Is Unlimited PTO Really Good for Payroll?

Unlimited paid time off (PTO) is a concept that is beginning to catch on with some of the world biggest and most respected companies. Netflix and Sir Richard Branson’s Virgin are just two examples of companies with unlimited PTO policies. There are very valid reasons for adopting these policies, yet offering unlimited PTO does come with unique challenges. The one question any company needs to ask itself prior to implementing unlimited PTO is whether it is good for payroll.

The question of unlimited PTO and payroll is dual-sided. In other words, companies must look at how adopting unlimited PTO policies would affect payroll processing on a weekly, monthly and annual basis. They also need to look at the financial side as well. Will giving employees unlimited PTO result in greater payroll expenses due to lost productivity?

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Streamlining Payroll Processing

Payroll processing has always been a time-consuming endeavor for businesses of all sizes. But as government regulations and taxes have become more complex, the amount of effort needed to competently and accurately process payroll has increased. Furthermore, things are unlikely to change. Payroll will be made more complicated with each passing year and every new regulation added to the books. Streamlining is, therefore, an important part of payroll processing.

Adopting an unlimited PTO policy can go a long way toward a streamlining goal. To understand how and why just consider what the average company without unlimited PTO goes through to accommodate things such as vacation time and sick days.

Calculating accrual for PTO involves keeping track of what every employee is entitled to based on his or her service. Then companies must track every instance in which PTO is used. That means tracking sick days, personal days and vacation for the purposes of comparing what is actually used against employee entitlements.

Adopting an unlimited PTO policy instantly and entirely eliminates the need for accrual calculations. There is never a need to track because there are no limits on employees. Unlimited PTO gets rid of one of the most time-consuming aspects of payroll processing.

The Risk of Higher Payroll Expenses

The other side of the coin is the total cost of payroll. It may or may not be adversely affected by an unlimited PTO policy. But let’s say that it is for a given company. Here’s how it could be a problem:

Giving employees unlimited PTO may encourage them to take more time than they otherwise would. This can result in lower productivity and ultimately require the company to bring on more workers to make up for losses. Payroll costs ultimately increase as a natural consequence of recruiting, hiring, training and paying workers.

The key to avoiding higher payroll expenses because of unlimited PTO is to make expectations very clear. In implementing a policy, management should establish clear boundaries determined mainly by output. In other words, employees have unlimited PTO as long as they get their work done in the allotted amount of time. If one worker can get a week’s worth of tasks done in four days, he or she can take the fifth day off. Another employee who struggles to get everything done should be a bit more circumspect about his or her use of PTO.

So, is unlimited PTO good for payroll? It is if policies are implemented properly and controlled effectively. Unlimited PTO frees up a lot of time in the payroll processing department and motivates employees to be more productive in order to create a better work-life balance. Unlimited PTO is something every company should at least look at.

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