Vacation and sick leave are key benefits provided by most employers. Some companies have traditional vacation and sick leave policies while others have Paid Time Off (PTO) banks that lump all paid time off benefits together and allow the employee to decide how those days off will be used. There are pros and cons to both methods of granting time off to employees.

Traditional Vacation and Sick Leave

Typically, companies will grant a block of time for vacation and a block of time to be used for illness at the beginning of each year.  According to EAF’s most recent Policies & Benefits Survey, the typical employer grants 9 days of sick leave each year and the amount of vacation varies depending on years of service.  In general, most companies grant 2 weeks of vacation after 1 year of service; 3 weeks after 5 years; and 4 weeks after 10 years of service. For the most part, traditional vacation and sick leave plans do not permit the employee to carry unused benefits days over into the next year. And, while most companies will pay out unused vacation time at termination, most employers will not pay out unused sick leave. There are both advantages and disadvantages to the traditional model of granting time off:


Easy to track and manage Unscheduled, last minute calls because of illness
Easy for employees to understand how much time they have available. May end up granting more days off under separate leave banks than under a single PTO bank
Would only have to pay out unused vacation at termination (if your policy permits) and not sick leave People may call out sick even when they are well just to use their benefit “entitlement”

PTO Plans

PTO plans combine multiple forms of leave – vacation, sick, personal – into one bank.  Some employers (especially hospitals and similar types of 24/7 operations) also include holidays in these banks. Time off in these plans generally accrue per pay period or per number of hours worked. Like traditional leave plans, PTO plans also have their pros and cons.

Employees like the flexibility these plans allow and that flexibility can be used to attract applicants to the organization. Employees may come to work sick so that they don’t have to use time that, in their minds, they’ve reserved for vacation.
Greatly reduces the number of unscheduled days off. PTO plans typically pay out all time accrued at termination, which means larger payouts to employees.
The company only has to deal with one leave bank instead of multiple banks. Unused PTO usually rolls, which means the company carries that expense forward.  Typically these banks are either uncapped or capped at hundreds of hours, which again increase liability.
Encourages honesty and reduces absenteeism. May cause “presenteeism” resulting in employees showing up to work sick in order to maintain as much leave as possible for their vacation.


Converting from Traditional to PTO


1.  Determine how many days of PTO you will allow employees to accrue each year.  For example, if you currently offer 15 vacation days and 5 sick days to employees who have worked for you at least 3 years, those individuals may begin accruing PTO at a rate of 20 days per year.  Companies don’t have to use this method to determine number of days per year.  You could come up with a flat amount that makes sense for your organization.

2. Determine how many vacation/sick days are in each person’s bank.  Will you convert all or part of those unused days at the end of the year to PTO?  Or will employees lose the traditional benefits at the end of the year and begin accruing January 1?  OR will you allow employees to begin accruing but not using PTO mid-year so that there are some days available to them in their leave banks?

3. Decide how many days of PTO can be taken at one time for non-health related leave.  For example, will you allow someone who has accumulated 160 hours in their PTO bank to take 4 weeks of leave all at one time? Or will you limit it to allowing them to take a maximum of 1 week or 2 weeks of leave at one time?

4. What is the smallest increment of PTO that may be taken by an employee?

5. What’s the maximum amount of PTO that employees will be allowed to carry forward from one year to the next?  How much, if any, PTO will be paid out at termination? (Pay out of PTO, sick leave, vacation leave may be mandated by your state.  Review the pertinent laws for your state to make sure your policy complies with state law.)

6. Write your policy in such a way that clearly spells out how time off will be accrued, how it may be used, expectations for scheduling time off in advance, and under what circumstances PTO balances will or will not be paid out.


Converting from PTO to Traditional Sick & Vacation policies

Some companies find that PTO just doesn’t work for their culture or their needs.  Because traditional PTO plans allows a significant number of hours to be carried forward from one year to the next, some companies find that carrying those large balances forward on a balance sheet are detrimental to the financial health of the organization. Additionally, they find that it impedes cash flow when they have to pay out a large number of PTO hours to individuals who leave the organization.


1. Determine the amount of sick leave and vacation benefits you will award to employees at the beginning of the year.

2. Determine the PTO balances in each individual’s account and decide if you will pay this out at the end of the year or if you will allow all or a portion to carry over into the new year and require the individual to use it within a specific time frame or lose it.

3. What is the smallest increment of vacation or sick leave that may be taken by an employee?

4. Write your policy to clearly communicate how vacation and sick time will be awarded, whether or not all or a portion of it will be paid out or carried over into the new year, and under what circumstances sick leave and/or vacation will or will not be paid out.

Again, depending on the state in which you operate, you may or may not have an obligation to pay out PTO, vacation and/or sick leave.

Whatever type of leave policy(ies) you choose to adopt, they can be used as tools to attract and retain employees. Just make sure your policies clearly spell out how employees are awarded their benefits and under what circumstances they will or will not be paid at termination.


Contributed by the Employers Association Forum, Inc. (EAF). EAF is a non-profit corporate membership-based association dedicated to serving the business and HR communities with world-class HR tools, hotlines & legal compliance, news & trends, surveys & economic data, benefits & insurance, risk management, training & consulting, and leadership & organizational development. HCCMO members receive discounted rates on all EAF classroom training at EAF’s training center in Longwood. Click here to learn more about EAF membership benefits http://eafinc.org/about-eaf/value-of-membership/.