Estimated reading time: 8 minutes
One of the most important benefits that employees receive is paid time off (PTO). Employees want time off to relax and recharge. They might also need time off to take care of personal matters.
There are many different ways to provide paid time off. One popular way is called front-loading paid time off (aka front-loading PTO). To help us understand more about this benefit option, I reached out to Marta Turba CCP, CSCP, CBP, vice president of content strategy at WorldatWork. For more than 65 years, WorldatWork has served professionals engaged in total rewards. The association provides guidance in the design and delivery of total rewards programs through membership, education, certification, and research.
Marta, thanks so much for being here. Let’s start with a definition. What is front-loading PTO? How does it differ from traditional PTO?
[Turba] Paid time off programs can be structured in three primary ways.
- An accrual-based program enables employees to ‘earn’ paid time off (typically in hour increments) each pay period, based on a set formula established by the employer.
- A front-loaded PTO program grants the ‘annual accrual amount’ on the first day of the plan year, making it available for employees to use from day one.
- Finally, an unlimited PTO program is less defined, enabling employees to take the time off they need without the structured parameters of a defined bank of time.
Why would an organization consider front-loading PTO over let us say unlimited PTO?
[Turba] That’s a pretty complex question but basically, an effective paid time off program design will encompass the needs of the organization, employees and the legal requirements in the areas of operation. Each PTO earning method—accrued, front-loaded, and unlimited PTO—has advantages and disadvantages. Most relate to cultural fit, desire for structure, financial liability, synergies with business operations, and administrative burden.
That being said, here are some reasons a front-loading plan may be preferred over unlimited PTO:
- A match for a wide variety of industries and roles.
- Easy for employees to understand, making it more likely they will take time.
- Enables better business planning, with clear allocations per person.
- Easier for managers to approval/decline PTO requests.
- Proven that these plans lead to more time off—which is a priority for organizations that are seeking to enhance well-being and productivity.
And, here are reasons an unlimited PTO plan may be considered over front loaded:
- Powerful in aligning culture, performance, and time off benefits in some orgs.
- Minimal employer risk, requiring no cash-out at termination.
- Ease of administration by HR and managers.
- A strong recruitment message.
Many PTO policies are aligned with length of service. How can organizations transition to a different type of PTO policy without alienating employees who have been with the organization for a long time?
[Turba] Employers have utilized various benefit programs over the years to incentivize longevity and retention, including vesting schedules, service awards, and time off earning acceleration. However, in recent years, these strategies have become increasingly disconnected from the drivers of business success.
Today’s workforce is more mobile, with shorter tenure. They demand an employee value proposition (EVP) that is evident from day one rather than revealed over time. Additionally, employers have learned that prioritizing employee wellbeing, of which time off is a critical component, enhances productivity, innovation, and commitment. These are traits desired from all employees, not just those with long tenure.
Here are tips to shift from a tenure-based PTO structure:
Determine how and whether your organization wants to recognize retention and service. If not through PTO, what other methods does the organization employ to acknowledge seniority? Remember, reward plan designs often ‘signal’ what the organization values. If your organization values tenure but opts to remove it from a PTO plan design, perhaps that value should be rewarded through other means.
Focus on sound PTO plan design that that aligns with today’s business needs. While eliminating tenure breaks in the PTO program design may be appropriate, other differentiators off benefits (for example, based on job level), may be essential to compete in today’s labor market. What is required to be market-competitive and/or differentiated?
Communicate the reasons behind the change. Make the core message about valuing all employees, not just one group. Emphasize how the well-being of each person is a priority, and benefits programs must support them. Also, how the ability to attract and retain a highly mobile and talented workforce is essential to everyone in the organization—it is a key driver of engagement and satisfaction at work. Position these changes in the context of a commitment to continually look for ways to enhance the EVP.
Avoid legacy arrangements. They can create disparities between employees, adding complexity to HR processes, perpetuating outdated practices, and compromising fairness and equality. By maintaining uniform policies, it is easier to streamline administration, promote fairness, and ensure alignment with organizational goals.
Get creative. One employer I worked with implemented a ‘splash’ PTO design, featuring a standard PTO program for the entire organization along with an additional 5 days of PTO granted during each 5-year anniversary year. It helped with recruitment, promoted equity in benefits, and conveyed the value of career paths with the organization.
I could see some organizations being reluctant to implement a front-loading PTO policy for fear that an employee would just take all their time off and then resign. Is there any research that supports / refutes this?
[Turba] Honestly, I’m not aware of any scholarly research on this topic. However, this is where it is essential that the PTO policy document and terms are well-defined and reflective of the organization’s risk tolerance related to PTO liability.
A traditional front-loaded PTO brings a full liability on the balance sheet for the employer. If an employee ends employment, most employers must cash out the unused balance per state law. Likewise, if an employee receives front-loaded PTO, uses the full balance early in the year, and terminates employment—there is no provision to recoup the used time. While this brings risk to the employer, it is important to mention some advantages of these programs, including employee access and less administrative overhead used in accrual calculations.
For those organizations seeking to avoid this risk, it is possible to establish a policy for a PTO program that utilizes an accrued PTO plan which allows employees access to the full annual PTO balance at the start of the year (before it is earned). This type of plan resembles a traditional front-loaded plan as it grants access to employees from day one. However, in the event of an employee’s departure, the balance between earned and used PTO is reconciled during final pay settlements. This approach offers greater employer protection and is accepted by employees as a common practice. However, the reality is that managing reconciliations can be complex, may not be allowed under state laws, and may not always be well-received by employees.
Last question. Name 2-3 things that an organization should consider when developing a paid time off policy in general.
[Turba] Here are a few things organizations should discuss when designing and implementing a PTO program:
Consider the entire package. PTO programs are significant—but assess all types of time off collectively: paid time off, organizational holidays, volunteer days, personal development days, leave policies and similar benefits. Candidates and employees alike look at the ‘big picture’.
Focus on the needs of the workforce. Determine what is most valued and how you can best meet those needs. It might be surprising to learn that benefits such as pet insurance and mental health support may rank higher in workforce surveys than time off. Understand what employees in your organization value—and collect insights in a comparative manner (would you rather have X or Y)? Then, design the package to deliver the maximum possible value.
Assess financial implications beforehand. Predict the impact that PTO program changes will have by modeling different options. Utilize data such as workforce demographics, usage patterns and turnover trends to project costs, savings, and benefits. Ensure these assumptions are understood by the leadership team before implementation and validate them through measurement and monitoring post-implementation.
In addition, here are a couple final tips:
- Advance communication is key for smooth implementation. It should occur ideally six months before implementing any change that may cause an employee to plan PTO differently. Focus on explaining both the what and the why behind the changes. While standardization aims for equitable systems, strive to avoid creating a sense of loss.
- Understand that the six months leading up to—and following—PTO changes require the most communication and change management support.
A huge thanks to Marta for sharing her knowledge and expertise with us. If you want to learn more about total rewards, check out WorldatWork’s publications.
I really liked Marta’s comment about how the employee value proposition is a signal of organizational values. As organizations look to the future, it could be a great question to ask themselves. Does our benefits package align with our values? And if it doesn’t, how do we get it there?
The post Front-loading Paid Time Off: What Organizations Need to Know Today appeared first on hr bartender.
