Authors: James Albright, Thomas Rylko
The demand for family leave has grown more insistent. And with paid time off (PTO) becoming increasingly important to providing an exceptional employee experience, it's game on for employers that recognize competing for talent requires rethinking their policies.
Many employers are taking a strategic, longer-term approach that focuses more intently on aligning leave and PTO decisions with the future direction of HR. The idea is to advance organizational goals by strengthening time-off benefits, which are core to employee attraction, wellbeing and retention. When reimagined, these benefits and their administration can also deliver a better return on investment.
In 2021, 29% of employers offer paid bonding leave compared to 25% a year earlier, most commonly more than 8 weeks (31%) followed by 1–2 weeks (27%).1 Paid leave policies that limit child bonding to two weeks, at most, could imply a narrow view about the scope of parental obligations to both current and potential employees.
When women left the workforce to care for relatives in 2020 at a troubling rate, their departure may have put their organization at risk of increased competition for talent. Considering that the support level for family leave partly determines whether turnover targets are hit or missed, the time may be right to extend the reach of these policies.
Greater leverage of PTO as an attraction and retention tool
More than 4 in 10 employers (43%) enhanced leaves to meet recruitment and retention objectives in 2021.2 When taking a more expansive and holistic approach to these benefits, it helps to keep in mind that flexible work arrangements increasingly matter to employees.
As the transition to hybrid or remote work environments continues, HR will need to direct more time and attention to disability claims and family leaves if necessary. Laws and other requirements for disability and sick pay vary at both the state and local levels. What's more, some may apply even when just one employee primarily works within a designated area. To avoid financial penalties for an absence of mandated active coverage, it's important to document each employee's main work location and keep the information current.
Benchmarking can support better PTO policies and practices, including the strategic escalation of allowances during employees' early years of service. In 2021, 26% of employers increase employee PTO days after 3 years of service, while 67% wait until the 5-year mark.3 When employees accumulate days either annually or at regular intervals during their first 5 years, this recurring upgrade of total rewards more strongly promotes retention.
Simpler approaches to vacation, sick days and holidays
Some employers are retreating from separately allocating and tabulating vacation and sick days, and moving toward a combined bank of time off. Less sick time on the books encourages fewer unscheduled absences, and compliance becomes simpler because related regulations vary across geographies. Policies structured to accommodate a streamlined approach should also account for any new or changing local requirements for paid sick days.
Organizations are also exploring creative PTO options such as allowing an employee to sell unused time for cash (19%) or buy additional days with pay (3%). Another popular alternative is donating days to other employees (26%).3
Designating holidays can be a difficult process, requiring careful consideration to avoid contradicting diversity, equity and inclusion (DEI) goals. As an alternative, employers are considering floating holidays that give employees the discretion to choose their days off based on personal, cultural or religious preferences. Specifying time periods for these holidays and setting a policy for unused benefits may help in addressing state wage and hour law considerations.4
Dispelling common myths about unlimited PTO
Unlimited PTO can serve as a cost-saving differentiator when competing for talent. It eliminates the employee's inclination to use all their allotted days, and the employer's need to cash out any balance remaining within the PTO period, or upon retirement.
A related advantage is reduced administration and reporting requirements. But most significant of all, unlimited PTO enhances flexibility for a better employee experience.
The transition to this newer PTO model is incrementally increasing in certain markets, yet concerns about misuse continue to slow adoption. As more employers realize that unlimited PTO does not mean unmanaged PTO, the pace of a growing interest will likely pick up.
Generally, terms embedded within these policies detail discretionary approvals, particularly for time periods greater than two weeks. They also carefully outline the use of PTO, distinguishing it from personal leaves of absence and disability policies. Evaluating unlimited PTO provides a starting point for most organizations, especially when focusing on leadership and exempt job levels.
Avoiding financial and wellbeing consequences of unused PTO
The return to a stronger U.S. economy, following the beginnings of a recovery in pandemic-suppressed sectors, has compromised the fulfillment of PTO needs. With the renewed push toward driving revenue, more employees hesitate to ask for time off and more managers find it difficult to approve their requests, especially at companies that sell products and services in high demand. A key contributor to this dilemma is often a reduced capacity to cover workload during absences.
Other factors also interfered with PTO use. Ironically, though scheduling flexibility improved for many employees with the introduction of hybrid and remote work arrangements, some put their vacation plans on hold because of the pandemic. This situation led to a higher conversion of PTO to cash, allowing employers to remove some of their obligations from the balance sheet.
The net result at year-end was an overload of obligations on the books, with 35% of employers reporting increases in unused PTO.3 Balance sheets carried an excess partly because COVID-19 disrupted normal usage patterns. Another factor is that employers generally offer more time off, though in certain cases the amounts surpass reasonable levels for effectively running the business.
Some employers are making good on a loss for employees with solutions such as temporarily expanding the carryover window or making one-time 401(k) contributions. Others may want to limit maximum PTO balances or allow no more than 1–2 week accruals — but these choices require adequate staffing prior to implementation so managers can approve requested time off. Going forward, greater alignment of PTO policies with HR strategies is likely.
Passing the pandemic stress test with a healthier approach to leaves and PTO
Slow and uneven relief from pandemic uncertainties underscores the need for time away from work and other obligations. Time off for self-care and to care for others is still a lifeline for many — an essential coping mechanism for maintaining psychological as well as physiological balance.
Notably, 68% of leaders agree they're concerned about the impact of stress and burnout on their organization, and for good reason.3 Wellbeing tends to suffer when employees don't take time to rest and rejuvenate, potentially leading to burnout.
A fundamental step in minimizing this behavior is assessing how closely PTO policies align with the culture and the desired employee experience. To prevent mental and emotional wear and tear from overwork, it's also important for policy language to clearly encourage the use of vacation time.
Strategic solutions for strengthening leaves and PTO reduce the administrative and financial challenges of time off for employers, while improving employee wellbeing and productivity. When managing these core benefits, staying on top of state and local requirements is also critical to success.
Time off, paid or unpaid, is an important priority to revisit when rethinking the employee value proposition. Decisions will likely have far-reaching implications for the ability to meet attraction and retention goals — including DEI — that drive long-term organizational growth.
This article is part of the 2021 Q4 Gallagher Better WorksSM Insights Report: Building a Better Employee Experience that explores longer-term strategies centered on paid time off, mental health resources and hybrid work environments, as well as trending approaches for more immediate challenges like vaccination mandates and incentives.
1Gallagher, "Workforce Trends Report Series: Physical & Emotional Wellbeing," July 2021
2Gallagher, "Workforce Trends Report Series: People & Organizational Wellbeing Strategy," June 2021
3Gallagher, "Workforce Trends Pulse Survey #3," October 2021
4SHRM, "Burned-Out Workers and Time Off—Do Employment Laws Allow Flexibility?," August 2021