1. What is PTO: What does PTO Stand For?
Some companies are replacing the employee benefits of sick leave and vacation pay and combining the two under the singular term of “paid time off,” sometimes referred to as PTO. While this often sounds good in theory, it can often become a very costly mistake for businesses.
Private-sector employers typically use terms like sick leave, vacation time and personal days to refer to PTO. Public-sector employers, such as local, state and federal government workers, cite paid time off as annual leave, which is the equivalent of sick leave, vacation time and personal days.
2. What is PTO?
Many people unfamiliar with the term typically wonder, “what does PTO stand for?” Simply put, paid time off is an employee benefit provided by the employer where the employee is compensated when absent from work. PTO is a “bank” of hours employees can draw from, typically at their discretion. Employers will credit additional hours to their employees banks periodically. For example, an employer may offer their employees 10 paid holiday days, two weeks vacation, two personal days and eight sick-leave days every 12 months, totaling 30 days each year (10 + 10 + 2 + 8 = 30). With a paid time off plan the employees would instead receive 30 days of paid time off. While the number of PTO days works out the same for the employee, the cost to employers often increases.
3. The Purpose of Paid Time Off
While private-sector employers aren’t typically required to provide either paid or unpaid vacation time and sick leave, many companies do, as a benefit employees find highly attractive. As such, providing paid time off is a very effective recruitment tool, with many job listings stating the company offers a “generous time-off” or has a “vacation policy” to increase the company’s odds of attracting more qualified applicants. To this end, paid time off policies benefit both employers and employees, by providing workers time off from work and thereby making them more productive employees, and helping employers in recruiting top candidates.
4. Federal Law
The Fair Labor Standards Act of 1938 regulates the number of working hours, a set minimum wage, overtime hours and classifying employees as either tax exempt and nonexempt. However, the federal law does not require employers to provide any type of PTO, such as sick leave, holidays time or paid vacation time. In fact, the Fair Labor Standards Act clearly states the employment policies, such as PTO, of private companies are workplace issues the federal government has no jurisdiction over.
5. Service Contract Act
The federal McNamara-O’Hara Service Contract Act, often referred to as the SCA, does provide for fringe benefits, like paid holidays and vacation days, in some cases, such as when certain government contract are awarded to a private company. However, the SCA doesn’t apply to most employers and:
- Is applicable only to government contracts over $2,500.
- Does not include contracts to provide services to federal agencies or construction projects.
6. State Laws
While paid time off isn’t required by law but an employer does provide PTO, some conditions may fall under state law. Some states have laws regulating how companies must pay out accumulated vacation time when the employee leaves the company. Some states also prohibit the “use-it-or-lose-it” policies some employers put in place that require employees forfeit any unused vacation time should they leave the company. For example, California law states PTO as being the equivalent of earned wages and is therefore due and payable to an employee if the employment relationship should end.
7. Benefits and Drawbacks of PTO
In recent years, many companies have made the switch from offering separate sick days, vacation pay and personal time off to a merged PTO program. Of course, the concept of PTO is sound, making a company more attractive to prospective employees while making it easier to retain current workers. Regardless of the reason an employee misses work, the time is charged against the employee’s available PTO. However, switching to a straight paid time off program can invite abuse, as the company no longer knows exactly why their employees are taking time off or why they are suddenly absent from work more frequently.
While abuse can be regulated, somewhat, by requiring approval for any paid time off, employees who had never used up their entire allocation of sick leave will typically use all of their paid time off each year. Even though there may actually be a decrease in the total number of days off allowed under a PTO plan, the main motivation seems to be to reward the conscientious employees who never use their sick or personal days, while providing a deterrent for those employees who habitually use every day of sick time.
8. What is PTO to Employees?
One of the major problems with a PTO system for employers is employees tend to view all of the PTO time as “vacation” time, and not want to take sick days when needed, as they don’t what to burn any paid vacation time. This not only reduces the productivity of an employee, try to work when ill, but it also risk having a sick worker infecting the office workforce with a cold or flu bug. This can cause other workers to become ill and have them miss work or come to work when they are sick.
9. How to Manage PTO
Because it can be such a powerful recruiting tool as well as lead to abuse, here are a few tips on how to effectively manage a PTO program:
- Employers must decide what does PTO stand for within their company. To make it effective, you must design a PTO program that suits the company culture.
- PTO programs should have clear guidelines. For example, if employees are required to request PTO in advance, except for emergencies, how is “emergency” defined and enforce? A sick child? Car problem? Just a bad hangover? These issues all need to be address to prevent abuses.
- Manage the employees and the company, and not the PTO, by setting clear definitions and sending sick employees home. Your obligation is to protect the productivity of your company, not your employees PTO bank.