Comprehensive Time Off & PTO Policy Guide for Small Businesses

Federal law does not require paid time off for small businesses or businesses of any size. Only a few states and cities mandate it nationwide. Still, paid time off policies for small businesses are a huge benefit when it comes to attracting top talent and keeping your employees happy and healthy.

Giving your team time to focus on their personal lives is crucial for both employee well-being and the success of your company. As IceHrm's Director of Human Resources, I ensure we have an effective leave management policy that balances company needs with giving every employee the opportunity to take necessary time off.

What is a PTO policy?

A paid time off (PTO) policy is a set of policies that govern how employees can take days off while maintaining their regular pay. Policies typically explain how PTO is earned, how it can be used, and any restrictions or conditions that apply. For example, a small business may offer a PTO rate of one day off for each month worked. The policy may also specify whether employees can cash out unused PTO or if it will roll over into the next year. Some small businesses may have blackout periods during peak work hours.

Types of Paid Time Off (PTO)

Vacation

Paid vacation days are provided by companies to allow employees to take time off from work, whether to travel or to have a day for themselves. Paid vacations are typically scheduled, and some employers require employees to give a minimum amount of advance notice of their vacation before taking it.

Sick

Sick time is provided for absences caused by the employee's own illness or injury or by caring for a sick or injured family member. The nature of sick time is that it is often taken without warning. Several states and cities have laws requiring sick leave for employees.

Bereavement

Bereavement leave is sometimes offered to allow employees to take time off after the loss of a friend or loved one. Some employers offer additional bereavement days for employees who have lost a member of their immediate family.

Jury Duty

Many employees must take time off to fulfill their civic duty as a jury. Jury duty is included in the average paid time off offered by small businesses. Some employers offer to compensate their employees for this time during a pay period, although they typically limit the number of days because the length of jury duty can be unpredictable.

Paid Time Off (PTO)

PTO is a single time credit that combines vacation and sick time, so to speak. Employees can use their PTO time for illness, travel, personal projects, caring for family members, and more. PTO allows employees greater flexibility in how they structure their time away from work. You can learn more about the differences between PTO and vacation and sick time in one of our recent blog posts.

Holidays

Many companies offer their employees paid days off for some or all national holidays. In the U.S., this may include days like Memorial Day, Independence Day, Labor Day, or Thanksgiving. Employers may also offer less traditional holidays, such as those related to the company's mission or origin.

When crafting a paid time off policy, there are several strategies you can choose from. Let's weigh the pros and cons of some of the most common and focus on the vacation and sick components so you can decide which strategy best fits your needs.

What Small Businesses Need to Know About Vacation Policies

As I mentioned, there are currently no federal laws regarding paid time off from work for most businesses, aside from the temporary laws established under the Families First Coronavirus Response Act.

However, the government does mandate unpaid time off for small businesses under the Family and Medical Leave Act. Your state may also mandate additional unpaid time off, so check your state laws to find out what type of time off policies are required for small businesses in your area.

However, the Paid Sick Leave Executive Order requires that businesses with certain types of contracts with the government, also known as "covered contracts," provide paid sick leave that is available for short-term health needs and preventative care. For more information about these contracts, visit the Department of Labor's sick leave page.

Another important legal aspect to note: PTO policies can be designed differently for different types of employees based on objective criteria such as their length of service or whether they are classified as exempt or non-exempt employees, but it is illegal to discriminate between protected classes.

PTO Payout

In many states (24 in total), employers are required by law to pay out an employee's unused PTO balance when that team member leaves your company. States with laws that ensure employees get their PTO paid out include:

Alaska, Arizona, California, Colorado, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island (after one year of employment), Tennessee, West Virginia and Wyoming, and the District of Columbia.

Paid Sick Leave Laws by Location

There are many states that have their own rules for sick pay. Find out what laws apply in your area when it comes to providing paid time off.

These states include:

• Arizona
• California
• Connecticut
• Maine
• Maryland
• Massachusetts
• Michigan
• Nevada
• New Jersey
• Oregon
• Rhode Island
• Vermont
• Washington
• Washington D.C.

Here are some cities and counties that also have their own sick pay laws. There may be sick pay laws in both your state and your city or county. You must follow a time off policy that is more beneficial to the employee.

• Berkeley, California
• Emeryville, California
• Los Angeles, California
• Oakland, California
• San Diego, California
• San Francisco, California
• Santa Monica, California
• Chicago, Illinois
• Cook County, Illinois
• Montgomery County, Maryland
• Duluth, Minnesota
• Minneapolis, Minnesota
• St. Paul, Minnesota
• New York City, New York
• Westchester County, New York
• Philadelphia, Pennsylvania
• Pittsburgh, Pennsylvania
• Austin, Texas
• Dallas, Texas
• San Antonio, Texas
• Seattle, Washington
• Tacoma, Washington

Many states, cities, and counties may have enacted additional laws regarding paid time off during the COVID-19 pandemic.

Even if you are not legally required to provide this benefit to your employees, in most jurisdictions you must stick with the plan you set out in your official policy. If you don't, you could end up in court in the future. So make sure you stick to the time off policies you want to offer your employees.

Now let's look at some of the different types of paid time off and policies and consider the pros and cons of each option.

Distinguishing the Time Off Types

In a traditional time off policy, employees get a certain number of days off for each of the different categories, such as vacation, sick days, or jury duty. You can offer these as days or hours in each category.

Vacation Days

Pros

setting a specific amount of time for each paid time off type, you can not only accurately measure how much time each employee takes off, but also what exactly they use that time for.

Cons

If employees run out of vacation days but still have sick days, they may "call in sick" instead of registering a day off in advance.

PTO

Many employers combine sick and vacation days into a single PTO policy. Instead of distinguishing between the different types of paid time off, employees are given the freedom to use the time allotted to them as they wish. It is up to the employee's discretion whether they want to use their PTO time for vacation, personal projects, or to take time off when sick.

Pros

All-in-one PTO banks give employees more flexibility in managing their time off throughout the year. Employees who don't get sick often can use that time for vacation instead, which is a popular option for many employees.

There is no question for the employer about what type of time credit to use for an employee's time off request.

Cons

Without dedicated sick days, employees may try to come to work when they are sick rather than "wasting" a day that could potentially be used for vacation in the future.

Time Credit

Time credit means that you, as an employer, allow the employee a certain number of days they can take for sick and vacation days throughout the year, and the employee earns those days pro rata throughout the year. For example, an employee might get 2 hours off for every week they work. This is the most common strategy for time off and the one we use here at IceHrm.

Pros

When employees earn their paid time off, they are more likely to feel entitled to take it. When employees actually use their PTO, there is less burnout on your team, and you can encourage them to take the days they have accrued.

A common way companies encourage their employees to take the days they are entitled to, while avoiding a large financial burden of paying out PTO upon termination of employment, is to put a cap on the days accrued in the plan. This way, your employees can't start accumulating more days until they've taken at least some vacation time, so they're encouraged to take time off.

Some companies limit the number of accumulated hours that can be carried over to another year, which has a similar effect to capping.

Another nuance of this plan is that you can offer the incentive to earn more vacation days the longer the employee works for you. Exempt employees at IceHrm, for example, can get three weeks of vacation in their first year of employment, and after the first year, that entitlement increases to four weeks per year.

Cons

With any type of accumulated PTO hours or days, you may have to pay out the remainder of an employee's vacation upon termination of employment, depending on where you live. If the employee doesn't use their time, it can get expensive.

Banking Paid Time Off

Similar to accruing time off credits, you as the employer grant a certain number of days an employee can take off during the year for each of the time off categories in your plan. However, with these plans, you as the employer don't require employees to earn their days off; instead, you pre-pay those days into the employee's time off bank.

To be honest, I don't see this plan very often.

Pros

The only benefit of such a plan is that it is easier to implement since you don't have to worry about building up time credits for each individual employee. This might be easier for companies that don't have a software solution for managing PTO.

Cons

The biggest problem with this plan is that you could theoretically hire someone to take their two weeks of vacation at the beginning of the year and then leave your company.

"Unlimited" Paid Time Off

In the startup world, you often hear about the "unlimited" paid time off strategy. This type of PTO policy allows employees to take paid days off as needed throughout the year. Days off don't accumulate, nor do they have a time limit.

Pros

The plan can be very useful from a recruiting perspective. Job seekers might see it as a generous perk because it helps them better balance their work and personal lives. And without limits, employees are more likely to take vacation knowing they can stay home if they get sick.

While many companies still track time off to better track usage, they don't have to. It also simplifies payroll.

On the financial side, an unlimited program offers another benefit. Remember that 24 states require you to pay an employee the remaining PTO balance when their employment ends? If you have an open plan with no accruals, you as an employer don't have to pay out "earned" PTO, thus reducing your financial liability when the employee leaves the company.

Cons

Unfortunately, the term "unlimited" is a misnomer because outside of a theoretical perspective, it's not really unlimited. Companies and managers still have to set expectations for employees about appropriate use of time off, and leaving it to the manager's discretion can create inequities between teams and individuals.

Research shows that many employees use less PTO on an "unlimited" time off plan than they would on a traditional accrued time plan. It may make some employees feel less entitled to take time off they haven't "earned." On the other hand, other employees could abuse this privilege because there are no official rules.

It's also a little harder to document how you meet some of the requirements of states or cities that require sick pay. In these areas, you often see people with two plans: an open plan and a sick day plan, so they can prove they have guaranteed employees the days they are entitled to.

Establish a company-based time off policy

No matter what PTO plan you set up, you should also set up a separate time off policy for when the company is closed. This can be as simple as adopting some or all of the federal holidays and adding any other holidays you want to include to your list.

Note: The Fair Labor Standards Act does not require you to pay for time off during the holidays.

Other factors to consider for paid time off

Let's dive deeper into what questions your policy manual should answer.

Who is entitled to what type of time off?

Some companies have different plans for different groups of employees. For example, you may want to offer different packages to your exempt employees than to your non-exempt employees. You may also want to set up a different plan for field employees than for on-site team members. As long as you do this objectively and don't violate any discrimination laws, that's fine.

How many days are employees entitled to PTO?

Determine how many days you want to give your employees and how they can earn that time. According to a recent survey, the average private sector employee with one year of experience at a company is entitled to 10 vacation days—but you can always offer more! One popular strategy is to increase vacation entitlement based on the employee's length of service.

When and how can employees take paid vacation?

In your handbook, specify the intervals at which your employees can take the day they have available. For example, some companies only allow employees to take full or half days off. Others allow smaller increments like hourly time off.

You may also want to establish a rule about how long an employee can take off. For example, you may not want an employee to take more than two weeks off in a row unless there is a protected reason under the FMLA or other vacation laws.

Some companies even establish a "blackout period" during which employees are not allowed to use their paid vacation. This is especially popular with companies like retail that have their hands full during the holiday season.

How many days notice does the notice need to be given? Include this in your handbook and require your employees to request time off by this time so their manager can prepare.

Bottom line

No matter which option you choose, make sure it's easy for you to manage (both financially and operationally) and beneficial for your team. If you create the perfect plan for everyone involved, you'll likely see higher employee retention, attract better talent, and have a happier and healthier workplace.

Dealing with PTO requests during peak times

Managing time off requests becomes more complicated when there's a lot of work or a shortage of staff. It needs to be handled carefully. Establishing a clear protocol for submitting time off requests, including a set time frame, is essential. Managers benefit from considering a set of criteria based on business needs when reviewing these requests. Strategies to ensure continuous coverage may include rotating PTO plans or bringing in temporary employees to fill in gaps.

FAQs on Time Off for Small Businesses

What is typical PTO for small businesses?

In many small businesses, PTO policies are based on an employee's length of service. This is also true for many large companies. New employees are typically entitled to 10 days of vacation per year. The number of days increases the longer the employee has been with the company.

What is the difference between PTO and vacation?

PTO and vacation differ primarily in their flexibility and scope. While vacation is specifically for time off, PTO is a broader term that can be used for a variety of reasons, such as illness, personal needs, or leisure time. Another difference lies in the policies that apply to both. PTO policies typically allow more freedom in how time off is used, while vacation policies are more rigid. This difference can impact employee scheduling and overall job satisfaction.

In small businesses, the distinction between PTO and vacation often revolves around flexibility and purpose.

• Flexibility: PTO typically offers more freedom and can be used for a variety of reasons - sickness, emergencies, or personal time. Vacation days are typically for leisure time and cannot be used as flexibly.
• Accrual and allocation: In small businesses, vacation days may be offered as a combined pool of days off that can be used for a variety of purposes, while vacation days are separate from sick days or personal days. For example, a small business might provide a total of 15 PTO days that can be used for any purpose, while 10 vacation days and 5 sick days are separate.
• Approval process: Since a small business has fewer employees, PTO days may require less formal approval compared to vacation days. A simpler approval process can be helpful when urgent situations arise that require immediate time off.

Implementing an effective PTO policy is essential for small businesses to attract and retain top talent. IceHrm simplifies managing time off, ensuring a happier and healthier workplace.