PTO is expensive.
PTO liability has grown to over $1 trillion sitting on the books of both public and private companies and organizations (about $7,600 per full-time worker in the US) per year. As workers are taking fewer days off (only about 40 percent of American workers use all their PTO annually, resulting in over 765 million unused vacation days).
Not only does this mean employees are taking fewer vacations, but companies are also experiencing huge balance sheet liabilities. Hence, finance departments are tasked with reducing PTO liability before year-over-year salary increases and promotions occur.
Enter: PTO conversion programs. Companies are turning to using this non-traditional benefit to reduce balance sheet liability while addressing their employees’ most pressing benefits needs.
The hidden cost of PTO liability
As employees accrue PTO hours, the employer becomes liable for those hours. With many policies, companies must offer PTO and pay employees for unused days off. PTO liability represents a financial obligation that the company owes to its employees. If this liability grows too large, it can have significant financial implications, affecting the company’s balance sheet and overall financial health.
As a result, accrued PTO becomes an unpredictable liability for companies, negatively impacting cash flow, weighing down balance sheets, and having a negative effect on credit. Not only that, but this liability also increases with time. As employees are promoted or receive salary increases, their associated PTO cost increases too. The longer an employee is tenured, their PTO costs skyrocket as accrued PTO adds up in addition to their pay increases.
A better PTO policy for employees
Most employees don’t find a “use it or lose it” PTO policy to be a helpful benefit. Employees have many unique lifestyle needs and challenges, so taking time away from the office might not suit them now. Perhaps they have an emergency expense where the value associated with their time off might be better spent. Essentially, they would have to forfeit that part of their earned compensation at the end of the year if they can’t use their accrued PTO.
But there is a more flexible solution that organizations can use. Employers can implement a PTO conversion solution that allows employees to exchange their unused time off to financial and social wellness benefits to reduce the balance sheet liability that PTO causes while also providing a flexible benefit for employees.
Our 2021 survey found that 83% of employees would be interested in convertible benefits. This aligns with the 2021 EBRI Workplace Wellness Study results, which found that 25% of employees said a PTO conversion plan would be a valuable improvement to their employer's benefits program.
The power of a PTO conversion program
PTO conversion programs allow companies to convert vacation time to cash, 401(k) or HSA contributions, student loan payments, and charitable contributions (including donating days to other employees).
As an employee-paid benefit, companies can reduce their PTO liability and pay it at a discounted rate (per IRS requirements) without incurring ongoing expenses. Reducing that liability before promotions and year-over-year salary increases kick in reduces the PTO payout when employees are ultimately paid out at termination. This offers a win for the finance department while providing unprecedented benefits and flexibility for employees.
Rather than waiting until employees leave a company to cash out their unused PTO, they can get value from this already-accounted-for benefit while they're still there by converting it to benefits they can use in real-time. When employees don't use their hard-earned time—whether taking it off or converting it—they leave hard-earned money on the table.
When employees can use their PTO instead of losing it or granting a payout, it reduces the liability of PTO on the balance sheet. Additionally, it allows employers to enhance their total rewards offering without introducing additional costs or benefits.
Let's look at this in practice:
If an employee has 32 hours of unused PTO, and each hour equates to $50, then the PTO liability for that one employee is $1,600. Multiply that by a company of 500 employees, and it results in a total PTO liability of $800,000, a considerable expense to the employer.
Let’s say that same employee exchanged 15 hours towards their 401(k). Instead of $1,600 in PTO liability, that employee now carries a liability of $850. If all 500 employees did this, the total liability for the company would be $425,000. Now let’s say the organization was going to do a cost-of-living adjustment across the organization and everyone’s salary was set to increase by 4%.
Without any PTO conversions, the PTO liability would have increased by $32,000 ($800,000 liability * 4%). But if each employee converts just 15 hours, the PTO liability only increases by $17,000 ($425,000 liability * 4%), effectively saving the company $15,000.
Flexible benefits with PTO Exchange
Each year, finance departments are tasked with finding additional savings and solutions to reduce liabilities. PTO Exchange can help address both those concerns with a flexible benefits platform that allows employers to enhance their total rewards offering without introducing additional costs.
Grab our ebook, “The Hidden Cost of PTO (and the Hidden Savings You Might Find)” to learn how PTO might be costing your company more money than you think or request a demo of our platform to see it in action.
Published on Aug 15, 2024 by Sam Lieberman
