Providing paid leave is a great way to attract talent and retain employees. However, once you dive into crafting the perfect paid leave policy, you quickly realize how complicated and confusing the task can be.
Here are some considerations to make when putting together your paid leave plan.
The first question to address is how much paid leave you should give employees. One factor in answering this question is the amount of paid leave you can afford to provide as a company. This may fluctuate based on other considerations addressed further down in this article but ultimately, you will need to determine the financial cost of paid leave to your company and what is realistic and right for you.
While the direct costs of providing paid leave are straightforward, such as the expense of paying employees during their leave, it's important to also consider the indirect costs associated with not offering this benefit. One significant indirect cost is the potential for higher recruitment expenses and loss of productivity, as employees may leave your company for another that offers better benefits, including paid leave. This brings us to the importance of understanding the local and industry standards for paid leave. If a major competitor nearby offers significantly more paid leave, you risk losing your employees to them. Therefore, it's crucial to conduct thorough research to ensure your company remains competitive, not only in terms of salary but also in the benefits you offer.
Similarly, how your company administers paid leave can also generate indirect costs. For example, the more complicated a paid leave policy is, the more expensive it is to implement and maintain in terms of management time and input.
It's important to also check that your location does not have required paid leave, such as Nevada for employers with more than 50 employees or Illinois. If there is required paid leave, you should comply with at least the minimum requirements of your state’s law.
The two most common ways to have paid leave accumulate is through a regular accrual or lump sum method. With an accrual-based plan, a small amount of paid leave will accumulate based on a set schedule, such as every pay period or every month. For example, if you decide to provide 80 hours of paid leave per year and you want to have time accrue to coincide with your weekly payroll, you could use the following calculation for the accrual rate:
You could also choose to have paid leave accrue based on hours worked. Again, assuming you would want a full-time employee to accrue 80 hours of paid leave per year you could use the following calculation:
Alternatively, a frontload or lump sum distribution would mean providing the full amount of paid leave for the full year at the beginning of the year. Keep in mind that you should also define the year, such as calendar year (January 1 to December 31), work anniversary, fiscal year, etc. For example, if you provide 80 hours of paid leave per year with the year defined by the employee’s work anniversary, the employee would receive all 80 hours of paid leave on their work anniversary each year.
Many companies choose to implement one Paid Time Off (PTO) plan versus several separate plans due to easier administration on the company’s part. It also allows employees to manage their time off the way they want. If you use separate time off plans you run the risk of employees who have exhausted their vacation or personal time attempting to use paid sick leave under the guise of being sick. You also add more work to your plate if you are asking for doctor’s notes to validate the use of paid sick leave.
You will need to verify that your state, city, or county does not have required paid sick leave before deciding on the all-encompassing PTO or separate paid leave plans. For instance, in California employers must provide up to 40 hours of paid sick leave per year, which does not have to be paid out upon termination, however, if you offer PTO or vacation leave in California, this must be paid out. While your PTO plan may satisfy the requirements of a required paid sick leave, combining mandated sick leave with other paid leaves could cause the two to interact in unintentional ways, such as a mandatory payout at termination.
In building your policy, you should determine who will be eligible to receive paid leave and when. Most employers only provide paid leave to full-time employees. You can also set different annual paid leave amounts based on hourly/salary, management/non-management, and other distinctions between employees.
It also may be a good idea to include a waiting period. This could be either a delay before the paid leave is provided after hire or a delay before employees can begin using the available paid leave. If using a frontload plan, delaying when the time is given to the employee is recommended while accrual plans work best with beginning the accrual at the date of employment and delaying the date at which the time can be used.
A common approach to paid leave is to provide new employees with a smaller amount of paid leave and, as their length of employment increases, so too will their annual paid leave amount. For example, a new employee could receive 80 hours of paid leave per year for their first two years and then increase to 120 hours per year. This tiered approach can help with the incentivizing and retention of employees.
When building your paid leave plan, you should determine what happens to available, unused paid leave at the end of the year or at the end of employment. While you should check state and local laws with regard to all aspects of your paid leave plan, you especially want to be careful about how you treat unused paid leave. Some states, like California and Colorado, do not allow “use-it-or-lose-it polices” where unused time is forfeited. Additionally, some states also require a pay out of available, unused paid leave upon termination regardless of reason, such as Illinois and Massachusetts.
If there are no state or local laws controlling the payout of paid leave, you should decide how this will be handled. One of the most common methods of handling unused paid leave at the end of employment is to pay out if an employee voluntarily resigns and provides proper notice, such as two weeks. This helps encourage employees to provide notice instead of leaving unexpectedly and gives you time to back-fill the position or reduce the amount of time the position is unoccupied. You can also limit how much paid leave you will pay out at termination, such as limiting the paid leave payout to a maximum number of hours. Again, the balance of direct and indirect costs here will be an important consideration in tailoring a plan which is best for your company’s needs.
For paid leave that is not used before the end of the year, you should consider how the leave is accumulated. Are you using an accrual where the employee receives a small amount each week, pay period, or month or do they receive the full amount in a lump sum at the beginning of the year? If you use an accrual method, it may not be a good idea to implement a use-it-or-lose-it policy as this would cause gaps in the year during which the employee has no paid leave available and can also cause employees to scramble to use their time at the end of the year before it’s gone; if your company faces end of the year booms in its business, this is especially to be avoided.
Conversely, if your employees accrue three hours of paid leave biweekly, it will take about a month and a half to have enough for one day off. This is doubly problematic if you define the year based on the calendar year as this can result in all your employees making a mad dash to get their time off around the holidays, which can lead to being understaffed if you approve all the requests or creating disgruntled employees if you do not allow everyone to take the time off before losing it. With an accrual-based paid leave plan, it’s best to allow for carryover of unused time, even if you limit the amount (for example, only allowing up to 40 hours to carry over into the next year). If you are interested in a use-it-or-lose-it policy, it’s best to do this with the lump sum distribution where the employee would immediately receive their paid leave for the year to use as needed.
If you choose to utilize a use-it-or-lose-it policy, this most likely is not a question you need to answer. However, if you allow for carryover of unused paid leave, you may want to consider limiting how much paid leave an employee can carry at one time. For example, if employees are provided 80 hours of paid leave each year and you allow this time to carryover, an employee that never takes time off can eventually have hundreds of hours of paid leave. To avoid this, you may want to implement a cap where an employee can only have a maximum of 120 hours, after which they will stop receiving additional paid leave until the amount drops below the cap.
Another important question to ask is whether to let employees carry a negative paid leave balance or “borrow” paid leave. This can be especially helpful if the employee is new and has not yet accumulated paid leave or if an employee is having personal issues that require them to take time off in excess of their available paid leave. However, be mindful that if an employee leaves the company and has a negative paid leave balance, you may not be able to recoup this money. Some state and local laws are very strict about deductions that can be made from an employee’s paycheck, even if you have a signed authorization. And even if you are allowed to deduct the negative balance, the amount may exceed their final paycheck.
If you want to allow employees to borrow paid leave, it’s a good idea to have a policy in place that allows approval of negative paid leave balances at the discretion of management or sets parameters around what type of requests may be approved. For example, you probably would approve negative paid leave for an employee that is in the hospital but deny a request from an employee that likes to party too hard and calls out sick often.
When creating a written paid leave plan, you should include a process for requesting and approving paid leave. Identify who would be responsible for approving time off requests, which could be an employee’s direct supervisor or other manager, and how requests must be submitted such as paper forms or electronically.
Communicate to your employees how much notice should be given for foreseeable leave, such as vacation or scheduled appointments; the standard is to require at least two weeks’ notice or as much as is practicable. The supervisor or manager approving requests should communicate back to the employee in writing whether the request is approved or denied. Another helpful tip to avoid misunderstandings is to include in your policy that a request is not guaranteed to be approved so employees know to hold off on buying nonrefundable travel reservations.
If the need is not foreseeable due to illness or other emergencies, you should request that employees provide notice as soon as possible. If appropriate, you should also include in your policy if the employee will need to provide a doctor’s note. However, keep in mind that some states and cities prohibit employers from requesting a doctor’s note until the employee has been out for a certain period of time, such as New York.
Once you have answered these questions, you should have a solid foundation for your paid leave plan. Remember: a clearly documented plan shared with employees will help avoid any confusion for both you and your employees. If this seems like an overwhelming task, FrankCrum clients can always reach out to their HR Consultant to discuss creating a paid leave plan that works best for their company.