4. How is paid time off (PTO) earned?
This post is part of the series of articles about 10 things to know when creating a PTO policy.
Now that we’ve written about the 3 broad categories of PTO policies that are out there, it’s time to start thinking about some additional considerations.
This post focuses on the different methods for earning PTO. You’ll need to decide which one is right for your business.
There are two main methods of earning PTO. One is a “grant”, the other is through “accruals”.
The Grant Method
Awarding PTO to staff as a grant (typically at the start of each calendar year) is by far the easiest way to administer time off balances. Each year, everyone in the company is granted their allocation of paid time off to use through out the year. This method is particularly popular in places like the UK. Yet in New Zealand, it is common to grant paid time off for the year on the anniversary of employment. If you choose this method, the date you grant PTO (i.e. calendar date or anniversary date) is up to you.
One disadvantage to note with this method is that in some states like California and Massachusetts, PTO time that has been awarded is legally considered to be earned and remaining balances must be paid out in the event of a termination. Check the rules within your state jurisdiction.
The Accrual Method
Another way for staff to earn PTO is to accrue time off throughout the year, typically on a daily basis (calculated per pay period). This method is by far the most popular method in the USA (and Australia). This method has several positive and negative implications.
It means that staff must work for a certain length of time before they’re entitled to take paid time off. However, it is still quite common to allow staff to take time off in advance and for their PTO balance to go into the red (up to a predetermined threshold — e.g. minus 80 hours). Your leave policy should be quite clear on this point as some states will not allow you to include a deduction for outstanding negative PTO balances from a staff member’s final pay check.
From an accounting perspective, this method also has the advantage that your business gradually acquires the paid time off liability throughout the financial year, rather than a lump sum at the start of the financial year.
It does take extra effort to calculate everyone’s balance on an ongoing basis, but several employee time tracking applications handle pro-rata accruals and balances. Software like Bindle makes it quite easy.