Do Companies Have to Pay Out PTO?

Do companies have to pay out pto

The United States recently passed the Federal Employee Paid Leave act. It offers federal workers paid parental leave of up to 12 weeks. This law means that the US government now pays out a form of PTO (paid time off) to its employees.

According to the US Bureau of Labor Statistics, private industry organizations offered about 79% of employees some form of paid time off in 2019.  

So, should your company also give workers paid time off? Will it benefit your employees and your business? Are you also obligated to pay a worker’s accrued PTO after they leave? 

This article talks about the impact of paying out PTO and other considerations surrounding the policy.

What is PTO and How Does it Work?

Paid time off is a period an employee takes a break from work while receiving their compensation. They also get to maintain their job status and other employment benefits.

A company’s paid time off (PTO) policy covers various reasons for time off, including:

  • Marriage
  • Travel (vacation)
  • Illness
  • Parental leave
  • Personal time
  • Rest

Businesses offer this benefit to allow workers time to rest, enjoy some time away from work, or deal with personal issues.

Every organization’s PTO policy is different. For example, some businesses allow workers to use their PTO at their discretion. For others, the paid time off requests are subject to review. 

It’s up to employers to develop a policy that suits their business process and employees. It’s also up to employees to find out how to request and use their company’s PTO.

Employees Use PTO Differently

Your staff has different needs and engagements. For some workers, paid time off is best used to visit a World Heritage Site or go skydiving. For others, quality family time supersedes everything.

That said, some workers may choose to use their PTO for sick leave or to care for an immediate family member or friend. While they can take unpaid leave under the Family and Medical Leave Act, getting paid may be the best move if they are in dire need of money.

Must Employers Have a PTO Policy?

While PTO is not required by federal law in the US, most employers offer workers paid time off. According to the US Bureau of Labor Statistics, private companies offered paid time off to one in three employees who have worked for one year in 2019.

But most countries in Europe and many states and local government mandates some form of paid leave.

As it turns out, employees value paid time off. A 2015 glassdoor survey found that workers preferred paid time off over retirement plans and performance bonuses.

What’s more, your company may be missing out on valuable talent who’d prefer organizations that offer paid time off. According to a Society for Human Resource Management (SHRM) study, offering paid leave offers employers different benefits including attracting talent, increasing employee engagement, and improving employee wellbeing.

So, while employers aren’t obligated by federal law and most states in the US to offer paid time off (more below), it’s in your best interest to do it.

Is Vacation Time the Same as PTO?

While PTO can cover time off employees use for travel or relaxation, it isn’t exactly the same as vacation time. So, every form of vacation time is PTO but not all PTO is classed as vacation time.

You can find out more about the difference between the two in this post.

Banked PTO

A PTO bank offers an employee an accumulated number of paid days or hours off per year. Employers can choose to allocate a worker’s entire paid time off for the whole year or allow them to “earn” the time off.

Accruing the time off follows a procedure that most employers set to avoid workers taking paid time off and leaving the company without earning those hours. For example, businesses can choose to allocate 14 days of paid time off to a worker’s PTO bank after every quarter they work.

Accrued PTO

While accrued PTO may seem like the same as banked PTO, they’re different. Companies practice the PTO accrued policy to save employee costs by reducing each employee’s general paid time off. So, they count time off for multiple reasons towards the employee’s entire paid time off.

Are there Laws Governing PTO?

The US doesn’t have any federal mandate for PTO like most European countries that guarantee 20 to 30 annual paid leave days. 

Businesses have full discretion over their paid time off policies. Employers are only obligated by federal law to provide unpaid time off for situations covered under the Family and Medical Leave Act.

However, more than a dozen municipalities and states across the US support some form of mandatory paid sick leave. These jurisdictions moved for these laws to protect workers who are forced between going to work sick or losing pay. That’s because those workers run the risk of infecting their coworkers and losing their jobs over something that can be avoided.

In the case of termination or resignation, some states mandate companies to pay out the worker’s banked or accrued PTO. In states and jurisdictions that don’t mandate such pay, employers can choose whether or not to pay out the owed PTO.

PTO and Exempt Employees

In the US, the Fair Labor Standards Act (FLSA) prohibits employers from deducting an exempt employee’s wages regardless of how much work they do during their paid work period. Exempt employees, according to the Department of Labor, are workers paid on a “salary basis.” 

So, imagine an exempt employee is paid a weekly salary of $1000. That means you can’t reduce their salary for not showing up to work as long as they have worked for some time during the week. 

That said, there are situations that allow businesses to deduct an exempt employee’s pay. One of those cases is when they refuse to show up to work for one full day or more without being ill, injured, or disabled.

The federal law permits employers to deduct an exempt employee’s absent hours from their PTO. That said, some states and jurisdictions frown on this practice as specific courts have ruled against it.

So it’s important that you learn the laws of the state where your business operates.

Limited and Unlimited PTO

Limited PTO is the traditional policy where employers define a maximum number of paid days or hours off. Whenever workers take paid time off for any reason, it counts towards their allocated paid leave period.

On the other hand, unlimited PTO or “open PTO” doesn’t put a cap on paid leave. Employers essentially allow workers to take all the time off they need without restrictions, as long as they deliver their work and meet deadlines.

Companies are Loving UPTO

UPTO (Unlimited PTO) is becoming widely adopted, especially in the tech industry and among startups.

Sure, it may seem like a policy that could be easily abused when you look at it on paper. Employees may be tempted to skip work since they’ll get paid anyway. So, why would businesses take that risk?

Studies have shown that it’s not as bad as it looks, and it’s even the opposite. 

According to Namely’s HR Mythbusters 2017 report, most employees who benefit from this type of policy don’t take as much time off. The report further found that they took fewer days away from work.

Another report by Sharon O’Malley listed a number of companies that successfully implemented unlimited paid time off. These companies reported that workers don’t abuse the policy and end up taking less time off.

Best Ways to Implement UPTO

You need to put the right measures in place to safeguard your UPTO policy. 

The goal is to afford employees as much autonomy over their paid time off as you can offer. That said, make sure you set requirements for taking leave. For example, there should be enough notice so they don’t take time off randomly. This way, you can make adequate plans to cover up for their absences.

You should also set expectations around performance. Let employees know the targets they must meet and define the consequences of not meeting them. When workers know their obligations, they’re less likely to take time off if it will hurt their chances of meeting their goals.

It’s also vital that you learn the laws governing unlimited paid leaves in your state. Some states restrict unlimited vacation leave to salaried workers.

How Does PTO (and the lack thereof) Affect Your Company?

How you approach paid time off affects the mood around your workplace and influences employee engagement. For example, if you offer paid time off, employees are more likely to work harder and less likely to leave.

Let’s cover the impacts of paying out PTO.

Paying Out PTO – Advantages of Paid Time Off

Attract Top Talent and Boost Reputation

Running a great PTO policy means you’ll attract experienced and talented workers. That’s because employees are always looking out for more favorable work conditions. 

What’s more, having a reputation for such work policies expands your possibilities because you’ll evoke positive emotions from potential clients. More people will love to do business with you knowing you value your workers and respect their mental and physical well-being.

Retain Employees and Reduce Turnover

Researchers Maya Rossin-Slater and Kelly Beard looked at the California Employment Development Department’s administrative data to study the impacts of the state’s Paid Family Leave provision

The report found that the state saw an uptick in the number of time off taken after the law went into effect. That said, the majority of the claimants only took one leave in 10 years. 

The report confirmed that employers didn’t mind the higher wages because they experienced lower employee turnover and expenses.

What’s more, employers that provide favorable PTO policies enjoy higher employee engagement. That’s because knowing they won’t lose wages while away from work gives them an extra sense of job satisfaction and financial security. They’ll remain loyal and motivated to work as a result.

Boost Productivity

Your company’s productivity and profitability will increase for different reasons when you offer employees paid time off.

Firstly, taking time to rest and recover from all the stress of work allows employees to come back better. They’ll be refreshed, more focused, and more energized to work.

Next, employees are more motivated to work for employers who allow them to take time off without cutting off their salaries.

Some employers attach paid time off to performance or use PTOs as part of employee recognition programs. These measures motivate employees to work harder to gain those rewards and benefits.

Reduce Stress and Anxiety

According to a 2018 study every additional 10 days of paid time off reduced the odds of depression by 29% in women.

Workers use paid time off to recharge and destress, which improves their mental and physical health. According to the World Health Organization, there are serious risks attributed to working long hours without rest.

Improve Work-Life Balance

When workers are afforded the chance to take time off without losing pay, they can comfortably attend to family and other personal activities. This way, they’re present when it matters and can spend quality time with their loved ones. 

Unlimited PTO makes it even better. Since workers can take paid leave at their discretion as long as they perform, they’ll build healthier social lives.

Reduce Absenteeism

When workers know they will still get paid while away from work, they will go through the proper channels to request time off. Doing that means they don’t have to skip work without notice, reducing the cost and terrible downsides of absenteeism.

To put things in context, the Gallup-Healthways wellbeing survey reported that the US economy loses $84 billion annually to productivity losses associated with health-related absenteeism.

But you’re not just going to suffer financial losses. An employee’s unannounced absence could cause you to fail to meet certain obligations, breaking client trust. 

Since workers have to request paid time off, employers always get notified in time and can take measures to cover for the absent worker.

Are there Consequences to Not Paying Out PTO?

Some companies choose to deny workers PTO or offer lower paid time off. They could lump everything, from vacation time to sick leave, into one small PTO plan. These are cost saving measures to reduce wage expenditure. 

The practice of not offering paid time off could backfire because your company will be at the risk of losing talent and employee engagement will reduce. You’ll suffer the ugly effects of absenteeism and productivity will take a dive. 

That said companies that run seasonal businesses may not be able to afford PTO during off seasons.

You Should Build a Culture Around Time Off

Paid leave is beneficial to both the employer and employee. It is one the best employee engagement activities you can organize for your workers.

Eileen Appelbaum and Ruth Milkman conducted a study on the impact of California’s Paid Family Leave program. The survey found that big and small employers enjoyed positive effects of the program across the board. Employees, especially low income earners, also benefited from the law.

So, take advantage of paid time off to allow your business to attract and retain talent, keep workers engaged, improve employee wellbeing, and boost productivity and profitability.

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