Differentiating PTO and Vacation: Crafting Your Time Off Policy

When it comes to time off, employees generally value clear company policy. Generosity, yes, but clarity is also very important.

Creating a solid exemption policy can be overwhelming on the best of days, but a solid understanding of the basic requirements as well as basic terminology can make a big difference.

One question in particular is asked more often than others: What is the difference between PTO and vacation days? While the answer may not be entirely clear at first glance, it's helpful to break it down.

What is PTO?

Paid Time Off (PTO) includes any paid time away from work and work duties. Sick time, personal time, mental health days, and jury duty are examples of paid time off other than vacation. Holidays don't necessarily count as PTO, as you'll probably want to choose which days your company is closed.

What is vacation?

Vacation refers to paid time off from work that is taken specifically for the purpose of the employee's relaxation. It is usually applied for and approved in advance. Although vacation is ultimately a type of PTO, PTO does not necessarily refer to vacation.

What are the legal obligations regarding leisure time?

Legal requirements regarding PTO can vary greatly depending on where your company is located.

In the United States, the Fair Labor Standards Act (FLSA) does not require payment for work not performed, such as vacation, sick leave, or holidays. All services offered are subject to individual agreements between employers and employees. However, it's worth noting that some states and jurisdictions have passed laws requiring employers to provide paid leave - in Maine, for example, employers with more than 10 employees are required to provide PTO.

In Canada, the Canadian Labor Code sets out certain minimum standards that employers must comply with regarding annual leave and public holidays. While vacation entitlement depends in part on the province or jurisdiction, Canadian labor law provides that every employee is entitled to two weeks of vacation equal to 4% of their regular wages earned in the eligibility year. An exception is Saskatchewan, where three weeks are guaranteed.

Most companies even offer more than required as a sign of goodwill. According to the Bureau of Labor Statistics, 77% of U.S. workers receive paid vacation days, 77% receive paid sick leave, and 79% receive paid vacation time.

It's always been good for business to treat your employees well!

Types of PTO systems

Unlimited:

To be attractive to top candidates in an environment where work-life balance is paramount, more and more companies are creating "unlimited" paid time off.

Employees are simply granted time off as needed without having to worry (at least officially) about how much time they are taking. Many employees appreciate the feeling of independence, and HR is happy that they no longer have to track hours.

The downside? Employees are often unaware of what the unwritten limits actually are and therefore take less vacation than those who have limited (but defined) PTO.

Accrued:

Accrued leisure is the most widespread and longest-used form of politics. Employees accumulate X hours based on the number of hours worked or the passage of time (e.g. every 2 weeks).

For example, a policy that grants employees 2.5 hours of PTO for every 40 hours worked is equivalent to 130 hours (approximately 16 days) of PTO per year.

You can also create incentives based on seniority, so an employee who has been with the company longer can accrue more PTO more quickly.

Firmly:

With the fixed PTO system, employees are granted a certain amount of PTO each year. Unlike accrual policies, employees typically receive their PTO allotment all at once - either on January 1 or another predetermined date.

Employees are free to use their PTO at any time. Allotted PTO rolls over each year, but while some companies roll over unused time to the next year, others require employees to use their entire allotment within a given year.

PTO compared to the many other types of leisure activities

More and more companies are foregoing the traditional time off categories like vacation, sick days, personal days, etc. and instead grant a set amount of PTO that the employee can use at their discretion - without having to provide a reason.

But rather than distinguishing between vacation and other types of PTO, what are the pros and cons of doing this?

Advantages:

A comprehensive PTO quota simplifies administration significantly because it is not necessary to record different types of leave.
Employees can keep the reasons for their need for time off private if they wish.
PTO is inherently flexible. An employee can schedule their time off from work as they see fit, taking vacation days, sick days, mental health days, or days to care for a sick family member as needed.

Disadvantages:

Some employees may use up their PTO early in the year and have no time left if something unforeseen happens.
Some states require certain types of time off to be paid out when an employee leaves the company. When sick and vacation days are bundled together, this can increase the total payout required.

The importance of encouraging employees to take their time off

Even if your company's minimum vacation days requirements are zero (or negligible), it pays to offer more than the strict requirements. Well-rested and not burnt-out employees have higher morale, are more productive and are happier overall. Satisfied employees stay with the company, which means a lower overall turnover rate.

For all of these reasons and more, it's important to encourage and remind your employees to actually use their free time.

Not to mention, in any system that rolls over unused PTO to the following year, it's in your company's financial interest to ensure employees are using all of their time off.

That's because despite the "guaranteed" minimum vacation time offered in Canada, only about 27% of employees use the PTO they're entitled to.

The best way to avoid forcing employees to use their PTO is to have a solid PTO policy that clearly outlines all terms and conditions regarding eligibility, increases, carryovers, apportionment, payouts, and leave requests.

How to record free time

While there are many ways to track time off, from spreadsheets to email “paper trails,” finding the right solution for you can be difficult.

If you only have a small team and only need simple time tracking, a simple spreadsheet may be enough. However, manual calculations can quickly become labor-intensive and error-prone. That’s why quality PTO tracking software can make all the difference.

While there are many PTO tracking services available, the IceHrm system is a simple and effective solution that can grow with your business. With IceHrm you can:

• Customize time off types and policies to meet your company's unique needs
• Automate accruals, policy changes, and balance renewals (no more manual calculations)
• Give your employees the ability to request their own time off and access their PTO balance at any time

Encouraging time off boosts employee morale and productivity. Consider IceHrm for streamlined PTO management. Prioritize employee well-being and retention.