Developing a Paid Time-Off Policy

Developing a Paid Time-Off Policy

Americans are known for putting in long hours with little rest, which can lead to burnout, lower productivity, and decreased job engagement. Although employers are not legally required to offer paid time off (PTO) to their workforce except in a few states, most choose to do so. Those that offer PTO benefits may have a competitive advantage. Nearly a third of employees say they would sacrifice pay for additional PTO. PTO promotes work-life balance and can be part of a benefits package that helps attract and retain employees. 

What Constitutes Paid Time Off? 

Employers typically give their workers paid days off for federal and state holidays. In addition, most offer PTO as part of their employee benefits package. 

A PTO policy creates a pool of paid days off that workers can use at their discretion. PTO may be used for any purpose, such as a sick day, a personal day, or taking time off for a birthday, religious holiday, vacation, childcare, or bereavement. 

According to the U.S. Bureau of Labor Statistics (BLS), about three-quarters of civilian workers have access to paid vacation time¹. Access to paid leave can vary based on industry, full-time versus part-time employment status, and union versus nonunion status².

State and Federal Leave Laws

The Fair Labor Standards Act (FLSA)³ establishes numerous employment standards applicable to the majority of US businesses. However, the FLSA does not mandate payment for time employees take off, for example, for vacation, illness, or holidays. Only two states—Massachusetts and Rhode Island—have state holiday rules that affect private employers. 

The Family and Medical Leave Act (FMLA)⁴ provides eligible employees up to twelve weeks of unpaid leave per year. Although the law requires only unpaid leave, employers may choose to let employees use some or all of their accrued vacation or sick leave for the FMLA leave period. More than a dozen states have their own family medical leave laws, which may impose different requirements. ⁵

Some states have mandatory sick leave, but not all of them require paid sick leave.  New Jersey requires employers to provide earned sick leave to full and part time employees with limited exceptions.⁶

Under federal law, employers may not terminate employees because of absences for jury duty.⁷ Federal law does not require employers to provide PTO for jury duty, but some states do require it.⁸ They must also comply with the Uniformed Services Employment and Reemployment Rights Act (USERRA), which protects the employment of service members, allowing them to return to their job following military service. ⁹

PTO Policy Considerations

The following are a few starting points for small businesses that seek to develop a paid time-off policy: 

• PTO is generally structured as a set number of days that may be used for any purpose (i.e., sick days, personal days, vacation days, and discretionary days). 
• Some companies have begun to offer workers unlimited PTO. Evidence suggests that an unlimited PTO policy does not result in employees taking more time off, so this may be a way to communicate generosity and trust without suffering a blow to productivity. 
• It is common to start new workers at a given number of days per year and then increase their PTO with tenure (e.g., new workers receive two weeks of PTO, and workers who have been at the company for five or more years receive three weeks). 
• Another option is to base PTO accrual on the number of hours worked per pay period. The number of hours accrued during each pay period may increase with tenure. 
• A rollover allowance allows unused PTO to carry over to the next year. The carryover can be capped or uncapped. Some companies have a use-it-or-lose-it policy for PTO. 

Outside of these basic PTO policies, a company can customize PTO in the following creative ways: 

• PTO as a reward for job performance
• Unlimited sick time (instead of unlimited PTO)
• Floating holiday vacation days
• PTO for employee birthdays
• Ability to buy or sell PTO
• Holiday shutdowns that do not count as PTO days
• Paid or unpaid sabbaticals
• Paid parental leave
• PTO for volunteering (i.e., volunteer time off or VTO)

It is typically unnecessary for an employee to give a specific reason for a PTO request. However, an employer may have restrictions on when PTO can be used, such as during peak operating times. If an employer has restrictions about the use of vacation leave during these times, they should be applied consistently and without bias.

A clearly written company PTO policy is key. Employers must ensure that employees understand the company’s expectations for taking time off, and supervisors and managers should be trained to enforce the policy, which should include the following elements: 

• Time periods when vacation leave is restricted
• Number of employees who can be absent at once
• Procedures for requesting PTO
• Process for prioritizing multiple PTO requests (e.g., first come, first served or seniority)
• Whether PTO will be automatically deducted for absences
• Appropriate use of unpaid leave

Finally, while most states do not require employers to offer PTO, when paid days off are available, state labor and employment laws may apply. For instance, some states prohibit use-it-or-lose-it policies. States also differ on whether accrued, unused vacation time must be paid upon termination of employment.

We Can Help 

At a time when workers are changing jobs in droves due to burnout and job dissatisfaction, a generous and thoughtful benefits package is crucial for retaining your best team members and attracting new talent. 

Our business attorneys work with small businesses to create PTO policies that are compliant with state and federal laws and clearly articulated in writing. Call us today to set up an appointment.

¹U.S. Bureau of Lab. Stats., Paid Sick Leave Was Available to 79 Percent of Civilian Workers in March 2021, TED: The Economics Daily (Oct. 12, 2021), https://www.bls.gov/opub/ted/2021/paid-sick-leave-was-available-to-79-percent-of-civilian-workers-in-march-2021.htm.

²See Employee Benefits, U.S. Bureau of Lab. Stats. (Sept. 23, 2021), https://www.bls.gov/ebs/factsheets/paid-vacations.htm.

³29 U.S.C. §§ 201–219.

⁴29 U.S.C. §§ 2601–2654.

⁵State Family and Medical Leave Laws, Nat’l Conf. of State Legislatures (Sept. 9, 2022), https://www.ncsl.org/labor-and-employment/state-family-and-medical-leave-laws.

⁶NJSA §34:11D-1 et seq., NJSA §12:69-1.1

⁷28 U.S.C. § 1875.

⁸Patrick Proctor, Do You Have to Pay Employees for Jury Duty?, Bus. News Daily (Feb. 21, 2023), https://www.businessnewsdaily.com/15916-jury-duty-for-employees.html.

⁹38 U.S.C. §§ 4301–4304.