Developing an employee paid leave program

ARTICLE | MARCH 22, 2022


There are many good reasons to develop a paid leave program - from attracting and retaining top talent to boosting morale and improving productivity. However, creating a paid leave program that maximizes benefits to the employee without breaking the bank or disrupting operations can be challenging.  

There are many questions to consider before implementing a paid leave program. In this article, we'll discuss each of these considerations, as well as how to implement your own unique paid leave program. 

Why offer a paid leave program?

There are many benefits of offering a paid leave program for your employees, such as:

  • Helping attract and recruit top talent to work for your business. 
  • Helping reduce stress and improve mental health, leading to greater productivity and higher quality work
  • Helping employees stay connected with their family and friends - which is something today's employees expect, and
  • improving employee morale and loyalty.

In a nutshell, studies show that employees who receive paid leave tend to be happier, more productive, and more loyal. If your business has the budget and ability to offer paid leave, it's almost always a worthwhile investment. 

Types of paid leave

While paid leave is not a legal requirement in the U.S., most companies offer some form of it. Over the years, various paid leave programs have been implemented - so your company's paid leave policy can be as unique or creative as your company. 

Here are some of the most common types of paid leave benefits: 

  • Personal Vacation Time. Employees typically use vacation time for travel, rest, and time with friends and family. Most employers require advance notice for vacation time, but you may set a different policy at your discretion.
  • Sick Leave. Employees use sick time when they're ill or injured. They may also use sick time to care for another ill family member. Sick leave is usually unplanned. In rare instances, employees may schedule sick leave ahead of time (e.g., for a planned surgery).
  • Parental Leave. Many employers don't provide parental leave except as required under FMLA (unpaid). However, the demand for paid parental leave is high, and this benefit may set you apart from other companies during employee recruitment.
  • Bereavement Leave. Bereavement is typically an unpaid leave benefit, but that's up to your discretion. If you choose to provide bereavement leave, most policies allow between 2 and 5 days of time off after the death of a family member. 
  • Medical Leave. The Family and Medical Leave Act (FMLA) requires up to 12 weeks of unpaid leave for certain employees who need to care for a family member. However, you may choose to pay employees for some or all of this time if you wish.

Questions to consider when creating a paid leave program

Every employer is different, so there is no one-size-fits-all paid leave program. Instead, there are six essential questions to consider as you develop a paid leave policy that best suits your business. 

Why are you creating a paid leave program?

Consider your goal in creating a paid leave program. Are you hoping to attract and retain better employees, reward employees for a job well done, be more competitive with similar companies, or better manage employees' time off?

Your reasons may be any combination of these, but they'll help you determine the types of paid leave that best align with your goals. For instance, you may be interested in supplementing federal FMLA requirements. If so, you'll likely want to create a medical and sick leave program. 

You might also be interested in creating a paid leave program to attract new, high-quality talent. In that case, you might want to get a little more creative with your paid leave policies, offering leave that competing businesses fail to provide. 

Once you know why you're creating a paid leave program, you'll be able to determine which types of paid leave benefits best align with your goals. 

Traditional leave policies separate leave into categories, like sick leave, vacation time, and bereavement leave. While traditional leave programs may offer employees more time off, they also require employers to manage multiple complex policies and handle a more significant number of transactions.

Standard "Paid Time Off" (PTO) policies, on the other hand, provide one bank of paid leave days for all purposes. Standard PTO policies often require less administrative effort because these plans often have fewer rules than traditional leave policies. 

Will you have one uniform paid leave policy or create different policies for types of employees?

It's much easier to set up and maintain one paid leave policy, but multiple policies may better suit your company structure. For example, you might want one type of leave program for salaried employees and another for hourly employees.

Likewise, some states have laws regarding paid leave. If you have employees in multiple states, you may need different policies for compliance purposes.

A flat paid leave program includes a set number of days with equal benefits for every employee. A tiered program gives long-term employees more paid leave than new employees. For example, the average flat paid leave program offers all employees 10 to 14 days of PTO. The average tiered program gives 10 vacation days for employees after one year of service and 15 vacation days after five years of service.

A flat leave program treats everyone equally and thus requires fewer administrative resources and less tracking. On the other hand, a tiered program is better for recruitment and employee retention. However, it requires more time and effort to track.

Research shows that smaller companies can use either system with little employee pushback. However, the bigger the company, the more employees expect a tiered system that rewards them for their tenure.

Will paid leave accrue?

You have the option of providing an entire allotment of paid days at the start of a period or allowing workers to build up paid leave for time worked. If you give employees all their paid leave at the beginning of the year, they may use their paid time off and quit. Therefore, it may be beneficial to provide paid leave based on time worked.   

Paid leave accrual can be based on any period. For example, one day of paid leave might be provided for each month worked. 

When considering accrued paid leave, you'll also want to determine what happens if an employee doesn't use accrued leave in a specific period. Will you set a maximum amount of paid leave that your employees can accrue? Does accrued paid leave rollover from one year to the next?

When and how can employees take leave?

Once you decide the type of leave your company will offer and how it accrues, it's time to consider how and when your employees can use their paid time off. 

Your paid leave policy should answer the following questions: 

  • Whom should employees notify when they want to take leave? 
  • How much notice should be given before leave is taken? 
  • Will there be any blackout periods when leave is not allowed (e.g., holidays or peak season)
  • Are there any limitations on the number of paid leave days an employee can request at any time? 
  • Will unpaid, accrued leave rollover to the following year, or will employees lose their paid leave if they don't use it? 
  • If employees can roll over leave from one year to the next, will there be a limit on the number of days an employee can rollover? 

How will you track accrued and paid leave?

Tracking time accrued and used as part of your paid leave program can be time-consuming and challenging. This is why experts recommend using human resource software to make the process easier and more reliable. Calculating time accrued and used manually may work for small companies just beginning to implement a paid leave program. However, this can be a tricky process, and manual entries increase the risk of errors. If you use an outsourced payroll company, this type of tracking is probably included in their service.

Will you pay unused leave upon employee termination?

Do you plan to pay employees for unused leave if they have a balance when their employment ends? It is critical to note that 24 states have laws requiring an employer to pay unpaid accrued vacation on the employee's final paycheck. 

It is important to review the laws of your state regarding payment of accrued leave, as each state has different rules and procedures. For instance, Rhode Island only requires employers to pay terminated employees their accrued leave if they were employed for at least one year. 

Implementing a paid leave program

Once you've considered the questions above, it's time to finalize your decision. Commit your policies to writing and include them in your Employee Handbook. If you're struggling to put your ideas into writing, a business attorney or human resources professional may be able to assist with the drafting of your paid leave policy. 

When your ideas are formalized in writing, it's wise to review the new policy with existing and new employees. You can explain your paid leave policy during new hires' onboarding process or a meeting for existing employees. 

Finally, ensure your human resources department (or the person responsible for administering paid leave) is familiarized with the policy. If you decide to use software to track paid leave, train employees on how to use the software so that everyone can successfully make use of your new paid leave program. 

We Can Help

The purpose of this article is to provide an overview of considerations when developing an employee paid leave program and is not a substitute for speaking with one of our expert advisors. Please contact our office if you would like to discuss your company's paid leave program or need to develop a new program.

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