of vacation time companies offer.

The primary advantage of having separate vacation and sick-time policies is that in most states you don't have to pay an employee for unused sick time when they leave the company, unlike PTO policies that require payment for all time accrued. Joan Crawford, co-owner of Frezzolini Electronics in New Jersey, says, "Since [our] company started over 70 years ago, we have always offered traditional vacation/sick/personal time." Crawford explains that, because they shut down the production line for two weeks every July, they give employees three weeks of vacation, two of which must be used in July. The company also offers two personal days and five sick days. Most employees use all their time but can roll one week over into the next year if they wish.

Disadvantages of a vacation and sick-time policy include:

• Your company will have to maintain two accounting systems—one for sick leave and one for vacation time. Crawford says that doing so is not an issue since their payroll company manages all time off.
• You will need to consider the reason for time-off requests and spend time approving them.
• Employees may use sick leave for reasons other than illness, calling in at the last moment for absences that could have been planned for.

Crafting your policy

Whichever type of time-off policy you institute, it's important to clearly explain the policy in your handbook. Be sure to explain the following:

• How an employee can request time off
• How far in advance employees must request vacation time or planned PTO
• Paid holidays and office closure dates
• Whether you're going to send home employees who are sick
• How much time off can be taken at one time
• How time off accrues and if you have a use it or lose it policy
• Whether unused time off is payable when an employee leaves your employment

Both PTO plans and vacation-time plans have advantages and drawbacks. Choosing the right policy for your company requires comparison and careful thought about what will work best for your business.