Vacation vs PTO (Paid time off)

Simon Westbrook's Profile

PTO vs Vacation In recent years I have seen a number of companies switch from having separate vacation, sick, and personal time off to an integrated PTO system. Regardless of the reason for not attending work, the employee is charged against his or her accumulated PTO accrual.

While there may actually be a reduction on the aggregate days allowed as PTO, the main motivator appears to be to reward the healthy or conscientious employees who never take a sick or personal day, and provide a deterrent to those that habitually manage to use every single hour of sick time accrued.

Now I have come across a company wanting to change back from PTO to separate plans for vacations and sick days. Their reason is that employees were so motivated to avoid sick and personal absence, because they could add to their vacations accrual, that the Company saw a significant increase in its accrual overhang.  While vacations are a legal carry forward entitlement, sick days were use it or lose it and there was no carry forward entitlement.

I would be interested in hearing any views and comments from those with experience of the change to PTO (or back) and what evidence there is to suggest that sick day entitlements are commonly abused.

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Having a combined PTO pool also incentivizes people to come to work even when they are sick & contagious, because they want to save their days in order to take a 3-week vacation.

Another advantage of multiple PTO buckets is that you can have scheduling rules for each. Sick/Personal days need no advance approval, but vacation time may require the manager's approval at least a few weeks in advance. Vacation can be scheduled in advance for the day before/after a holiday (Memorial Day, 4th of July, Labor Day), but sick/personal days cannot, in order to avoid having everybody call in sick on the 5th of July.

A downside of multiple PTO buckets is that the people who use up all of their sick days tend to constantly go to their bosses to get approval to use vacation time for their most recent day off due to illness. If your plan allows managers to make exception such as this, a burden is put on those managers.

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We have implemented a PTO policy that encompasses sick days, vacation days, personal days, etc. all in one - that is, we do not care what the reasons are, as long as they do not exceed the given number of PTO days. Also, we have a "use it or loose it" policy - no carry over to the next year.

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The discussion is about which is better for employer and employee. Super interesting.

Enjoy!

Best... Sarah

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Just like Ercih, we had a loose it or use it policy. Made end of year accruals fast and easy (there were none).

Vacations need to be scheduled, and those in Accounting needed to take all their vacation (week at a time) during the year. Others could take it whenever they felt.\the need.

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A significant disadvantage of PTO is that you have to accrue it monthly, so it hangs on your books, and then you have to pay it out when you separate from the employee (in CA and some other states, although I can't recall which). This means that if you do a layoff, you not only pay severance (if you're doing that) but you have to pay off PTO which can be a big slug of $. This is a major issue if you are doing a layoff expressly to save your company money, and here you go writing a big check to all of your laid off employees. Further, I know that many employees do their darnedest to amass PTO (up to your max accrual amount) simply so that they have a cushion if they are laid off or even if they quit - doesn't matter which. So watch out for your max accrual b/c it's just a bank account waiting to be funded for employees who separate from the company.

The rules vary by state so check yours closely. For sure ask your lawyer for the "real" advice, b/c you can be sued and, depending on your position in the company, help personally liable for certain compensation issues.

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I agree with Mark that CA rules can make a PTO bank a huge liability. In CA once you have given someone PTO you can never take it away (i.e. use it or lose it doesn't apply). We have had to change our policy for CA so that once they hit the max accrual they just stop accruing PTO instead getting it taken away at a later date.

One thing to note in CA you don't have to pay out Sick leave when you separate from the employee (check with the state because rules could have changed since last I looked). Therefore if you have a higher staff turnover it might be better to keep them separate so you don't have to pay out that balance along with any accrued vacation.

Either way you go you have advantages and disadvantages for people who play the system. The key is to manage the expectations of what is and isn't acceptable ways to use the PTO. Then enforce those expectations.

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Don't forget that your PTO bank will inflate along with your salary increases.

I've always banked as much PTO as possible because, every time I received a 5% raise, the dollar value of my PTO increased accordingly. And, it was tax free....at least until I cash it out or use it.

Until we changed some payroll procedures, this little factor of deferred time off hit home at year end every year when I had to adjust the entire compensated absences liability accrual to reflect the then current rates of pay for each employee. The rather large JE I had to make was a reminder of why we have to be ever mindful of the nickels and dimes in business so that the dollars can take care of themselves.

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Alas, I appreciate that our community is one of Finance and Accounting professionals, but think as the CEO should think -- Step back and remember that the single most valuable asset in any company are the people -- your company needs to provide competitive benefits AND TREAT the employees as mature professionals. THINK NETFLIX -- they don't track PTO, vacation, sick, or any other -- they expect their employees to do the right thing, get their jobs done, and they can take as much time off as they need. Oh, and by the way, guess what? No accruals on the books!

Think pro-employee, treat them right and with respect, but yes, hold them accountable, and lo and behold -- EVERYBODY WINS.

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I agree, one needs to consider the valuable assets of employees. So many forget this fact. I didn't realize Netflix had this policy. I like them more now. My company is very flexible and I would say PTO is an accounting nightmare. We tend to have an off the books comp time scenario.

Ronda
Controller

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We've been using integrated PTO for the last 25 years. It's not a perfect system. It's true that people tend to come in sniffling rather than give up a potential vacation day. But once employees are earning PTO at a decent clip, they are more rational about staying home when they can't be productive at work. To all of us PTO feels closer to the NETFLIX philosophy without granting complete trust. Does NETFLIX have NO people who abuse their free-for-all system? Amazing. P.S. We've been lucky not to have had to deal with lay-offs and large accruals of PTO that need to be paid out.

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We cap the accrual of PTO that's allowed to carry to the next year at 20 days, although we have had to inform a few employees that they needed to take extended time off in December to not lose that PTO.

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We also have implemented a PTO policy that encompasses sick days, vacation days, personal days all in one. We do not care what the reasons are. In order to not receive incidents, all time off needs to be approved and advance notice given. Call outs for being sick do receive an incident. After so many, the employee is given a verbal then written warning and after a few more - let go. This was instituted several years ago to weed out the abusers. We now have a well oiled staff.

Time off that is more than two days needs six weeks’ notice. At the end of the year, we are allowed to carry over 96 hours. There have been many employees over the years that we’ve had to urge to take time off and then ended up writing off excess untaken hours.

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In California, it isn't legal to cap carryovers for PTO already earned by an employee, as the State takes the position that it is a recapture of compensation. My companies typically deal with this by provisions in the plan that stop accrual of PTO for an employee once they have accumulated 2 years' worth of hours at their current accrual rate, and restart it with usage bringing the accrual below that amount.

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My understanding of CA laws led me to believe that you had to accrue vacation and pay out upon termination as it was earned, similar to PTO? Do you know if this is the case?

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Yes, Mark, you are right. CA does require whatever is accrued to be paid out, either at the separation or within a very short period of time (days).

One more reason we've re-located nearly every function out of CA. (Forgive that; CA was a great place, livable if less government.)

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I've been in two firms that implemented PTO policies, but not the back end processes to clearly track.

In the end, each company had to take a series of accruals to account for the variance in the PTO system and expense to date. In response, each had to make sweeping changes to the PTO program which were a train wreck for employee morale.

I agree with Keith that the goal is to keep it a benefit - so whatever the design make sure people understand both the spirit and their responsibility for reporting PTO - then back it up with the processes and procedures to make it simple.

For what it's worth, I've always given my managers the right to give people who have been working long hours a day off without charging PTO. Never had any issues with abuse since we all agreed upon how to best use.

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Our company is virtual, everyone works from their home. We have PTO, with additional allowances for Jury duty pay and Funeral leave. 5 days carryover maximum, if you have more and you don't take it voluntarily it is assigned at year end. Every body likes it, much easier to administer and plan for.

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Very good points. In application, PTO is usually easier to administer because you are tracking one "pot" of time. And from a payroll perspective, entering time is much more efficient. I haven't seen where people come to work sick anymore under a PTO policy than the other. I have seen a rash of "sickness" when the end of the year approaches and the sick leave is about to disappear because of no carry forward policy.

From a fairness perspective I am also troubled by "use it or lose it" policies as the company benefited from the employee not taking the time off and thus (theoretically) increasing the productivity of the company.

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Excellent discussion. We've been considering switching from vacation/sick accruals to PTO, so this has given me a lot to think about. And, once again, appreciate that I am not working in California...

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But we do have nice weather.

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Insightful thread on this topic. I would also add that PTO is "less intrusive" to the employee and echo the earlier comment "pro-employee". As part of business integration, we moved all companies to "use-it-or-lose-it" (where legally possible)and gave the impacted employees 18 months notice to "use" their accrued time-off. As a side note, there is growing attention about downtime in the age of always being connected. Companies should encourage the employees to disconnect and recharge. The impact on productivity will be apparent.

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Simon, we've been using PTO for at least 20 years with a "use it or lose it" clause. It has worked out great for us. We are manufacturer with a lot of hourly employees and have not encountered any morale issues. Rarely does anyone lose their PTO. We believe it is critical for people to take off from work and for cross-training. To that end, making people take off ensures others can adapt and fill-in for each other. And from a financial control perspective, I would be leery of those that don't take off. It's amazing what you learn about your operation when some of your key people are out for a week.

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I have worked for several companies (all California) that moved from separate buckets to PTO. The points made above about the balance sheet, cash implications are all true. However, we also found that the elimination of the "use it or lose it" problems with sick pay significantly offset those issues. The issue we had was that November and December were peak months and the rush of employees calling in "sick" during those last two months impacted productivity because of gaps in critical departments and significant overtime as people doubled-up to cover for those who were out.
After analyzing the costs, we determined that it was more cost efficient to move to a PTO model, but cap the rollover at 80-120 hours (depending on position). Also we also capped the accruals at 2 years and as Malak noted above encouraged employees to take time off during slower times so that they avoided burnout.

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Our debate has focused so far on the accrual process and what happens to the accrual when it gets uncomfortably large. The reason for the accrual getting large is because insufficient time off is being charged against the accrual. In many mid to small size companies, a large number of employees are "working from home" or traveling on sales and support calls outside of the office. When I see an empty office and no PTO claim forms I have to have my suspicions that a percentage of PTO is not being reported.

Yes, I know that managers are supposed to know where and what their reports are doing, and the overall judgment is based on whether the job is actually getting done as and when required, but these are blunt instruments of control compared to the old fashioned daily register of attendance. Does anyone else have this uneasy feeling? And does anyone do any verification of suspected absences that have not been reported, and if so, how?

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Simon, I see where you are coming from, but how would you propose to investigate? I am still of the opinion that an engaged manager is the best defense against PTO abuse.

You are correct that the "work from home" trend makes it extremely difficult to determine if employees are working. Technology is going to have to step up to the plate here and give us some systems that can "measure" when someone is working or not.

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Scott: network monitoring tools, application audit trail logs, email log and traffic reports can all tell you today if someone was interacting with company data. For example, if my AP manager stays home to work, and I see zero log on under his/her user ID to the accounting system that day, I am likely to be wary of that. However, you run the risk of a big brother accusation. I prefer your engaged manager approach.
PTO abuse can often be part of a bigger problem in that person's performance, interaction and behavior.

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All those tools are useful for tracking work, but before you get to that point, the most important part is the manager's decision in allowing employees to work out of the office in the first place. If you do not trust the employee's work ethic, then he/she should be in the office.

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Aside from the monetary considerations, I prefer to separate sick leave from vacation. For one thing, as others have mentioned, combined PTO may (and often does, in my own experience) lead to employees showing up to work when they really should stay home. Nothing so wonderful as having half your staff sneezing, coughing and wheezing, and operating at well under normal levels of productivity simply because the first person to catch a bad cold or the flu doesn't want to use up his/her PTO time.

Also, I think it is desirable to encourage employees to take real vacations, and I find that often employees are afraid to do so for fear that if they use up their PTO for a vacation, they will be put in a real bind if they later have an injury or illness that keeps them away from work for a week or two.

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How do you ensure all managers are enforcing the combined PTO policy. We currently have a separate bucket for personal/sick and another bucket for vacation. We have found that some managers will approve time off as PTO when it should be vacation - and our policy clearly defiines reasons you can use PTO. We want to combine personal/sick with vacation and have one bucket but need some method of auditing to ensure managers are not allowing their employees to take time off and not record anything. Any suggestions.

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I find it odd, that having to accrue for the time not being used is viewed so negatively.

Basic finance principals says it's better to accrue for an expense than to pay for it up front (Time Value of Money). Is it a cash outlay when it happens? Sure, but theoretically, it's been a savings the whole time, before it becomes an expense. So any negativity on the liability side is offset by an asset (Cash).

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At our company we have both vacation time and PTO time. PTO is use it or lose it. Vacation time we allow up to one week of carryover to the first quarter of the next year with manager approval. System works very well.

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Rhonda,
You need to be careful with comp time programs especially if you have hourly employees. Comp time is not recognized and legal generally for hourly employees and if you are in California you can have major issues because overtime is calculated on 8 hour day and not a 40 hour work week. If you allow a person to work 10 hours only pay them for 8 and let them take 2 hours off by working six hours you have shorted them 1 hour pay (two half time premiums) in California. If your comp time crosses pay weeks, you have the same problem in other states. Big problem when this gets discovered by a problem employee, most employees appreciate the flexibility. Also by not having a documented tracking system for comp time, then the state will ask the employees to estimate the hours of comp time and takes their word and not the employers. Unfortunately, it is getting harder and harder to try to do the right thing and what makes since, because the rules have become so restrictive that everyone ends up losing.

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This is truly a case of one size does not fit all. Your program has to fit your workforce. We have had to do away with the PTO program and also had to do away with granting all of our sick time on the first day of the year. We have a work force of technicians that operates in all 50 states who have to be at work for us to generate revenues, and it is problematic when some one does not show up as our clients have to prepare for us to come perform our services, if we do not show up at the last minute they are not happy and have wasted time and money. With PTO and granting sick on day one, employees mainly in California would use up all their time in Jan and Feb of each year, unbelievable, and because it was PTO they claimed they were sick so no notice. We have gone back to the old system of having to have vacations approved in advance and sick is accrued monthly. We did implement a program where we pay people for their unused sick time at the end of the year. This rewards the employees who use their benefits properly. We also allow employees who have earned 3 or 4 weeks of vacation to sell back one week a year for extra cash. We limit the buy back to fix number per month and it is first come basis, this keeps everyone from selling back in January to pay Christmas bills.

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As discussed, there are several ways to limit the liability from the books. I've always been a fan of separating the two (vacation from sick.) But, I'd also be an advocate for unlimited sick days. Sick people at work threaten the health of others and the company's productivity.

Years ago when H1N1 was a threat, I instilled a policy that anybody with an signs of a fever must stay home home. And, that they would not be charged with sick days. As it turns out, we had an employee with H1N1. Had I not been aggressive in protecting our employees, this could have been much worse.

Couple an unlimited sick policy with a short-term disability policy, and you're workforce will be protected without creating a huge financial burden for the company.

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PTO is definitely the best approach. One way to limit liability is to have a limited carryover policy i.e. you are allowed to carry 40 hours of unused PTO over to the next year. This way employees can save time for a big trip, but it does not create an unmanageable liability for the company. The other part of a good PTO policy is to allow a limited negative PTO balance (40 hours with management approval) so that people can take vacations earlier in the year and deal with unanticipated illnesses.

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Two things to remember: - (1) your employees are your biggest asset and (2) there is no perfect system. PTO allows for maximum flexibility for employees. However, employees need to take some time off / vacation to recharge their batteries. Have a minimum PTO days taken per year with the remaining PTO used or banked,

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Is there a legal requirement to carry over vacation time? We have a use it or lose it policy. Employees can cash-out their vacation before their anniversary date. We do not offer PTO.

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The short answer is yes.

Each state has different laws, and some include carryover policies. It gets even more "fun" if you happen to operate internationally. CA is probably widely considered the worst in the US, but it's nothing compared to the policies in place in many European nations.

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You can't have a "use it or lose it" vacation policy, because it is considered to be earnings accrued as you go. But, you can cap the accrual, even in CA.

Straight from the horse's mouth: (See FAQs 4 and 5)

http://www.dir.ca.gov/dlse/FAQ_Vacation.htm

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Our company is implementing PTO, which has caused some rumblings from staff. We have many questions about what the future roll forward will be. As it stands, vacation is use it or roll into sick time. Sick time accrued is capped at 520 hours. After implemented we may have staff take 3 months off in that year to use all accumulated time. We also have concerns that every other benefit seems to have been depleted and this is one more that I can’t find enough benefit in the plan (savings, cost to implement, less intrusive) to justify it. You could treat your current vac/sick time as PTO by loosening the “rules” about when they can use which without a major shift. Feels like an HR trend – keep hearing how more people are doing it and HR likes it. Don’t hear a lot from staff about how they enjoyed loosing overall time. But *yeah* now I don’t have to pretend to be sick to take a day off in advance and my team is better prepared for my absence. Again, you can do that now by allowing them to use either.

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When we moved from a vac/sick/personal day plan to PTO, we aligned the accrual rates with the existing ones and no employees complained. And of course, existing balances were transferred to PTO accounts. It was in effect, "compensation neutral".

Several employees, myself included, had to cash out large accrued balances because we capped PTO accruals at 690 hours. I hated the tax implications of that for my wife and I and diverted as much as I could into our deferred comp plan.

Ideally, I wish we had rolled holidays into the PTO plan as well and not had any company holidays because, in reality, we don't. We are a 20 hr/day, 365 day/yr operation. Plus our workforce is quite diverse ethnically and religiously. That diversity means that U.S. traditional holidays do not always fit with those of our workers. And, we operate service on major holidays anyway which means somebody has to work.

I'm surprised that no one else here has mentioned this value of a PTO plan that is inclusive of holidays. It allows the employer and the employee a great deal of needs based flexibility that can benefit all concerned.

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