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<i>Dear Workforce</i> What Is the Secret to Switching to Paid Time Off

January 22, 2009
Dear Just Asking:

PTO typically replaces sick, vacation and personal/floating holidays.

In 24/7 operations, such as hospitals or hotels, PTO can include some or all fixed holidays as well. About 24 percent of employers offer PTO, and this model has grown steadily in popularity. However, PTO isn't necessarily a fit for all employers. In evaluating the feasibility of PTO, you should analyze utilization data and current balances, and understand your population demographics to determine the likely impacts of making this change.

Financial impacts
PTO is de facto vacation in some states (for example, California), and there are rules about cash-out upon termination and the ability to limit carry-over and set maximum accrual caps. Thus, PTO typically increases "booked" liabilities and cash costs if these financial treatments are a change from current policy for vacation, sick and personal/floating holiday time. Financial impact is the most common reason employers decide not to pursue a PTO model.

Productivity impacts
Providing PTO gives employees much-desired flexibility, but this may lead to an increase in the use of unscheduled time. Policies can balance this behavior, but the impact should be modeled, particularly for high-utilization populations such as call center or customer service employees. On average, expect that an hourly worker will use four out of every five days provided; salaried worker average is three out of five.

Administrative impacts
PTO is administratively simple—a single bucket of time, a single timekeeping code, etc. However, this may still require a change to payroll, timekeeping or HRIS systems. Many PTO conversions are delayed by the availability of IT resources.

Behavior impacts
If the employees are "users" and not "bankers" of time off (which you can determine through data analysis), the first year of PTO can be difficult. Prudent employees save time to bridge to a short-term disability plan, but some employees will use all of their PTO and be unprepared for a disability. After the first year, this behavior typically self-corrects. Good communication during the conversion can mitigate this impact.

Impact on other plans
Often employers use sick banks in lieu of a short-term disability plan. It may be financially prohibitive to allow employees to convert balances in sick banks into PTO. Thus, an employer currently using sick banks should consider offering a formal disability plan with the migration to PTO, or freeze these balances into an extended illness bank.

SOURCE: Ophelia Galindo, Buck Consultants, Orange, California, November 18, 2008

LEARN MORE: A guidebook on policy is helpful when starting a PTO effort.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.
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