3 Approaches to Core Leave Benefits

A key decision to designing leave benefits that balance business and workforce needs is whether to offer Paid Time Off (PTO), separate vacation and sick leave benefits, or unlimited time away.

June 25, 2021

With 98% of employees indicating that time away is a valued benefit, large employers know that designing leave benefits carefully to balance business and workforce needs is a top priority.1 A key decision is whether to offer Paid Time Off (PTO), separate vacation and sick leave benefits, or unlimited (known as permissive) time away.

This article opens with general questions for employers to ask themselves when redesigning leave benefits and shares the prevalence, advantages and disadvantages and implementation considerations for each core leave benefits approach.

Factors Influencing Large Employers’ Leave Benefits Design Other Than Legal Requirements, 2020 
Figure 1: Factors Influencing Large Employers’ Leave Benefits Design Other Than Legal Requirements, 2020

Redesigning Leave Benefits: Employer Questions

The right leave benefits design varies across employers and changes over time. Employers can start by reviewing these questions to establish goals and direction.

  • What’s your company’s leave benefits philosophy? Do you want equity for all employees? Do you want to reward employee retention? Is time away part of your health and well-being strategy?
  • What state and local leave mandates do you need to comply with?
  • What financial liability associated with leave benefits is your company willing to hold?
  • Who will be eligible for leave benefits? Will different employees (e.g., based on job type or tenure) receive different benefits?
Large Employers Considering Changing Leave Structures, 2020 
Figure 2: Large Employers Considering Changing Leave Structures, 2020
  • How much time off will employees receive? Are there certain business needs you should consider (e.g., workplace coverage, blackout dates)?
  • In what increment will employees be able to take leave (e.g., 1 day, ½ day, 1 hour, 1 minute)? (Consider the capabilities of HR/leave system.)
  • Will employees need approval to take leave? If so, what’s the process?
  • Will your company track leave use? (Follow legal requirements closely.)
  • Will leave benefits be front-loaded or accrued over time? If front-loaded, when (e.g., calendar year, fiscal year or individual work anniversary)?
  • Will employees carry over unused leave? Will they be paid out at the end of the year or at separation? (Follow legal requirements closely.)
  • Will there be a leave cap? If so, what will it be?

Approach #1: Unlimited/Permissive Leave

While unlimited time away receives lots of buzz, only 6% of large employers currently offer it to exempt employees, and 1% offer it to non-exempt employees.2 An unlimited leave approach allows employees to take as much time off as they need or want as long as work goals are achieved. Sometimes, however, the decision is dependent on manager discretion.

Unlimited time away can be a win-win for employers and employees. For employers, this approach eliminates the financial liability of unused leave. Employees see the value in work/life harmony. Two-thirds of U.S. employees would consider a lower-paying job with unlimited vacation.3

Nonetheless, unlimited time away has its drawbacks. Table 1 below identifies advantages and disadvantages for employers to weigh.

Table 1: Unlimited Time Away Advantages and Disadvantages

Advantages

Disadvantages

  • Attraction and retention
  • No financial liability from unused paid leave
  • Reduced administration costs associated with tracking and approving leave
  • Increased flexibility, trust and respect for work/life harmony
  • Still requires tracking to comply with various legal requirements
  • Ambiguity with an unclear policy and procedures, especially when first launched
  • Inequity if offered to some but not all employees (e.g., only available to senior employees)

Employer Considerations

  • What It’s Called: Although unlimited leave is popular nomenclature, most employers use a different name internally, such as flexible time off, discretionary time off or permissive time off.
  • Eligibility: When considering if an unlimited approach is right for a company, the workforce make-up and eligibility criteria should be considered carefully. Offering unlimited time away to certain employees and not others can create inequities within the workforce. Therefore, this approach may not be right for all industries or company leave philosophies.
  • Careful Rollout: When first launched, tenured employees may feel unlimited leave is a “takeaway.” One recommended practice is to give employees plenty of time to use accrued leave before making this change (e.g., 6 months or a year).
  • Culture: This approach works best with a high-performing, result-oriented culture and performance system.
  • Payouts: Some states require payouts when an employer transitions to unlimited leave benefits; other employers offer payouts to appease employees.
  • Legal Requirements: Employers still must comply with legal tracking and reporting requirements. Also, employers should be mindful of the language used. For example, saying “most employees take 4 weeks” may create a legal entitlement that could require payouts in certain states.
  • Manager Role and Expectations: It is important to set clear expectations with employees and managers upfront, such as an expectation that managers will approve time away requests unless they have a valid business reason to deny it. Also, employers should establish a way to ensure that leave approvals (if required) are fair across the organization. Alternatively, employers may choose to not require manager approval for time away and instead have clear guidelines for how employees should coordinate their time off with their managers.
  • Coordination with Other Leaves: It’s advisable that employers carefully consider and communicate how unlimited time will coordinate (or not) with other leave types, such as FMLA (Family and Medical Leave Act), parental leave and jury leave.

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Approach #2: Paid Time Off Leave

Paid Time Off (PTO) benefits are known for flexibility and ease of administration. Employees are provided a set amount of time away, often dependent on tenure and job type, that can be used for a variety of reasons, from vacations to caring for a loved one. In 2020, 40% of large employers offered PTO benefits to exempt employees, and 38% offered these benefits to non-exempt employees.2

While ease of administration is a key advantage of the PTO approach, the proliferation of paid leave laws has made this approach somewhat less desirable by requiring employers due to various legal requirements. Table 2 below identifies advantages and disadvantages for employers to weigh.

Table 2: Paid Time Off Advantages and Disadvantages

Advantages

Disadvantages

  • Ease of administration
  • Employee flexibility
  • Increased privacy
  • Improved absenteeism, including fewer unscheduled absences
  • Still requires tracking to comply with various legal requirements
  • More likely to work sick
  • No safety net for emergencies
  • Challenge for caregivers who use PTO while caring for sick children and adult dependents rather than vacation and personal time
  • Potentially a higher financial liability upon termination than separate vacation and sick leaves

Employer Considerations

  • Legal Requirements: Before implementing any changes, employers should review federal, state and local leave laws to ensure compliance.
  • Financial Liability: PTO is generally treated the same as vacation time under the law and must be treated as wages.
  • Coordination with Other Leaves: Many employers offer a variety of leaves beyond PTO (e.g., bereavement leave, caregiver leave). These leaves can provide needed assistance to employees, especially when unforeseen events occur or responsibilities change. At the same time, employees can be confused about what leave to use when. A strategic, thoughtful communication plan can mitigate this problem.
  • Adding New Leaves: When adding a new type of leave (e.g., family leave), an employer may consider lowering PTO benefits to reduce potential business impacts. Again, communicating the value added of this redistribution for various employee populations will be important.

Use It or Lose It?

Establishing cap and carryover limits for PTO or vacation leave can reduce the financial burden of unused leave. Again, employers must pay close attention to local leave laws, as some states explicitly prohibit use it or lose it policies, requiring carryover and payout at separation.


Approach #3: Separate Vacation and Sick Leaves

In this approach, also known as a traditional or nonconsolidated leave program, employees receive separate allotments of time away for vacation, sick and sometimes also personal days. Today, it remains the most popular among large employers, with 54% of large employers offering separate vacation and sick leaves to exempt employees, and 61% offering separate leave to non-exempt employees.2 Similar to the PTO approach, employers often offer additional types of leave, such as jury duty and bereavement leave.

Separate vacation and sick leave can positively impact workforce health. Employees with paid sick leave are more likely to receive preventive health services and are less likely to work while sick, decreasing the spread of communicable diseases to colleagues and customers. Table 3 below identifies advantages and disadvantages for employers to weigh.

Table 3: Separate Vacation and Sick Leaves Advantages and Disadvantages

Advantages

Disadvantages

  • Better equipped to meet mandated sick leave requirements
  • Less likely to work sick
  • Fewer emergency room trips
  • More likely to receive preventive health services
  • Lower voluntary turnover rate
  • Less financial liability at separation than PTO
  • Less flexibility
  • Less privacy
  • More unscheduled absences

Employer Considerations

  • Legal Requirements: Before implementing any changes, employers should review federal, state and local leave laws to ensure compliance.
  • Financial Liability: Many states require vacation time be treated as wages and paid out accordingly. While many states do not require that unused sick leave be paid out in cash when an employee leaves, many large employers do.
  • Coordination with Other Leaves: Many employers offer a variety of leaves beyond vacation and sick leaves (e.g., bereavement leave, caregiver leave). These leaves can provide needed assistance to employees, especially when unforeseen events occur or responsibilities change. At the same time, employees can be confused about what leave to use when. A strategic, thoughtful communication plan is critical.
  • Flexibility and Privacy: This approach provides employees less flexibility and privacy, which are becoming increasingly important to employees. Employers should consider how they can maximize employee flexibility and privacy as processes for requesting and tracking leaves are established.

Front-load or Accrue Leave?

Employers must decide between front-loading leave benefits (often prorated for new hires) or having employees accrue leave over time. Accruing leave throughout the year can help employees with PTO benefits have a needed safety net for unexpected health issues. While giving new employees a lump sum of leave to start can be a recruitment strategy, a downside of front-loading is the financial liability of paying out leave at separation.

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TABLE OF CONTENTS

  1. Redesigning Leave Benefits: Employer Questions
  2. Approach #1: Unlimited/Permissive Leave
  3. Approach #2: Paid Time Off Leave
  4. Approach #3: Separate Vacation and Sick Leaves