Understanding ‘PTO’ vs ‘vacation’ when creating your time-off policy

When it comes to time off, employees generally value clarity in a company policy. Generosity, yes, but clarity is right up there too.  

While creating a strong time-off policy can be overwhelming even on the best of days, having a solid understanding of the basic requirements, as well as basic terminology, can make a world of difference. 

There’s one question in particular that comes up more often than others: what’s the difference between PTO and vacation days? While the answer may or may not seem obvious, it really helps to break it down. 

What is PTO? 

Paid time off (PTO) covers any paid time away from work and work duties. Sick time, personal time, mental health days, and jury duty are examples of non-vacation paid time off. Holidays are not necessarily included in PTO because it’s likely that you prefer to dictate which days your company is closed. 

What is vacation? 

Vacation time refers to paid time off that’s taken specifically for the purpose of the employee taking a break. It’s generally requested and approved in advance. While vacation is ultimately a type of PTO, PTO does not necessarily refer to vacation. 

What are the legal obligations around time off?  

The legal requirements around PTO can vary widely depending where your company is located.  

In the US, the Fair Labor Standards Act (FLSA) does not require any payment for time not worked, like vacations, sick leave or holidays. Any benefits offered are unique to individual agreements between employers and employees. It’s worth noting, however, that some states and jurisdictions have enacted laws which do require employers to provide paid leave—Maine, for instance, requires employers with 10+ employees to provide PTO. 

In Canada, the Canada Labour Code sets certain minimum standards for employers to follow with regard to annual vacation and holidays. While some vacation entitlement is dependent on province or jurisdiction, Canadian labor law stipulates that every employee is entitled to two weeks vacation at 4% of their regular wages earned in an entitlement year. The deviation from this is Saskatchewan, which guarantees three weeks. 

Most companies actually offer more than they’re required to, as show of good faith. According to the Bureau of Labor Statistics, 77% of US employees receive paid vacation days, 77% receive paid sick leave, and 79% receive paid holidays.  

Treating your people well has always been good for business! 

Types of PTO systems  

Unlimited:

To appeal to top candidates in a landscape where work-life balance is king, a growing number of companies are creating “unlimited” paid time off policies. 

Employees are simply granted time off as needed, without having to worry (officially, anyway) about how much time they’re taking. Many employees appreciate the sense of agency and HR teams love not having to track hours.

The downside? Employees are often unclear about what the unwritten limits actually are, and as a result they end up taking less time off than those with limited (but defined) PTO. 

Accrued:

Accrued time-off is the most common policy type and has been in use the longest. Employees accrue X hours based on the number of hours worked or the passage of time (i.e. every 2 weeks).

For instance, a policy that offers employees an accrual of 2.5 hours of PTO for every 40 hours worked would translate to 130 hours (roughly 16 days) of annual PTO.

You might also create incentives based on seniority, whereby an employee can accrue PTO more quickly if they’ve been there longer. 

Fixed:

In the fixed PTO system, employees are granted a particular amount of PTO annually. Unlike accrual policies, employees typically get their PTO allotment all at once—either on January 1st, or some other predetermined date. 

Employees are free to use any amount of their PTO anytime they choose. The allotted PTO renews each year, but while some companies roll any unused time over into the next year, others mandate employees to use their entire allotment within a given year. 

PTO vs the many other types of time off 

More and more companies are doing away with traditional time-off categories like vacation, sick days, personal days, etc., in favor of allotting a certain amount of PTO to be used in any way the employee sees fit—without having to specify their reason.  

But what are the pros and cons of doing it this way, rather than keeping vacation and other types of PTO distinguishable?  

Pros:  

• An overarching PTO allotment dramatically simplifies things from an administrative perspective, as there is no need to track different types of time off. 
• Employees can keep their reasons for needing time off private if they so choose. 
• PTO is inherently flexible. An employee can divide their time away from work as they see fit, taking vacation days, sick days, mental health days or days required to care for a sick family member as needed.  

Cons: 

• Some employees may use up their PTO early in the year and don’t have any time left when something unforeseen happens. 
• Some states require certain types of time off to be paid out when an employee leaves the company. If sick days and vacation days are bundled, this may increase the overall payout required. 

The importance of encouraging employees to take their time off 

While the minimum PTO requirements applicable to your company may be zero (or negligible), offering a policy above and beyond what is strictly called for tends to pay off. Employees who are well-rested and not burnt out have higher morale, are more productive, and are more satisfied overall. Satisfied employees stay put, which means lower turnover rates overall. 

For all these reasons and more, encouraging and reminding your employees to actually use their time off is important. 

Not to mention, in any system where unused PTO rolls over to the following year, it’s in your company’s financial interests to ensure employees use all of their time off.  

After all, in spite of the “guaranteed” minimum vacation time offered in Canada, only about 27% of employees are using up their allotted PTO. 

The best way to avoid having to force employees to use PTO is to have a solid PTO policy—one which very clearly communicates all terms pertaining to eligibility, increases, rollover, splitting, payment, and vacation requests.  

How to track time off  

While there are numerous ways to track time off, from spreadsheets, to email “paper trails,” it can feel overwhelming to find the right tracking solution for you.

If you have a small team and basic tracking needs, a simple spreadsheet might work for you. However, manual calculations can quickly become labor intensive and error prone. That’s why quality PTO tracking software can be the difference-maker. 

While there are many PTO tracking services, PurelyHR’s time off system, is a simple and effective solution designed to scale with your business. With PurelyHR, you can:

• Customize time-off types and policies that fulfill your company’s unique needs 
• Automate accruals, policy changes, and balance renewals (no more manual calculations)
• Give access to employees to request their own time off and access their PTO balance any time

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