How to Develop, Communicate and Implement an Effective Earned Time Off Program

April 30, 2013

Historically, employers have offered paid time off to employees for vacation, illness, personal time, holidays and other reasons. For employee recruitment, retention and satisfaction, time off has become an increasingly important aspect of an employer’s benefit package. A growing trend has developed where employers are moving from granting paid time off based on categories and circumstances, to a blanket Earned Time Off (ETO) program. An ETO program combines the majority of the various types of paid time off into one main category of time available for the employees to use for vacation, personal use, illness and other time away from work.

A single bank of ETO allows the employee to have more ownership, responsibility and flexibility in managing his/her time off. Employees who use less time for illness and similar unplanned absences consequently have more time for planned time off such as vacations. For example, a parent may be more encouraged to make alternative arrangements for a sick child and preserve an ETO day for vacation rather than take an unplanned absence to stay home with the child. Unplanned absences are more disruptive and problematic for healthcare operations than when time is scheduled to be off. In some traditional plans, dishonesty can occur as employees take unused sick time in attempts to maximize their benefit time. But with ETO the employer does not have to excessively monitor the category for the use of the time off as with sick versus vacation time, thus simplifying program administration. ETO policies can be ideal for flexible and part-time positions, as it can be easily pro-rated for these employees. With appropriate development and implementation, an ETO program can be a winning strategy for both employees and employers.

ETO programs are adaptable to virtually every size of healthcare entity. In tailoring a program, several key elements must be addressed to make it effective. Among them are that consideration must be given to the current time off program, employee and family illnesses, holidays and length of employment.

Management should analyze the current time off program for its strengths and weaknesses. Evaluate the total number of days provided, employee perceptions of the current program, management concerns experienced by the employer. In addition, management should specify the goals for the revised program such as simplification, reduced absenteeism and more flexible benefits. As early as feasible, employees should be asked to participate in the analysis and provide feedback to foster additional ideas and employee buy-in. Another important element is that time should be earned or accrued throughout the benefit year instead of as a lump sum deposit of time at the year’s beginning.

One of the first transitional details to address is the types of leave that will be covered in the ETO program. In its simplest form, ETO allotments will cover the time usually provided for vacation, sick and personal time. More comprehensive programs can include holidays and bereavement leave as well as the traditional vacation, sick and personal time.

After defining the types of leave to be addressed with the ETO, assigning a value or number of days is the next critical step. For example, a group practice typically offers ten days of vacation, six days of sick leave and one personal day for a total of 17 days of paid time off. This group may propose a total of 14 days of ETO. Employees gain control and flexibility to use the 14 days as needed, whereas the traditional program only allowed them to control the use of the vacation and personal time. Employers reduce the number of days paid per employee, discourage unplanned absences and empower the employees in the management of their time.


Based on the size of the group, special consideration should be given to time off when employees encounter extended illnesses. When they are in place, short- term disability policies and the Family Medical Leave Act provide certain benefits to employees when they are faced with devastating illnesses. However, many small groups do not have these benefits and desire to support employees who have extended situations such as maternity leave, post-operative recovery or serious family illnesses. If the amount of ETO is generous, one option is to allow employees to “bank” unused earned time off to create a separate category for extended illness. If the amount of ETO days available to employees is more limited, a separate bank for extended illness can be set up. A separate “extended illness bank” generally accrues six days per year. With either method, it is important that the bank have definitive rules for use. For example, time from the “extended illness bank” can only be used after three or five days of the current ETO is used for the same illness. If the employee defers current ETO into the extended illness bank, the extended illness bank is generally paid, at a full or discounted rate, upon termination from employment. When the employer gives a separate extended illness bank, unused accruals are commonly forfeited at termination. Maximum amounts in the extended illness bank should be designated in conjunction with rules for use.


Another common inclusion into the ETO pool is the allotment for holidays. Groups who require staffing for traditional holidays should add the holiday time into the ETO to equalize the available time off for employees who work holidays and those who take holidays off. If the employer does not open for holidays, holidays can be designated and observed as a separate paid time off to simplify the administration of ETO and scheduling.


Allocations of ETO should be designed to incrementally increase with length of employment. With a lower number of ETO days initially, the increase in ETO can occur more quickly with length of service. Using the earlier example above, 14 days ETO may be accrued during the first year of employment and then increased to 15 days for the second of service. The newer employees receive an incentive and the employer continues to realize an overall lower number of benefit days.


There are other factors to consider in developing an ETO program. The decisions are dependent upon the group’s experience, culture, leadership and goals. An important component is whether an employee can carryover accrued, but unused ETO beyond the employment anniversary date. If so, is there a maximum carryover amount? If not, do you pay an employee for the unused ETO? At what rate do you pay an employee for unused ETO? Another administration issue is whether employees can borrow against future accruals and have a negative ETO balance. If so, in what circumstances and how much can you borrow? Planning must also include determinations for how ETO is managed at an employee’s termination. The employer may differentiate between payment, in the situation of a resignation, and a forfeiture when the termination is by the employer.

There are also several approaches a group can use for accrual of ETO. Although the accrual total may be fixed, it can be allocated on either a per payroll or per hour worked factor. Using the previous 14 day ETO example, a full-time employee would accrue 4.308 hours for each bi-weekly payroll. This is computed using 14 days at 8 hours per day divided by 26 pay periods.


As the ETO program is developed, it is critical to test the new program against common situations that occur with the current paid time off program. How many employees are using the maximum number of days allowed? How many sick days did employees use? How many employees have unused time left at the end of the year? Determine how employees will be impacted by the ETO plan and anticipate their perception – gain or loss. Review unusual circumstances related to paid time off that have occurred to determine how they would be managed under the ETO plan, again assessing employee reaction.

Such a comparison against the existing plan can suggest modifications that may be needed, transition allowances that must be made, or obstacles to be overcome. For example, if there is unused vacation, sick or personal time at the ETO conversion date, it is not unreasonable for that time to become a beginning balance for the employee’s ETO plan.  Otherwise, the employee feels cheated out of time not used, affecting employee morale and threatening the transition’s success.

Communication becomes key to successful implementation, as is the timing of the introduction of the new ETO program. Other important implementation considerations include:

  • Plan for a logical start time, such as a new calendar year, and allow employees sufficient time – prior to implementation – to understand the new system.
  • Begin with written policies and procedures for the new ETO program.Written guidelines should be specific and detailed.
  • Hold staff meetings to educate employees with clear explanations of the goals and benefits of the new ETO system. Try to anticipate any aspects that might be perceived by the employees as negatives and address the concerns directly.
  • Demonstrate areas where the employer has compromised to promote a smooth transition.
  • Discuss with employees specific examples of how ETO is used.
  • Provide employees with the written materials and handouts to clarify the plan and address their questions.
  • If practicable, consider meeting with each employee individually to review the current time off plan, the transition to the new ETO program, and address the employee’s personal circumstances.

Ongoing communication is important for ongoing success and administration. It is helpful to include an ETO report of the accrued, used and balance with each employee’s payroll. If applicable, extended illness bank amounts should be included with the payroll reports. An annual evaluation of the employee’s use of ETO can be instrumental to discuss time management and is necessary if the employee must make accrual elections to carryover or be paid for unused time. As issues develop or modifications are made to the policies and procedures of the ETO plan, communicate these changes with the employees.

ETO is a prevalent benefit program in healthcare settings due to its simplified administration, flexibility to accommodate healthcare positions and ability to motivate and empower employees’ management of time. These ETO benefits are available for small and large practices alike, if addressed with detailed planning and communication.

Reed Tinsley, CPA is a Houston-based CPA, Certified Valuation Analyst, and Certified Healthcare Business Consultant. He works closely with physicians, medical groups, and other healthcare entities with managed care contracting issues, operational and financial management, strategic planning, and growth strategies. His entire practice is concentrated in the health care industry. Please visit

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