Many organizations are reevaluating their employee benefits offerings in light of the pandemic. With more employees working remotely, companies are looking at the benefits they offer in a physical office environment versus the ones that are able to be utilized virtually. They’re also looking at how employees are able to take time off. That’s the focus of today’s reader question.
Hello. My company is headquartered in Virginia and plans to switch to front-loading paid time off (PTO) at the beginning of 2021 to reduce some of the administrative burden that comes with traditional PTO policies and create a new benefit for our employees.
I feel as though front-loading is a newer PTO concept, and I’m having a hard time finding some legitimate information on it online. I have some slight concerns such as, how we would appropriately address PTO payouts (payouts are currently based on length of service), as well as what to do about employees who use all of their PTO at the beginning of the year, and then leave the organization.
What are your thoughts on front-loading policies, what pros and cons do you see that you think we should consider? Thank you for any assistance you can offer!
I’m not sure we can address everything about paid time off, but I did think this note was a great opportunity to talk about front loading paid time off (PTO) and why organizations might or might not want to implement it. To help us understand more about front loading PTO, I reached out to Steve Boddy, CCP, one of the total rewards subject matter experts at WorldatWork. We recently shared some survey data from them about what individuals expect in the employee experience. If you haven’t checked it out, you’ll find it an interesting read.
Steve, thanks for being here. Let’s start with a definition. What is front-loading PTO?
[Boddy] Front-loading PTO is a time off benefit program/policy that awards an amount of time (typically hours) for each employee at the beginning of each year (either calendar or fiscal). Time is also generally awarded on a pro-rated basis for new hires.
An example would be an organization that wants employees to have roughly 3 weeks paid time off a year to cover vacation, sick, and personal time so they award each employee 120 hours of PTO on January 1 of each year.
How does front loading PTO differ from a traditional PTO policy and/or unlimited Paid Time Off?
[Boddy] Traditional PTO policies generally use an accrual methodology. This method allows employees to earn or accrue a certain amount of PTO per pay period and employees build up a bank of PTO over time. In the example above, if the same organization had 24 pay periods, an employee would accrue 5 hours per pay period (160 hours / 24 = 5).
Unlimited PTO is another paid time off policy increasing in popularity, especially for exempt employee populations. This method allows employees to take as much time as needed each year without regard to PTO balances. It’s typically up to each employee’s manager to monitor and calibrate employees who are either not taking off enough time or are taking too much.
It sounds like one of the key differences in PTO, front loading PTO, and unlimited PTO plans is how they are applied to the financials/balance sheet.
[Boddy] Correct. Accrued or traditional PTO is an accrued liability on the balance sheet as it is earned. If an employee leaves, cash out of earned but not used time is required in most states. With front loaded PTO, there’s full liability on the balance sheet the day the PTO is granted. If an employee leaves, then the company will typically complete a full cash out (as required in most states). Lastly with unlimited time off, there’s no accrued liability on the balance sheet and it’s not cashed out upon termination.
Please note that the results of the recent WorldatWork 2020 Inventory of Total Rewards Programs & Practices (December 2020) indicated that 12% of participating companies now offer unlimited paid time off programs.
Now that we know what front loading Paid Time Off is, why would an organization move to frontloading PTO policy?
[Boddy] There are several factors that employers take when considering this type of policy.
- It is very attractive to employees and can differentiate the employer when recruiting talent.
- It is easy to communicate to the employee population and easy to understand.
- Employees and new hires have the luxury of taking significant paid time off at the beginning of the year. For example, if an employee wants to take 2 weeks off in January for a ski vacation, this would be fully paid under a front-loaded PTO policy. Under an accrual policy, some or all this time off would either be unpaid, borrowed from future accruals, or not approved by the employee’s manager.
Please note, an accrual plan may be considered easier operationally because the benefit is earned/managed as work is performed vs. providing a ‘vested’ benefit upfront.
The reader note mentions that current PTO payouts are based on length of service. How could an organization address payout when transitioning to a front-loading PTO?
[Boddy] This would really depend on the culture of the organization, state law requirements, and the provisions of the new plan that is established. Possible options include:
- Adding the front-loaded PTO amount to current PTO balance. This may result in an excessive unused PTO liability to the organization, but it is an option.
- Paying out the current accrued and unused PTO balances to each employee then front-loading the new amount so all employees would start fresh based on the new front-loaded PTO award schedule.
When considering payouts, the ‘old’ PTO amounts would depend on state law and whether the full amount is payable under the employer’s policies. Generally, the employer could either roll it over to the new PTO, pay out the value of it, or preserve the existing ‘old’ PTO benefits as a separate paid leave bank that they can continue to use.
Last question. Is there something that an organization can do to reduce the risk of an employee taking all their Paid Time Off then leaving the organization under a front-loaded PTO policy?
[Boddy] Not really. This is the biggest disadvantage of front-loading PTO. However, there may be some solutions available, depending upon applicable state law and clear communication to employees on the organization’s policies in effect governing PTO benefits and use.
Other solutions (as permitted by applicable law) may include capping the amount of PTO payout in the event of separation or implementing a waiting period to use front-load PTO benefits. PTO use is also governed by an organization’s PTO approval and use policies in effect. Organizations should ensure their policy states that use of PTO is subject to management approval and operational requirements.
I want to extend a huge thanks to Steve for sharing his knowledge and expertise with us. Be sure to check out WorldatWork’s 2020 Inventory of Total Rewards Programs and Practices (mentioned above) as well as their website for current insights – they have a full section of pandemic planning and response resources.
Today’s reader note is very indicative of what’s happening right now in the workplace. Organizations are reevaluating the employee experience because the employee experience is changing. At some point, will we go back to everyone being in the office? Yeah, sure, maybe. But for now, organizations are having to manage a hybrid workforce and revisiting employee benefits is part of the process.
P.S. If you’re considering a change in employee benefits, you might find these two articles where I talk with attorney Samuel Hoffman with Foley & Lardner LLP helpful:17