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Employers Are Banking on Paid Time Off

Despite obstacles, employers continue to shift to pooling vacation and sick days

A man sneezing in bed.

As they look for ways to ease administration and increase the perceived value of paid time off (PTO) for employees, a growing number of organizations are altering their PTO benefits. But this approach isn't a good fit for every organization.

Some employers have begun experimenting with "unlimited" paid-time-off policies that don't limit the number of days off, leaving the matter to be negotiated between employees and their supervisors. But more commonly, employers try to shake things up with PTO banks that bundle together most forms of PTO for employees to use as they please, rather than assigning a certain number of days to sick time, vacation and so on.

"This is part of the trend toward allowing employees more freedom of choice in general, including how they use their paid time off," said Rich Fuerstenberg, senior partner with Mercer in Princeton, N.J. PTO banks are "more of a defined contribution approach to time off where the employer provides employees with a bundle of time and the employee decides how to use it." In doing so, employers hope that workers will have more appreciation for paid time off as an employee benefit.

A growing number of employers are switching to PTO banks, making it an increasingly popular approach to administering paid leave. Data tracked by consulting firm Mercer's annual Survey on Absence and Disability Management, a poll of over 450 U.S. employers, found strong growth in PTO banks—from 38 percent of employers in 2010 to 63 percent in 2015.

At the same time, there are emerging trends that could put a cap on the growth of PTO banks, including state and local laws governing sick leave. Some states and localities, including California and New York City, have laws requiring employers to provide employees with a certain amount of paid sick leave. 

"There is a ceiling on the use of PTO banks because of these types of state and local laws," Fuerstenberg said. "I think we will see PTO bank use leveling off a bit based on what happens at the state and local levels."

Such laws do not preclude the use of PTO banks, but they do make administration a bit more complex. 

"Employers in California can have a PTO bank, but they have to earmark certain days as sick days," Fuerstenberg said. "Employers may start to wonder why they are using a PTO bank if they have to keep sick days separate from the rest of PTO." Given that ease of administration is a key selling point of PTO for employers, these types of laws could have a cooling effect on PTO bank popularity.

[SHRM members-only how-to guide: How to Develop and Administer Paid Leave Programs]

Balancing Act

At the root of most concerns about PTO banks is that they give employees too much freedom. "It is very important that sick time not be treated as vacation time, because it can get you into some very sticky situations as an employer," said Claire Bissot, managing director with consulting firm CBIZ HR Services in St. Louis.

One concern is that PTO banks could encourage employees to come to work even when they are sick and either put fellow employees at risk of contagion or harm their own health—something that paid sick days were specifically designed to discourage. "Employees may think, 'why would I call in sick if I can use that time for vacation?' " Bissot said.

In other situations, employees may run into trouble by using up all of their banked PTO before year end. If an employee uses all available PTO to take a long vacation in September, what happens if that employee gets sick for several days in November? In this case, the employer must either come up with another solution, such as advancing time from the coming year or forcing the employee to take unpaid time off.

Employers can mitigate some of this risk by having employees accrue PTO days throughout the year. For example, if an employer offers 24 days of PTO, that time could accrue at a rate of two days per month. "That can help to mitigate some of the chances for misuse or abuse of the PTO bank," said Jennifer Loftus, SHRM-SCP, national director at HR consulting firm Astron Solutions in New York City.

5 Questions to Ask

Employers that decide to implement a PTO bank should consider some questions before doing so, leave specialists advise:

1. Will employees roll over unused time to the next year, either on an unlimited basis or up to a certain amount?

2. Should employees be allowed to cash out unused time at year end and keep the cash or contribute it to a 401(k) plan or health savings account?

3. Can current payroll systems and HR information systems handle administrative requirements?

4. Is the organization prepared to communicate about the PTO bank, including what it is, how it works and how employees can track their accrued PTO?

5. Are managers supportive of this approach and prepared to adjust scheduling and other issues as needed?

In the right circumstances, a carefully designed PTO bank can generate more attention and enthusiasm for an important employee benefit. However, employers must move forward carefully to make sure the PTO bank is the right choice for both the organization and its employees.

Joanne Sammer is a New Jersey-based business and financial writer.

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