Vacation Policies for Small Business

Things To Consider Before Putting Your New Vacation Policy In Place

day planner open to a week of scheduled "vacation"
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Federal law does not currently require small businesses to provide employees with paid time off (PTO). However, with a record low unemployment rate in the U.S., a good benefits package can be essential to attracting and retaining talent for your business, and a competitive benefits program includes paid time off. In fact, 25% of workers reported that vacation time and paid time off were the most important considerations other than salary when deciding on a job offer.

If your own business has no vacation policy in place because you are unsure how to begin creating a package, or you are considering expanding your vacation policy to be more competitive, here are a few things to consider.

Three Common PTO Policies 

There are three common types of PTO policies most businesses use: 

  1. Traditional
  2. Bank system
  3. Unlimited

Deciding which system of PTO is right for your business will depend on several factors, including how flexible your workplace can be without losing efficiency, what your competitors are offering, and your overall budget. That said, there is no need to reinvent the wheel, as there are three models most businesses choose from.

Traditional PTO Policies

Many small businesses opt for a traditional PTO policy, which means they offer a certain number of days to their employees, bucketed by category: sick days, vacation days, personal days, etc. The number of days for each type of PTO varies from company to company, but generally more senior positions and long-term employees receive more than those in lower level jobs and those just starting out.

Paid Time Off Banks 

The banking system compresses the categories used in traditional policies into one bank of hours that the employee can use for any reason. Employees particularly like this system because they do not feel pressure to make an excuse to miss work. It also eases the administrative burden for employers, because they no longer need to track all of the categories, which can save costs.

Unlimited Time Off

Many tech companies like Dropbox and Github have embraced this more liberal approach to PTO. Unlimited time off is exactly what it sounds like–each employee gets to decide how much PTO to take. While it sounds good for employees on paper, unlimited time off has been criticized because it can foster an environment that discourages time off instead of enabling it, with employees feeling guilty every time they take PTO and worrying about being judged by their peers and superiors for taking any PTO. That said, some companies swear by it, and when unlimited PTO is embraced by the company culture, it can be a big selling point for potential hires.

Successful PTO policy practices

The best PTO policies make the rules clear. So, once you have chosen which PTO model you want to use, you should decide the period, how much time you will offer, how it is awarded, and how you will handle unused time in a traditional, bank, or unlimited policy (e.g., will extra hours roll over or disappear). Each of these concepts requires additional consideration.

  • Anniversary vs. Calendar-Year Period: If your policy starts on the day your employee begins work, whoever administers your PTO will need to keep track of all anniversaries. Calendar-year allocations simplify the time keeping since everyone is working on the same calendar, but you will need to prorate the first year for almost every hire (calculating what percent of the days they are entitled to based on their start date as a fraction of the year).
  • Tiered vs. Flat Time Allotment: In tiered allocations, more senior employees and those who have been working longer have more time than others, whereas, in a flat system, everyone working at the company gets the same amount. Tiered systems are less egalitarian but do incentivize employees to stay with the company longer. For example, in Company A, everyone gets 22 days per year of PTO. In Company B, senior staff and long-term employees get 5 weeks off, while junior employees get 3-4 weeks of banked PTO.
  • Grant vs. Accrual Allocations: Grant allocations give employees all of their PTO benefits at the start of the period–whether calendar-year or anniversary year—whereas the accrual method allows them to accumulate PTO as they go, e.g. one day per completed month. The grant method makes accounting simpler, but if an employee leaves early in the year, you can be stuck with a large bill for the unused PTO they are still entitled to. The accrual method is less appealing to new employees who may want to take PTO sooner than they are entitled to it on a calendar basis.
  • Loss, Carry-Over, Loss and Payout: Some companies select a “use it or lose it” attitude to time off, but this can result in understaffing at the end of the year as employees rush to use their extra PTO. Carry-over is a popular option, but if left unchecked indefinitely, employees can accrue lots of unpaid PTO which then becomes due as a payout when they leave.

Paid Time Off Has Benefits for Both Sides

Studies have found that employees who get PTO are generally more satisfied, perform better on the job, and are more loyal to their employers. For employers, PTO can be a great way to attract and retain talent and is one of the less expensive benefits you can offer. The key is to craft a clear policy that is affordable for your business, easy for you to administer, and that provides as much flexibility for your employees as possible without negatively impacting your operations.