HR Topics

 How to Develop and Administer Paid Leave Programs


Sep 6, 2013

Employers generally recognize that many employees struggle to balance the needs of work with outside interests and obligations. Time away from work is important not only to handle personal matters and to take care of illnesses but also to promote a happier and healthier workforce. Providing paid leave benefits to employees may also enhance employers’ recruitment efforts and retention strategies.

Paid leave programs affect employers financially, administratively and operationally; therefore, an employer should have a well-designed plan that meets both the employer and the employees’ needs.

Step 1. Identify the Objective

Why is the employer considering paid leave programs? Is it to be more competitive? Is it to build a rewards program for employees? Is it to manage employees’ time off, or is it to improve the productivity, health or safety of the workforce? Whatever the reason, establishing the need for paid leave will help the employer determine the type of leave, how much to provide, when to provide it and how it will affect the business.

Step 2. Identify Any Paid Leave Requirements Mandated by Federal and State Law

Federal laws do not require employers to provide vacation, sick, personal or paid time off (PTO) benefits to employees. However, some state laws do, and employers must be aware of those regulations when designing their plans.

Step 3. Identify What Type of Leave to Offer Employees

Employers may choose to offer separate vacation, sick and personal leave benefits or may combine the three in one comprehensive PTO plan.

  • Vacation is the most commonly offered leave benefit as indicated in the SHRM survey Examining Paid Leave in the Workplace (PDF). Vacation is generally used for time away from work for rest and relaxation, travel or handling personal matters. Vacation is typically scheduled in advance; however, some employers allow employees to use vacation time for unexpected absences.
  • Sick leave is typically used for leave due to an employee’s own serious health condition. Some employers allow employees to use sick leave to care for an employee’s dependent with a serious health condition. Some employers are required by state law to allow an employee to use sick leave for other relatives, such as in California where sick leave may be used for a parent, spouse or registered domestic partner.
  • Personal leave is generally used for any reason.
  • PTO is also taken for any purpose. Employees tend to like PTO plans for this reason as it allows flexibility in how their leave is used. Employers like PTO plans because they do not have to monitor the reason why employees are taking leave.

Some items to consider when selecting which leave to provide are the state leave requirements. As mentioned above, some employers may be required by state law to provide paid sick leave to their employees. An employer who is required to provide sick leave, for example, may choose to have a separate sick leave plan rather than a combined PTO plan so that time off can be tracked easily and the employer can ensure compliance with the law.

In addition, some state laws require employers to pay accrued, unused vacation upon termination of employment. If an employer chooses to have a PTO plan, an employer may be required to pay accrued, unused PTO upon termination of employment. For this reason, some employers have elected to have separate plans because sick leave is typically not a benefit that is paid to employees when terminated.

Employers who want to remain competitive in their industry may want to research what other options organizations are providing their employees. This information may be obtained from resources such as benefits surveys, benchmarking reports, or reviewing competitor websites and job postings.

Step 4. Identify Who Will Be Eligible for Paid Leave Benefits

Employers may provide all employees with paid leave benefits or different benefits to various groups, as long as the practice is not discriminatory.

Full-time, part-time and temporary status is normally determined by the employer. Some employers consider full-time employees those who work 36 to 40 hours per week, whereas some employers consider full-time employees those who work 40 hours per week. Most employers provide only full-time employees with paid leave benefits; however, some employers place a high value on part-time employees and choose to provide them with these benefits as well.

Some employers may choose to offer paid leave benefits to only certain groups, such as executives or sales employees who generate high revenue for an organization.

Step 5. Identify How Much Leave Employees Will Be Eligible for and When They Will Earn It

Once an employer decides what leave to offer and who will be eligible, the next step is identifying how much leave to provide and when it is earned.

  • Vacation and PTO. Many people have an expectation that an employer will provide a standard number of weeks of leave during the first year of employment. For example, some employers provide two weeks of vacation during the first year of employment. To offer employees an incentive to stay with an organization, an employer may increase the number of weeks based on seniority (i.e., offering three weeks of vacation after the employee completes three years of service or five weeks after 10 years).
  • Sick leave. Employers typically offer a set number of days or weeks each year. For example, an employer may offer an employee eight hours of sick time each month or one week of sick leave per calendar year.
  • Personal leave. Employers typically offer a set number of days for personal leave. For example, an employer may offer two personal days in an anniversary or calendar year.

Employers must decide if the employees will receive the paid leave at the start of employment or if it will accrue based on the number of hours worked or seniority. If the employee is provided the paid leave all at once, it may be considered by law to be earned wages, and an employer may be required to pay any accrued, unused leave upon termination of employment. For example, an employee hired on Feb. 1 receives two weeks of vacation at the time of hire. If that employee quits March 30, the employee may be eligible by state law to receive the two weeks’ vacation pay. For this reason, some employers design a plan in which paid leave is accrued. The following chart illustrates an example of a vacation accrual schedule.

Years of Service

Days per Year (full time)

Days per Year (part time)

Hours per Pay Period (full time)

Hours per Pay Period (part time)


























Employers may also place a cap on accrual. For example, an employer may state that vacation time stops accruing at 80 hours until time off is taken. This approach may encourage employees to schedule vacation regularly so the vacation continues to accrue.

When determining how much leave to provide, employers should look at their budget. For an exempt employee, an employer pays a predetermined salary that should have already been budgeted; however, when a nonexempt employee takes paid leave, there may be additional costs incurred. An employer may need to replace that individual with a temporary employee. A temporary employee from a staffing agency, for example, may cost one and one half times the regular employee’s hourly rate. An employer may decide to have another employee cover the absence, possibly resulting in overtime wages. If an employee is not replaced during this leave, will the employee need to work overtime in the following weeks to make up the time? This scenario, too, may result in overtime costs. Employers should review and account for paid leave when budgeting.

Step 6. Identify How Much Paid Leave May Be Taken at a Given Time

Employers must decide if employees will be required to use paid leave or if they will have the option to use it. Employers must also decide if the leave may be taken in increments or only for full-day absences.

Employers may require both exempt and nonexempt employees to use paid leave prior to taking any unpaid leave. Under the Fair Labor Standards Act (FLSA), nonexempt employees are paid only for the hours actually worked; therefore, an employer may establish a policy requiring nonexempt employees to use paid leave. If the paid leave has not been earned yet or has been exhausted, employers are not obligated to pay nonexempt employees for hours not worked.

For exempt employees, however, the FLSA requires that an employer have a bona fide leave plan in place before any deductions can be made for absences for sickness or disability. Under the FLSA, an employer may require an exempt employee to use paid leave for absences. For partial-day absences, an exempt employee may be required to use paid leave; however, if the paid leave has not been earned or has been exhausted, an employer must still pay an exempt employee the full day’s pay for partial day absences, except under the Federal and Medical Leave Act (FMLA). An exempt employee may also be required to use paid leave for full-day absences. If the paid leave has not been earned or has been exhausted, an employer may deduct one or more full days from an exempt employee’s salary.

When determining whether employees should be required to use paid leave, employers must also consider federal and state leave laws. For example, under the Uniformed Services Employment and Reemployment Rights Act (USERRA), an employer may allow, but may not require, an employee to use vacation for leave due to military service.

Step 7. Identify When Employees Can Take the Paid Leave

Employers need to determine if the paid leave will carry over year-to-year or if the organization will have a “use-it-or-lose-it” policy. A “use-it-or-lose-it” policy indicates that an employee must take the paid leave by a certain date or within a specified time frame; otherwise, it will be forfeited. Please note that California law prohibits this type of policy for paid personal, vacation and PTO leave.

To encourage employees to stay and to minimize attendance issues during initial employment, some employers establish a waiting period before an employee may take time off. For example, an employer may decide that an employee must be employed 90 days before using paid leave.

Some employers may limit the amount of vacation taken. For example, an employer may state that an employee may not take more than two consecutive weeks of paid leave at a given time. Limiting the amount of leave taken may help an employer plan the work schedule better. The employer may not, however, limit time off if an employee is eligible and needs leave under the FMLA or state leave laws. An employer may, however, allow an employee to use paid leave benefits during periods of unpaid leave. When allowing employees to use paid leave benefits during periods of unpaid leave under federal and state leave laws, an employer must also consider whether paid leave may be used to supplement disability insurance. An employer must verify this information with the organization or the state’s disability benefitsplans.

Some employers may also want to implement “black-out periods” when employees are not permitted to take paid leave. For example, in the retail industry an employer may not want to permit time off during busy holiday periods.

Step 8. Identify How Employees Request and Schedule Leave

Employers should establish a procedure regarding when employees should request leave, how they should request leave and the process of approval or denial of the leave.

Employers may want employees to provide a certain amount of advance notice for vacation, personal or PTO leave. For example, an employer may ask employees to request time off at least 30 days in advance, so the manager has a sufficient amount of time to replace the employee or prepare for the absence.

Employers should determine how the paid leave programs will work with human resource information systems (HRIS) and payroll software. Employers with these systems may set up a procedure in which employees enter a request for time off, the manager may approve or deny the request, and the data is entered electronically. Employers find these systems useful in tracking leave and generating reports. Employers without these systems may have employees use time-off request forms.

Step 9. Address Any Other Outstanding Questions

This guide is unable to address every issue that may come up when designing paid leave programs. Some other questions to consider are:

  • What happens if a holiday falls during an employee’s paid leave?
  • What if an employee on vacation becomes ill during the leave?
  • What if the office closes during an employee’s paid leave?
  • Will employees continue to accrue paid leave when they are on paid or unpaid leave?

Step 10. Create a Policy and Communicate It to Staff

One of the most important steps in developing and administering an employer’s paid leave programs is to create a written policy, update employee handbooks or policy and procedure manuals, and communicate the new policy to staff.

Employers may create policies using other sample policies as a starting point or using consultant or legal services.

Please note that vacation, sick, personal or PTO benefits not paid out of the employer’s general assets or issued by separate check may be subject to the rules under the Employee Retirement Income Security Act (ERISA).

Leaves not covered in this guide that an employer may want to consider or that may be required by state laware voting, jury duty, military, bereavement, holidays, and maternity or paternity leave.


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