How flexible is your PTO policy? 

August 3, 2023

What better time than peak summer vacation season for employers to revisit their paid time off policies? With unemployment rates at historical lows, employers want to offer benefits that stand out from the crowd and help attract and retain talent. Adding flexibility to paid time off (PTO) policies can help achieve that aim. A recent Mercer survey of 348 employers yielded some unique and timely insights on how employers are “flexing” their PTO programs – and how they handle the challenges that can create.

One of the fundamental PTO design decisions employers need to make is determining whether vacation and paid sick leave should be separate policies or if they should be combined into a single PTO bank. Combining time off into a single bank provides employees with more flexibility in how they use time off. It can also be administratively simpler, avoiding the need for an employee to decide if a particular day off is a vacation or sick day. In our survey, fewer than half of respondents (46%) provide separate vacation and paid sick leave allocations. The rest of those providing accrued PTO have combined paid sick leave and vacation in a single bucket – although some of these employers track paid sick leave separately to comply with state and local mandates. We suspect that as mandates increase more employers will pick this option – or simply go with separate buckets to demonstrate compliance more easily.

Arguably, employers who have implemented unlimited PTO (UPTO) are looking for the maximum in flexibility. How do they handle paid sick leave in their unlimited PTO policies? Results were similar to those for employers with accrued PTO. Of employers who offer unlimited PTO, 45% include vacation and paid sick leave in their UPTO policy, 45% include vacation but not paid sick leave, and 10% combine vacation and paid sick leave in their UPTO policy but track paid sick leave required by state law separately.

Traditionally, employees get value from their PTO benefits simply by taking time off. Although it was never a common practice, for many years a small number of employers have allowed employees to sell back some of their PTO during annual enrollment (3% of survey respondents currently have this policy in place). More recently, employers have begun allowing employees to sell back excess PTO outside of annual enrollment. The growing interest in this policy has been fueled by software vendors that can facilitate the transaction, enabling employees to convert PTO to cash or cash-like benefits that can be spent on a curated list of items selected by the employer. Our survey found that 11% of employers allow employees to sell back excess PTO time at designated times during the year and 4% allow employees to sell excess PTO throughout the year. Including those who permit PTO to be sold at open enrollment, a total of 18% currently allow employees to sell PTO days, and an additional 2% are considering it in the near future.

Of the employers who do allow employees to sell unused PTO, most do not allow employees to sell more than 10 days per year, with 1-5 days being most common. Limiting the number of days an employee can sell can help prevent employees from selling all their paid time off, leaving no time left to refresh and recharge. Arguably, allowing employees to sell some of their unused time may help them to pay for a vacation they actually take.

Close to half of survey respondents (46%) have a single PTO policy that applies to all employees. However, the reality is that many employers compete for talent in different pools. A PTO policy for a manufacturing or retail company may be aligned with industry benchmarks but be non-competitive for senior leaders or salaried employees in the high-tech part of their business. Survey respondents reported having different PTO policies for salaried and hourly employees (27%), executives and non-executives (18%), or other employee groups (22%).

Some employers, especially those with one PTO policy for all employees, may find their PTO policy lacking when recruiting new talent. A PTO policy that offers a fixed PTO allowance to all new hires may find that the policy is competitive for college recruits but not for mid-career hires. The survey found that 21% of employers directly consider prior years of service in determining PTO allocations for new hires and 37% base PTO allocations for new hires on title or grade level. Just 39% say PTO allocations are based on tenure only, regardless of title or prior service at the date of hire.

The PTO design you select should reflect your organization’s culture, business needs and financial requirements. There are a number of ways employers can add flexibility to their PTO strategy while still balancing those considerations. Given the pace of change in this benefit area, it’s important to reevaluate your PTO policies periodically to ensure they remain competitive – and that they meet the increasingly diverse needs of your workforce.