What is PTO and How Does it Work? A Complete Guide

Some of today’s biggest employment challenges involve helping employees strike the right balance between their work and personal lives. Employers must do their part to help employees find this balance by providing them sufficient Paid Time Off (PTO).

PTO can be essential for employees to tend to the needs of their loved ones or take a break from their hectic work schedules. Since the nature of time off varies depending on necessity, there are several categories of paid time off.

Let’s understand the significance of PTO and how it helps employees rejuvenate and become more productive at work.

What is PTO?

PTO, also known as Paid Time Off, is a benefit employees receive from their companies to take a break from their work hours without losing pay. Providing PTO is a proven strategy to help employees maintain a healthy work-life balance in today's work environments.

PTO is more than just a short break from one’s regular work routine. The employee decides how to use their time off and plans their work schedules so that their team functions smoothly in their absence.

Such planning helps employees work more efficiently and utilize their work hours more productively. Further, they can spend their time off without worrying about work-related hassles, achieving the perfect work-life balance they've dreamed of.

We will explore the different types of PTOs that employers typically provide to their employees and how they can be utilized for various situations.

How Does PTO Work?

Companies offer PTO in various forms to employees based on several factors, such as the nature of work (onsite or remote), the type of employment (full-time, hourly, or freelance), and years of experience.

Additionally, companies can provide PTO through regulations to ensure they can track employees and prevent misuse during their work tenure. Here are some of the common methods that companies use to provide PTO.

1. Accrual

The accrual method regulates how employees earn their paid time off based on their work hours. PTO is often provided in hours, depending on the number of hours, days, weeks, or months that employees have worked for the company.

Accrual PTO is a common PTO provision followed by most companies to provide fair PTO in return for the work hours employees clock, ensuring a true commitment to their work. Several PTO calculators online utilize the accrual method to help both employees and companies accurately track and manage their PTO hours.

2. Allotment

The allotment method provides PTO hours or days in advance, typically at the beginning of a fiscal year, to be used at any time throughout that year. This method enables employees to plan their time off more effectively without exhausting their yearly PTO limit.

The allotment method shows that a company trusts its employees and their ability to plan times off better, rather than exhausting them in the very beginning and leaving the company. The common allotment method followed by several companies is to provide one day of PTO for every month of the year. Note that PTO or paid leaves are provided by companies in addition to other forms of leave, such as local holidays and leaves complying with regional or national labor laws.

3. Unlimited PTO

Some companies provide unlimited PTO to their employees to show that they trust their ability to manage their work tasks and personal time optimally. Such a feature shows the company's belief in its employees’ commitment to performing their best at work while managing their time off without leaving any work dependencies.

Unlimited PTO is often provided in start-ups or small companies with few employees. Tracking unlimited PTO in companies with more employees can be difficult, leading to more complications than productivity.

Types of PTO Employers Offer

PTO works differently depending on how employees wish to use their time away. Some employers offer generalized PTO, allowing employees to use the time off for any reason.

Some other companies categorize PTO into several labels, allowing employees to select why they are absent from work. Mentioning the reasons for their PTO helps employers track employees' absences and provide them with additional support, depending on their absence.

1. Vacation Leave: Employees must be encouraged to take two to three short vacation breaks or at least one vacation extending up to a week or two to help them disconnect from their work and spend time traveling with friends or family. Vacation leaves are particularly popular during calendar days preceding or following long holiday weekends, when employees can combine their PTO with any local holidays or festivals for a relaxing, extended getaway.
2. Sick Leave: Emergency time-off due to sickness in an employee or their immediate family members is a common form of paid leave. Employees are not penalized for absences of a few days. Employees may need to submit valid medical documentation or request temporary remote work arrangements to prevent loss of pay in the event of leave extension.
3. Paid Holidays: Companies offer PTO on days that are of great significance for employees to spend with their families and loved ones, such as New Year's Day, Christmas, Independence Day, Thanksgiving, Diwali, Hanukkah, and other days employees celebrate.
4. Personal Days: Employers let employees take time off for dates of personal importance, like their wedding anniversary, their kid’s birthday, attending an examination, and more.
5. Floating Holidays: These are days that employees take time off from work to be part of events at their discretion. Such holidays are taken when employees must participate in religious ceremonies, attend weddings and family functions, and similar events.
6. Bereavement Leave: Companies offer PTO for employees to grieve the loss of their near and dear ones without worrying about their work tasks. They also encourage team members to take on the grieving employee’s work, allowing them to focus on the funeral proceedings.
7. Parental Leave: Companies provide paid maternity or paternity leave for new parents to take time to settle with their newborn and stabilize their support system before returning to work. The duration of this leave varies depending on regional labour laws and the company’s policies.
8. Jury Duty Leave: Companies provide one or more days of paid leave when employees are selected for jury duty. Since jury duty is part of their responsibilities as citizens, employees are entitled to avail themselves of paid leave to fulfill their civic duties.
9. Volunteer Time Off (VTO): Sometimes, companies offer VTO to employees who have worked more than their regular work hours. Employees who had to work on weekends to complete urgent priority tasks can take a break for one or two workdays to recover and return to their regular schedule.

How is PTO Calculated?

When offering PTO to various types of employees within the company, it is essential to track PTO usage and remaining balances to ensure employees do not exceed their allocated PTO limits. Employees can also calculate their PTO availability to better plan their leaves and work schedules.

Here are some standard methods companies use to determine PTO for employees. The PTO rate gives the PTO hours earned by the employee for each work hour.

Method 1 - Based on Annual Work Hour

Most Suited For: Full-time and part-time employees with calculated working hours and associated billing.

Parameters required:

• Employee’s work hours per week.
• Fixed PTO hours provided by the company.

Calculations:

Step 1: Calculate the employee’s annual work hours

Annual Work Hours = Weekly Work Hours * 52 (total working weeks in a year)

Step 2: Calculate the PTO rate per work hour as

Example:

Assume an employee works 35 hours per week on average and has an allowance of 80 PTO hours in a given work year.

So, the employee’s annual work hours will be

35*52 = 1820 work hours per year.

The PTO earned per work hour is calculated as

PTO = 80/1820 = 0.044 PTO hours per work hour

So, for every hour the employee works in a given year, they receive 0.044 hours of paid time off.

Method 2 - Based on Pay Period Accrual

Accrual refers to the period during which employees earn their PTO. The accrual frequency can be in hours, days, months, or years, during which employees receive their allotted PTO hours.

Most Suited For: Companies hiring freelancers, contractors, and independent consultants with pay periods differing from the company’s on-roll employees.

Parameters required:

• PTO hours for a given accrual or pay period
• Total pay periods completed by the employee
• PTO hours used before completion of the period

Calculations:

Calculate the PTO hours earned as

PTO = PTO Hours per accrual * Completed Pay Periods - PTO used

Example:

Assume an employee is paid monthly and has 2 days of PTO. The employee has received payments for 3 months and has taken 1 day off so far. So, the eligible PTO time is calculated as

PTO = 2*3 - 1 = 5 days

So the employee can utilize these days in the forthcoming weeks without any loss of pay and plan work optimally.

Method 3 - Hourly Accrual

The hourly accrual system is similar to method 2 but does not relate to the pay period. Here, employees earn PTO based on the total number of hours they work for a given period.

Most Suited For: Employees clocking different work hours depending on their requirements at every phase of their work project.

Parameters required:

• PTO accrual rate, or the number of PTO hours for the given accrual period.
• No. of hours clocked for the accrual period.
• PTO hours used before completion of the period.

Calculation:

The PTO hours earned are computed as follows,

PTO = accrual rate * actual hours clocked - PTO used

Example:

Assume an employee gets 1 hour of PTO for 45 work hours.

The PTO accrual rate is calculated as

1/45 = 0.022 hours per work hour

1. At the beginning of the project, the employee clocks in 45 hours of work for the first week, so the eligible PTO rate is
   PTO = 45 * 0.022 - 0 = 0.99 ~ 1 hour of PTO
2. The next week, as work slows down, the employee clocks in 39 hours while availing the previous week’s PTO earned. The availed PTO is considered to be part of their work hours, making the total work hours 40 and leaving the available PTO hours nil.
   So, the eligible PTO rate for this week will be
   PTO = 40*0.022 - 0 = 0.88 hours of PTO

Hybrid or Tenure-Based Accrual Systems

Several companies offer accrual-based PTO, which varies depending on specific parameters. For instance, employees who have worked up to 5 years get 12 days of PTO per year. After that, their PTO increases by one day each year according to their year of service. For example, a person working for 12 years would have 24 PTO days.

Similarly, companies can offer a hybrid of fixed leave days and specific PTO hours for emergencies, depending on employees’ preferences and the company's current rates of employee absenteeism.

Several PTO calculators are available online to provide accurate PTO rates based on whatever methods your company follows while offering PTO. Revaluate180’s PTO calculator is a great tool to find out exactly how much paid time off you have earned.

Why PTO is Important for Employee Well-Being?

PTO is one of the most formal and transparent ways for employees to take work breaks without losing pay. Burnout at work is becoming a common phenomenon among people of all ages.

Burnout can cause employees' mental strain, possibly leading to prolonged absences. This directly impacts an employee’s team and their dependencies, ultimately affecting the team’s deliverables. Moreover, the other team members will be expected to put in more effort to cover any unannounced absences, further fueling their feelings of burnout.

Companies can prevent such cycles of work stress by encouraging employees to take periodic breaks from work to rejuvenate and focus on their personal lives. Providing transparent PTO policies and enabling employees to understand their eligibility to utilize their PTOs helps employees feel valued by their company.

Benefits of PTO for Employers

Now that we know how PTO works and how it can be tracked with simple calculations, let’s understand the benefits of providing flexible PTO options for employees.

1. Promotes Smooth Work-Life Balance

Not all employees are skilled at planning and balancing the time they must devote to their work and personal life. Forgetting to take sufficient breaks or taking on too many responsibilities can ultimately worsen their well-being. When companies provide paid time off, employees have the opportunity to plan their work so that they can take time off before their PTO days expire.

2. Higher Retention Rates

PTO is an indirect compensation measure crucial for employee recruitment and retention. Paid vacations are an attractive factor that sometimes becomes a deciding factor for employees to choose between companies for their next job role. Naturally, companies providing PTO see more candidates wanting to work with them, and existing employees find fewer reasons to leave.

3. Stronger Employer Brand

A company is valued in the industry based on how it treats its employees. Companies that genuinely care for their employees’ overall well-being are always proactive in helping them take time off for their crucial necessities, primarily the leave types we discussed earlier. Developing innovative methods and flexibilities in PTO establishes the company as an employee-centric brand, attracting investors and customers to partner with them.

4. Better Employee Engagement and Productivity

Burnout at work is a common reason why employees become less productive. Providing sufficient paid time off to promote work-life balance is a key initiative to improve productivity in the workplace. Moreover, PTO helps employees engage with and plan their work schedules in collaboration with their team members, ensuring that work runs smoothly, regardless of their leave plans.

5. Reduced Absenteeism

Isn’t PTO all about being absent from work? How does PTO reduce absenteeism?

When employees receive sufficient paid time off from the company and have leaders who encourage them to take breaks periodically, they tend to feel less stressed and experience less burnout. Prolonged work with no breaks can lead to sudden, unannounced periods of employee absence, affecting their work commitments.

Final Thoughts

This post has shown us that PTO initiatives are mandatory for all companies, regardless of size and domain.

Time off from work for various reasons, such as illness, attending functions, celebrating cultural festivals, traveling with family, childcare, and other personal reasons, allows employees to spend time away from work. However, such valid reasons do not mean their wages should be deducted.

Therefore, companies must adhere to ethical policies that promote paid time off. This enables employees to avoid burnout and better balance their work and personal lives. Companies can adopt different methods to provide and calculate PTO for employees.

Several PTO calculator tools are available to help employees estimate their available PTO hours and plan their work time more effectively. Feel free to use our PTO calculator and contact us if you need further assistance with planning and tracking employees’ PTO.