Small business owners who oversee a growing team know that one task that can disrupt workflow and hurt morale is managing employee time off requests.\nThis task only grows more crucial, and more complicated, when you decide to implement a paid time off policy.\nAlthough there are no federal laws surrounding paid time off (as in businesses are not federally required to offer it), in a strong economy, paid time off becomes more than one of many perks—it’s seen as a requirement by prospective employees.\nUnfortunately, business owners can’t just announce a paid time off policy and let the chips fall where they may.\nThey must consider questions of time off management, fair vacation scheduling, a part-time employee vacation policy, accrual, and other factors.\nLet’s run through the ins and outs of establishing and managing your business’s paid time off policy.\nThis post will answer:\n\nWhat is a PTO policy?\nWhat is an unpaid time off policy?\nWhat are the legal implications of PTO?\nHow many paid days should an employee get off?\nWhat is unlimited PTO?\nThe ins and outs of managing time off requests\nHow to handle employees who ask for too much time off\nCalculations of paid time off\n\nWhat is a PTO policy?\nPaid time off, or PTO for short, is a voluntary benefit offered by businesses to their employees, with the goal of keeping them engaged and happy.\nYou’ll find it difficult to attract, not to mention retain, high-quality talent these days without a PTO policy.\nThe basic tenet of PTO is that you give employees time off each calendar or financial year — 40 hours, or two weeks, or longer — and pay them for that time, as well.\nPaid time off can encompass different kinds of “days off.”\nIt might mean vacation days, sick days, and personal days. It’s up to you whether you want to group all of these days off into a collective PTO leave policy or PTO “bank.”\nThis is different from an unpaid time off policy.\nUnpaid time off policy\nUnpaid time off is what it sounds like: Employees can take the time off if they’re sick, or have a personal emergency, or need a break, but employers won’t pay them for it.\nIn a competitive economy like the one the U.S. is experiencing, top-flight talent can expect to choose from multiple offers.\nIf your business doesn’t offer time off, or only unpaid time off, expect another company to hire away the best employees.\nIf you’ve already hired a team and want to keep them engaged, paid time off is an excellent tool to help ensure that.\nHappiness at work is linked with productivity, and low satisfaction is linked with high turnover.\nTo avoid the burnout that comes from a 24\/7 work culture, give your employees time off so they can recharge.\nThis commitment to your employees’ well-being will, in turn, give your company a positive and high-performing workplace culture that boosts not only to your bottom line, but to your reputation — making your business a more attractive to future employees.\nThis cycle of attracting, retaining, and impressing quality talent is worth the price of PTO alone.\nCreate your PTO policy in minutesSimple, accurate time off tracking with Hubstaff\nHow to get started with PTO\nNow that you understand PTO and see the potential value in it for your business, it’s time to breakdown what you should consider when starting a time off policy for your small business.\nPaid time off vs. time off\nAs mentioned above, the one crucial difference between a paid time off policy and time off policy is, of course, pay. There are several different types of form of time off, however:\nPaid time off\nPTO leave can include vacation, parental leave, sick leave, a paid leave of absence, a paid military leave, bereavement leave, jury duty, and paid holidays.\nYour business might choose to offer vacation and sick leave under the umbrella term “paid time off,” without also offering paid parental leave or allowing for a leave of absence.\nThe exact details of the policy is up to you as the business owner, or company leadership.\nTime off\nUnpaid time off can include time off for vacation, parental leave, sick leave, a leave of absence, military leave, and holidays — all without pay.\nIt also may include unpaid time off, medical leave under the Family Medical and Leave Act (where employees can take up to 12 weeks of unpaid time off work to care for themselves or a family member), or non-FMLA medical leave.\nWhat are the legal implications of PTO?\nFederal law does not dictate that businesses give their employees any PTO. The United States is an outlier with respect to paid time off, in that it’s the only one of 37 countries in the OECD not to mandate paid vacation policies.\nEmployers thus have latitude when it comes to implementing their paid time off policies. The only requirements are those via contracts and agreements signed with employees, through collective bargaining or otherwise.\nOnce you offer paid time off to your employees, there are a few factors you’ll need to consider going forward, including:\n\nA written policy: No matter what you decide about PTO — whether or not to offer it, how long you allow for, and under what circumstances it’s allowed — you’ll need to make your policy clear from the beginning. Create a written policy as part of your employee handbook, so there’s no confusion from employees, past or present. The only time a state will hold you to upholding tenets of your time off policy is when you make a promise and then break it.\nPay-out regulations by state: Some states consider earned vacation time as wages, and prohibit businesses from a “use it or lose it” policy, which means you’ll have to pay out their PTO in wages if they leave the company. If your business is in California, for example, you’ll follow different regulations than those in New Jersey.\nEmployee classifications: Whether your employees work full-time or part-time, year-round or seasonally, or are paid hourly or annually may affect whether you offer them PTO and how you calculate their time accrued. Whatever you decide, make sure that you write it down ahead of time, rather than come up with it on an as-needed or as-requested basis.\n\nHow many paid days should an employee get off?\nHow much PTO to offer your employees entirely depends on what you can afford, what makes sense for your business, and what your competitors offer.\nOne of the primary considerations of PTO is how it affects recruitment and retention.\nWith that in mind, offer what you think will appeal to your employees and prospective employees.\nThe average American worker gets about 10 paid vacation days each year, or about two work weeks.\nIt’s up to you whether to improve upon that number. Some companies do just that, even going to the point of offering “unlimited” PTO.\nKeep in mind that most businesses give employees time off on federal holidays when possible — such as Labor Day and Christmas Day — without counting it against their official PTO balance.\nWhat is unlimited PTO?\nUnlimited PTO is an increasingly popular method of giving employees time off.\nEmployers tell their workers they can take as much time off — for vacation, sick days, personal reasons, etc. — as they need throughout the year. Provided they get their work done, of course.\nThere are two benefits to the employer:\nOffering unlimited time off is an attractive perk to many people, especially young workers who prize autonomy and flexibility.\nIt also means the employer does not have to pay out time off once the employee leaves, if so required in their state.\nUnlimited PTO requires both trust and diligence from both sides of the equation.\nThe employer has to trust that the employee won’t abuse the perk, and the employee has to trust the employer to not hold it against them if they do take the time.\nSome research shows employees actually take off less time under an unlimited vacation model than they would otherwise. You don’t want your policy to lead to burnout in the long run.\nHow to manage time off requests\nWhether you give employees a set amount of time they can take off, require them to earn the time off with time worked, or grant them unlimited PTO, you’ll need a system for managing their requests.\nMany businesses use a human resources management system or information system to process all HR activities (such as payroll, onboarding, and scheduling time off). Some third-party services cover all aspects of employee time management. You should also consider how you deliver this information, as the way the new process is shared with your team can help with learning retention and making sure policies stick.\n1. Create a policy and document it\nYour first step should be to outline your time off request policy in your employee handbook, and include all the steps expected and necessary when requesting vacation or calling in sick.\nThis might include notifying a supervisor by email, or making your request in advance.\nAdd provisions that you think may come up, such as why a manager might deny a time off request.\n2. Find a tool that tracks time off for you\nTime off requests scribbled on post-its or lost in your email are a thing of the past.\nEspecially when there are tools such as Hubstaff that track time off requests, approvals, and balances for you.\nThe beauty of using a cloud-based solution for tracking employee time off, sick days, and vacation requests is that there will be transparency, as well as a digital record of requests (alongside approvals or, if necessary, denials).\nYou’ll see who requested time off, how this time fits into their allotted PTO, whether it conflicts with existing approved requests, and what reasons managers gave for denying requests.\nThe app even lets you customize your policy on a per-user basis, which is helpful as businesses grow and continue to add staff.\n\nFor employees, it’s easy to see how much time off they have left without having to check with HR or keep track themselves.\nHow to handle when employees ask for too much time off\nWhat should you do when employees request too much time off?\nIf you have an unlimited vacation policy, compare your employee’s output to their time off.\nIf they aren’t meeting their expectations in their role, you have a perfectly good reason to deny their request and explain why.\nIf you have a set amount of PTO and your employee goes over that amount by missing work, you can “debt” them a day (that they’ll lose next accrual period), or you can dock their pay — even if they are salaried and exempt.\nBe careful with deductions, as you can stumble into owing that employee overtime pay if you improperly make deductions from their salary.\nAn easy way to manage time offRequest, review, and approve requests with Hubstaff\nHow to calculate PTO\nSo how is PTO time calculated? There are several methods.\nYou can do some calculations on your own, or you can have your time tracking software do it for you.\nYearly allotment\nThis is the simplest method: When an employee’s year starts, you give them a set amount of PTO: 40 hours, 80 hours, etc.\nThey draw from that pool of time off throughout the year.\nWhen the next year starts, you give them another block of PTO. You may or may not utilize a “use it or lose it” policy here, if allowed by state law.\nHourly accrual\nThe hourly accrual rate means PTO depends on how many hours an employee works.\nThe calculation is simple:\n\nDivide the hours in one work week by the amount of expected hours worked in one year.\nThat could be 40 hours in one work week, divided by 2,000 hours in a year, equaling .02 hours.\n\nThat means employees will earn .02 hours of PTO for each hour they work. They can use these hours (perhaps after accruing a certain minimum) any way they’d like.\nDaily accrual\nA similar accrual method that depends on an employee working an 8-hour shift.\n\nDivide the number of days worked in a year by the number of vacation days you allot.\nThere are typically 260 work days in a year, but you’d subtract the amount of days off you give an employee.\nSo if they take 10 days off, they’ll only have 250 work days.\n\nThis method is best for part-time workers, who may only work a few days a week.\nBi-weekly, monthly, and bi-monthly accrual\nThese methods pertain to your pay period and remain consistent across each paycheck.\nCalculate bi-weekly accrual by dividing your allocated PTO (say, 40 hours) by each pay period (in this case, every two weeks, or 26 in total).\nIn this calculation, 40 ÷ 26 = 1.54 hours PTO accrued. The same goes for monthly (40 ÷ 12) and bi-monthly (40 ÷ 24).\nYour digital time tracking solutions should be able to keep track of employees’ time accrued and PTO spent.\nThis will help you manage employee requests and create a record that prevents a potential FLSA lawsuit.\nYour next steps\nNow that we’ve gone over each aspect of a solid PTO policy — how it works, why it’s important, and how to calculate it so your employees can use it without issue — it’s time to put your plan into action.\nWork with your HR team, a business attorney, or consultant to create a policy that’s right for your business’s bottom line and goals.\nWhether your policy is unlimited or average, whether it accrues hourly or bi-monthly, and whether you separate out your PTO among vacations and sick days or leave it under the same umbrella, the most important aspect of your policy is that it’s available for any employee to consult as needed.\nYou should never make up your rules for requesting time off on the fly, or apply your standards arbitrarily.\nIf you offer 10 or so days of PTO to your employees, you’re giving them a perk worth about 4% of their yearly wages.\nThat’s a small price to pay for ensuring greater productivity, happiness, engagement, and loyalty among your growing team.\n\nAbout the author\nEric Goldschein is the partnerships editor at Fundera, a marketplace for small business financial solutions. Eric has nearly a decade of experience in digital media and writes extensively on finance, HR, marketing, and small business trends.