How to Create PTO Policy for Small Business

Even if your employees think you're a great boss and love what they do, they still need time off for vacations—preferably paid. They want to feel valued for their dedication and commitment, and the saying "work hard, rest well" definitely still applies.

The COVID-19 pandemic has made a lot of people rethink their sick leave and vacation needs. On one hand, many felt somewhat vulnerable during that force majeure situation. On the other, working from home showed that it's not the same as a real getaway, which has pushed employees to seek improved paid time off policies, and many employers have noticed this shift. Unsurprisingly, a recent survey by Indeed & Glassdoor found that American workers ranked paid time off as the second most valued benefit, just behind health insurance and tied with retirement benefits.

Having a solid paid time off (PTO) policy is super important for startups and small businesses that want to attract and retain talent in today’s competitive job market. In this article, we'll break down how you can benefit from a PTO policy, examine the different types available, outline what to include into a standard PTO policy for a small business, and offer some tips and best practices for implementation.

PTO Policy: Definition, Benefits, and Challenges for Small Business

Paid time off policy isn’t just about vacation days; it sets the guidelines for taking and managing time off. While it should align with your organization’s needs, it is equally important that it supports employees in achieving a healthy work-life balance.

What Is a PTO Policy and What Makes a Good One?

A PTO policy is the document that outlines the rules and expectations for employees regarding paid vacation time, sick days, and personal leave within a calendar year. In many developed countries, including the USA, there are no federal laws mandating that employers provide PTO. Nevertheless, most companies offer it to foster a supportive, engaging, and trusting work environment.

But what makes a good PTO policy?

A good PTO policy considers the needs of both employees and management. By being clear and carefully crafted, it helps the time-off request approval process go smoothly. Here's what a standard PTO policy should cover:

• number of PTO days per employee;
• accrual rates (e.g., based on years of service or hours worked per pay period);
• rollover policies;
• approval processes for requests;
• methods for tracking PTO;
• cash-out policies for unused time;
• relevant federal and state laws regarding paid and unpaid leave.

When creating and implementing your guidelines, consider how they align with the company's overall attitude toward rest. A well-designed PTO policy encourages employees to take advantage of their benefits and promotes a positive culture around time off. 

Why Your Small Business Needs a Paid Time Off Policy

A company's PTO policy benefits everyone involved—both employers and employees. While employees love having time off for vacations and personal activities, this time is also key to keeping a good work-life balance. Overworking can raise stress levels and hurt overall health. When companies encourage employees to take their paid time off, they help create a happier and more effective workplace.

It might seem like long hours are good for business, but that can backfire. Employees who work too much often end up taking more sick days due to stress or burnout, which can cost employers in the long run. By promoting a balanced approach to time off, companies can support their employees' well-being and protect their own bottom line.

Here are 4 primary benefits of well-designed PTO policy to your small business:

A PTO policy can curb unscheduled absences — employees miss work for many reasons, some can be anticipated, while others, like sudden illness, strike without warning. While we can't control unexpected health issues, a well-structured PTO policy can effectively reduce unscheduled absences caused by other factors, fostering a more reliable and engaged workforce.

Offering PTO to hourly workers gives you a competitive advantage — though the legislation in many countries doesn't require PTO for hourly employees, introducing a paid time off policy can set your business apart in the quest for top talent. With the average turnover rate in the U.S. at 17.3%, it's crucial to attract skilled workers and give them compelling reasons to stay. Offering PTO can significantly reduce turnover and improve employee satisfaction and morale.

PTO policy can streamline your administrative tasks — keeping track of sick days, personal days, and vacation time for your employees can be a real headache. Implementing a PTO policy makes it much simpler. Employees can simply request time off without worrying about which category it falls into, and you won't have to double-check every request. With everything treated the same, you'll have more time to focus on what really counts.

Providing PTO enhances employee productivity — according to a survey by O.C. Tanner, employees who take a week or more of vacation are 70% more likely to feel motivated to drive their company's success. A well-crafted PTO policy not only acknowledges hard work but also rewards dedication, fostering a culture of appreciation. And it goes the long way—companies with integrated recognition strategies are four times more likely to have engaged employees.

Vacation Policy Challenges for Small Business

Small businesses are generally less resilient than established companies when facing challenges at both the macro level—such as significant changes in labor legislation and fluctuations in the job market—and the operational level, including the effects of wage expenses on profits and staff turnover.

Let's dive into the dynamics of our topic. For example, in a big company with 500 employees, it's quite easy to find someone to cover for a team member who's on a two-week vacation. Some large businesses can even bring in temporary workers, which small businesses usually can't do.

But in smaller teams with fewer than 20 people, having one person out for two weeks can really shake things up. One person's absence can hit productivity, morale, and profits hard. And if someone's feeling burned out or unhappy at work, it can affect the whole team.

So, what are the biggest challenges small businesses face when it comes to vacation policies?

Limited resources — small businesses frequently operate on tight budgets, so they can't always offer vacation perks like larger companies do. For example, while large corporations can afford to send non-working employees to the "bench" to keep them on the team, small businesses often lack the financial flexibility to do the same.

Manual tracking — for many small businesses, the cost of PTO tracking software is out of reach, forcing them to rely on manual processes. This not only puts an additional burden to HR managers but can also lead to mistakes and inefficiencies, wasting valuable time and effort.

Ensuring fairness and consistency — small businesses frequently face challenges in providing fair and consistent PTO allocation. This often stems from a lack of formalized processes and clearly defined rules for requesting, approving, and taking leave.

Managing time off in peak season — during peak seasons, small businesses often cannot afford to hire temporary employees. As a result, certain dates are designated as blacked-out periods, restricting vacation time. This can leave some employees feeling excluded, which may decrease their motivation and productivity.

While these challenges may seem daunting, every small business can overcome them by developing and implementing a tailored, well-designed paid time off policy.

Types Of PTO Policies for Small Business

There are many different PTO policy examples for small businesses out there, and choosing the right one for your company can significantly shape your team's experience, engagement, and retention.

It's crucial to have clear and easy-to-understand paid time off policies. This way, employees can make the most of their time off, and it makes things easier for you and your HR team when it comes to managing and tracking PTO.

Plus, your PTO policy should reflect what your company stands for. If you say you value work-life balance but offer limited and hard-to-use PTO, employees might just see those values as empty words. 

Let's take a look at PTO policies that can be adopted by small businesses.

Traditional PTO 

Traditional PTO is one of the most popular examples of PTO policies for small businesses. It is based on dividing employee time off into categories such as vacation, sick leave, and personal days. This policy gives employees a straightforward way to see how much time off they have and how it builds up. For example, they might get 10 vacation days, 8 sick days, and 2 personal days, adding up to 20 days of PTO yearly, plus company holidays. When they do not use all their days, the employer must pay them for the unused time.

Employees typically accrue PTO based on their length of service, with longer-tenured staff receiving more days off. This structured approach enables employers to comply with time-off regulations easily and allows employees to plan their time off efficiently.

Pros:

• clear structure makes employee vacation planning effortless;
• may help retain talent through accrual policies that reward longer tenure;
• allows for more controlled budgeting and cost management with predetermined PTO days;
• easier compliance with time-off regulations due to clearly defined categories.

Cons:

• tracking rollover time-off can be costly and time-consuming;
• employees may feel they lack sufficient vacation time or work-life balance;
• unused PTO payouts for departing employees can be expensive for a company;
• less flexibility for employees in how they use their time off.

Banked PTO 

A banked PTO policy is a system where employees accumulate a set number of paid days off into a "bank" that they can use for various purposes. This approach simplifies the management of time off by combining different types of leave into a single pool, providing employees with greater flexibility and autonomy over their time off.

Employees usually earn PTO in hourly chunks over the year, and the time they've earned gets added to their PTO bank with each paycheck. How much PTO they earn can change based on whether they work full-time or part-time and how long they've been with the company.

Pros:

• makes managing time off easier by putting all types of leave into one bucket;
• gives employees the freedom and privacy to use their time off however they want;
• encourages planning ahead and cuts down on last-minute absences;

Cons:

• could cost more if everyone uses all their time off;
• some people might feel they have less time off compared to old systems.
• companies might have to pay out a lot for unused PTO when someone leaves.
• needs careful attention to local rules about sick leave.

Unlimited PTO 

Unlimited PTO policies are a hit with tech, social media, and engineering companies. With this policy, employees can, in theory, take as much time off as they want whenever they need it throughout the year. But, of course, companies usually set some rules to make sure everyone gets their work done.

This kind of policy helps employees juggle their personal and work lives better. Plus, it can be a big draw for attracting and keeping talented people in your company. Big names like Google and Meta offer this kind of PTO policy.

Pros:

• employees enjoy more flexibility and a better work-life balance;
• acts as a great tool for attracting new talent;
• could save employers money in the long run;
• encourages a culture of trust and independence.

Cons:

• some employees might take less time off because they feel guilty or unsure;
• there's a chance some people might take advantage and overuse the policy;
• tracking and managing time off can become complicated;
• managers have more responsibility to ensure the policy is applied fairly.

6 Steps to Develop a PTO Policy for Small Business

Creating a vacation policy for a small business requires thoughtful analysis, some solid research, and ensuring you comply with all relevant federal, state, and local laws. Here are some steps to help you customize a paid time off policy that fits your business and your team perfectly.

Step 1: Identify All Types of Leave Available

Like we mentioned earlier, paid time off policies can really differ depending on what your company wants and what the rules say. For example, you might decide to add some extra types of leave to better support your employees. Here are the most common types of PTO:

• vacation leave (provides employees with time for relaxation and travel);
• personal leave (allows employees to handle personal matters, such as moving to a new home);
• sick leave (enables employees to take time off when they are ill or injured, or when they need to care for ill or injured family members);
• parental leave (supports employees following the birth or adoption of a child);
• bereavement leave (offers time off for employees after the death of a close friend or family member);
• jury and witness duty leave (grants leave to employees who are required to serve on a jury or as a witness in a trial).

Of course, these are only the most popular types of leave. You may add other options adjusted to your company needs.

Step 2: Determine Employee Eligibility Criteria

To keep things budget-friendly, you can set some guidelines for who qualifies for paid time off. A lot of companies figure this out based on things like employee type and when they started.

For example, you might want to include in your PTO policy that:

• only full-time employees can take PTO;
• part-time, seasonal, or temporary workers won't be eligible;
• full-time employees need to wait 30, 60, or 90 days after their start date before they can use their PTO, this waiting period can help encourage them to finish their onboarding smoothly.

Step 3: Define the Approval Process for Requesting PTO

Most companies require approval for paid time off to prevent misuse. In non-emergency situations, employees typically need to submit a formal request for time off. This request is then reviewed by the employee's direct manager or an HR team member for approval.

Since every company has its own way of handling PTO requests, it's a good idea to outline in the PTO policy how employees can ask for time off. Here are some questions to think about when putting together your approval process:

• How much advance notice do employees need to give for non-emergency PTO requests?
• What's the process for asking for PTO in emergencies, like when you're sick or need to handle childcare?
• Will you need any proof for certain situations, like a doctor's note or a school letter?
• What is the process for submitting a PTO request?
• Who is responsible for approving an employee's PTO request?

Most HR software can simplify the process of requesting and approving paid time off. If your team uses Slack, there's a solution that makes this process lightning-fast: OrgaNice, a handy PTO tracker.

Imagine your employee, Jeffrey, has planned a vacation and needs his manager's approval. Traditionally, he might send an email, wait for a response, send another email with more details, and so on. This could lead to a situation where two business days have passed, and there's a chain of ten emails in his inbox, yet he still hasn't received approval.

Fortunately, there's a more efficient solution. Without needing to switch between tabs and windows, Jeffrey can access the OrgaNice app directly from Slack. By clicking the "Request Time Off" button, he gets a simple window where he can fill in all the details like what type of leave he needs, when it starts, and when it ends. Then, he just sends off his request. In a second, his manager, Michael, receives a notification and can either approve or reject the request or start a private chat, all within Slack.

And once Jeffrey's request is approved, all team members get a quick heads-up in a shared Slack channel, so everyone's in the loop and can plan accordingly.

Sounds cool, right? Just add OrgaNice to your workspace, turn on the "Request Time Off" feature, and pick the Slack channel where you want to share approved requests. That's it, you're all set!

Step 4: Write Your PTO Policy (with All Procedures Outlined)

After completing all the previous steps, you’re ready to sit down and write your small business PTO policy. At this stage, it's essential to address all questions related to managing time off in your organization and thoroughly document the procedures. Clearly outline the conditions for implementing each aspect of the policy, specify who will be responsible, detail how the processes will be carried out, and establish the timeline for both implementation and monitoring.

By aligning with your company's goals and considering the corporate culture you aim to foster, you can develop a unique policy that brings your company's effectiveness to the next level.

Below are the most important aspects that should be covered in a standard PTO policy for a small business:

• PTO amount. Determine whether you will provide your employees with a lump sum of days off or divide them into separate categories, such as sick leave and vacation. Specify how much time off to allocate for each category and/or in total.‍
• Accrual rate. Decide how you want to handle PTO accumulation. Options include granting a set number of PTO hours per pay period (monthly, quarterly, or annually) or providing the entire year's PTO at the start of the calendar year or on the employee's hire anniversary.‍
• Availability. Figure out if you'll offer PTO to just employees or if contractors will get it too. Also, think about whether there will be times when employees can't take time off, like during busy seasons or special events when you need everyone on deck.‍
• Waiting period. Establish an introductory period, such as 30, 60, or 90 days, before new employees are eligible to take PTO.‍
• Rollover PTO. Decide whether employees can carry over unused paid time off to the following year. To prevent too much unused PTO from piling up, you can limit how many days can be carried over or set a deadline for using last year's days. When including the rollover policy to your PTO, be sure to check your state and local laws.‍
• Payouts. Set up a policy for what happens to unused PTO when employees leave the company, whether they resign, get terminated, or leave for any other reason. Even though many states don't require it, offering compensation can help create a positive company culture, encourage former employees to return, and boost the company's reputation.‍
• Borrowing. Think about whether you want to let employees use PTO they haven't earned yet. For example, during their probationary period, new hires could borrow from their future PTO to handle personal commitments they had before starting the job. If your business can accommodate this, it's a great way to keep employees happy.

These basic points can be easily adjusted and expanded to fit your company's culture and business needs.

Step 5: Communicate the PTO Policy

Even the best vacation policy for a small business won’t help your team if it’s not communicated well. How will your employees find the policy details or get updates when things change? The way you share and make the PTO policy accessible really affects how your team understands, plans for, and uses their time off.

Let's dive into key principles for sharing policies with employees:

1. Explain the reasons for the PTO policy implementation or update. Employees may feel frustrated by changes that significantly impact their work conditions, so it is important to directly explain why the implementation or updates to the PTO policy are necessary. Clearly outline what is changing, what remains the same, and what steps employees need to take to comply with the new requirements.
2. Prioritize face-to-face communication whenever possible. If the PTO policy changes call for it, think about setting up a meeting or webinar with senior management to chat about why the changes are happening and what they might mean. Talking face-to-face about important stuff usually feels more real and helps build trust with the team.
3. Make sure new policies are easy to find. PTO is there for employees to use, so they should be able to access the policy at any time. Your EMS or intranet website should have a clearly labeled, easy-to-navigate section that outlines all company policies and procedures. Essentially, this serves as a digital employee handbook. Your internal communication policy should include steps for this process. Whenever you make changes or updates to the handbook, clearly communicate these changes to employees and inform them where they can find the updated information.
4. Consider providing training. Changes to policies and procedures can sometimes be complex, and simply writing them down isn't enough to ensure understanding. Depending on the nature of the changes, you might need to initiate company-wide training at the start of the new initiative or as needed. Also, consider incorporating refresher and follow-up training sessions if necessary.
5. Foster two-way communication. People often push back against change, especially if they've been doing things the same way for ages. They might react emotionally or think the changes don't make sense. Just like you need to explain why change is needed, it's also important to give employees a chance to share their feedback and ask questions any time. This can help keep them in the loop and engaged during the whole process.

Step 6: Review the Policy Regularly

The last step before wrapping up the vacation policy for a small business is obtaining approval from executive management and deciding how often you’ll review it. As your business changes, your PTO benefits might need to change too to keep up with new or shifting revenue streams.

Here are a few metrics to keep in mind when you review the policy:

• actual PTO usage (determine whether employees are taking their time off or if it's accumulating unused);
• PTO accrual rate (if PTO days are accruing too quickly, it might be necessary to adjust the policy);
• time spent on PTO management (monitoring the managers' workload can prevent inefficiencies from becoming a burden).

We usually suggest taking a look at your PTO policy once a year. But if there are big changes in the company or if your workforce data shows that the current policy is making employees unhappy or dragging down productivity, you might need to update it sooner.

PTO Policy Tips and Best Practices

A well-crafted paid time off policy can be a powerful asset for any company. When designed to be comprehensive, generous, and adaptable, it clearly communicates to employees that they are valued and supported. This can foster loyalty and commitment, leading to increased productivity and a more harmonious workplace.

So, what are the tips and best practices used by companies that are considered benchmarks in human resources management to create such an effective PTO policy? Let's explore some of the top strategies they employ.

Get Employees in on PTO Policy Decisions

To help your employees feel more involved and included, start by asking for their input on PTO policies. You can do this by sending out surveys or holding small group discussions to find out what types of PTO options they really value and how they like to earn and use their time off. Listening to their feedback will help you spot areas that need improvement and make changes to your policies.

It's also important to create open channels for communication where employees can share their thoughts and suggestions about PTO. This could be through regular team meetings, suggestion boxes, or anonymous feedback forms. By fostering a culture where everyone feels comfortable sharing their ideas, you give employees a chance to help shape the policies that affect them.

By paying attention to what employees want, addressing their concerns, and including them in decisions, you create a friendly and respectful workplace. This not only leads to better PTO policies but also boosts overall employee happiness and engagement.

Design a Flexible PTO Policy

Creating a flexible PTO policy is super important, especially since millennials and Gen Z are now the biggest groups in the workforce. These folks tend to stick around longer at jobs that offer flexibility and good benefits, so make sure your PTO policy fits what they're looking for.

Key features of a flexible PTO policy:

• All-in-one leave options. Try to bundle all possible types of PTO into your policy. This way, employees can choose the kind of time off they need, whether it's for vacation, being sick, or personal reasons.
• Diverse needs. A flexible vacation policy for a small business supports diversity and inclusion by letting employees take time off for important religious or national holidays. It also covers other days off, like mental health days, doctor visits, or medical leave.
• Building trust. Having a flexible PTO policy shows you trust your employees and don't micromanage them. This can make them happier and more likely to stay.

Make Your PTO Policy Clear and Understandable

A well-designed compensation policy promotes transparency and reduces confusion and potential disputes among employees. To ensure clarity:

• Use simple language. Craft your PTO policy using clear and straightforward language. Avoid jargon or complex terms that might confuse employees.
• Organize into sections. Break the policy into easily digestible sections to help employees understand it better.
• Highlight key points. Clearly outline the main points and procedures in a straightforward manner.

Also, think about describing the common scenarios to show how the policy works in real situations. Real-life examples help employees understand their rights and what they need to do for PTO, like how to get approval and how payouts work. Using pictures like flowcharts or infographics can make it even easier to understand.

Adjust PTO policy to Your Company Culture

Look at what makes your company special, like its values, goals, and work environment. Think about what sets your company apart and what your employees care about. For example, if you're a startup focused on being innovative and flexible, or a family-friendly business that values work-life balance, make sure your PTO policy matches these values. This way, it feels right for your team and supports your company's identity.

If you're not sure, try sending out an anonymous survey to your employees. This can help you understand how they feel about your company's time-off culture and what they want in a PTO policy. Use their feedback to make adjustments to the policy.

Enhance Your PTO Policy with Perks and Benefits

Offering perks can make your business more appealing to new hires and boost morale for your current team. Here are some typical additions to a standard PTO policy for a small business:

• flexible work hours;
• wellness programs;
• turning unused PTO into something valuable;
• extra vacation days for hitting certain goals.

Flexible scheduling lets employees adjust their work hours to fit their personal lives.

Wellness programs, like mental health resources or fitness classes, show that you care about your employees' health and happiness outside of work.

Employees can also use their unused PTO for things like saving for retirement, handling emergencies, or paying off student loans.

Giving extra vacation days for hitting performance goals or staying with the company for a long time can really motivate people. It gives them something to aim for and rewards their hard work.

Provide Personal Time Off Options

Giving employees the chance to use their time off for more than just vacations encourages them to support charities, volunteer, and grow professionally.

For example, they can use PTO to help a charity. They might take a day off to join a fundraising event or volunteer at a local food bank. This lets them support causes they care about and shows the company cares about the community too.

Volunteering is another great option. Companies can set up group activities like cleaning up parks or helping at a homeless shelter. This not only helps the community but also brings the team closer together.

Encouraging employees to use PTO for professional development is also beneficial. They can attend conferences, workshops, or online courses related to their job. This helps them build skills and shows the company values their growth and career advancement. 

Concluding Thoughts on How to Create a PTO Policy for Small Business

Creating a comprehensive small business PTO policy is crucial to strike the right balance between employee satisfaction and productivity. A well-designed PTO policy offers numerous benefits, including a competitive advantage in attracting and retaining talent, preventing burnout, and fostering a more productive work environment.

Small businesses can choose from various PTO policy types, including accrual, banked PTO, or unlimited PTO, based on their specific needs and employee preferences. It's important to carefully evaluate the implications of each policy type and ensure they align with your business goals.

If you're using Slack and want to make PTO management easier, check out OrgaNice. It's a time-off management app that lets you track time-off balances, handle PTO requests and approvals, and keep everyone on the same page across offices and countries—all without leaving Slack. And if you have additional questions, don't be shy to reach out!