What Is Paid Time Off (PTO) & How to Create PTO Policy

Paid time off allows employees to relax and recharge without stressing about their paychecks. It’s a fundamental part of maintaining the well-being and productivity of your workforce.

A Forbes survey has found that employees consider mandatory paid time off as one of the top 5 benefits they really want.

But managing paid time off can be tricky and complicated. In this guide, you’ll learn what paid time off (PTO) is, different types of PTO, and how to create a PTO policy for your company.

What is paid time off (PTO)?

Paid time off, or PTO, is time employees are away from work and still get paid. It’s often measured in hours or days and kept in a PTO bank, and employees can use their PTO for any purpose.

While a traditional leave plan categorizes leaves into vacation time, sick days, personal days, holidays, and more, PTO is often uncategorized. Employees have more freedom using their time off and employers can manage time off more easily.

Some businesses may grant each employee a PTO bank at the beginning of employment or a time period. Others let employees accrue PTO over time.

PTO policies vary depending on the industry, the company’s size, the local laws, and how each company sets its PTO policy.

How does PTO work?

Companies that use a PTO policy often grant each employee a pool of hours or days off at the beginning of employment, or before/after a certain time period.

Depending on the policy of each company, the number of leaves granted and how employees use PTO differ. Employees can earn PTO based on how long they’ve worked for the company. They can accrue PTO, carry unused PTO from one year to the next, or cash out unused PTO.

Laws in different states vary in how PTO can be accumulated or expired, and how companies must pay for unused PTO when employees quit.

Types of PTO policies

Lump sum (or Annual allotment)

Lump sum, or annual allotment, is when employees are given a certain number of days off each year. These days can either expire if employees don’t use them, or they can roll over to the next year.

Usually, employees get the allotment on January 1st or on their first day of work. The number of days they get may be the same for everyone or could be more based on years of service.

PTO accrual (or Accrued time off)

PTO accrual means employees earn or accumulate paid time off over a period of time. Employees can accrue their PTO hourly, weekly, bi-weekly, monthly, quarterly, annually, or every pay period.

For example, let’s say a worker gets 1 hour of PTO for every 10 hours they work. If they work 40 hours a week, they would earn 4 hours of PTO. After a month of working, they’d have 16 hours of PTO they can use when they want to take a break.

Accrued PTO varies depending on how long an employee has worked at an organization. The longer they’ve worked there, the more PTO they can get each year. Managers or business owners will need to define the exact numbers in their PTO policy.

Unlimited PTO

Unlimited PTO means employees can take time off whenever they want, without a fixed number of days. They use their days off at their own discretion.

In some companies, the employer/manager may evaluate the situation before approving the time off. They may keep track of how many hours or days an employee takes off to decide if it’s ok for someone to be away from work. That’s why many people think “discretionary” is a better and less misleading name for this policy.

Research shows that people who work in companies with unlimited PTO actually take fewer vacation days on average compared to those with regular PTO.

Employees might feel pressured by their colleagues and worry they’ll seem less committed if they take time off. They’re also anxious about not knowing how much time off is okay to take.

Although employees taking less time off seems like a good thing, proper rest is important for staying mentally and physically healthy.

If you use an unlimited PTO program, you may want to look at workplace culture to make sure employees don’t feel anxious about taking time off.

Also, some states may have laws regarding compensation for unused PTO, which can make payouts more complicated. Unlimited PTO may not mean you’re free to not pay for vacation time. Consult with legal experts to make sure you’re compliant.

Pros of unlimited PTO

• Unlimited PTO increases employee morale and happiness, which contributes to better productivity and performance.
• Your business becomes attractive to job seekers and current employees, which can be helpful in recruitment and retention.
• You may not have to pay for unused PTO if you have a well-written policy.

Cons of unlimited PTO

• Trust is vital when implementing an unlimited PTO policy. And building trust takes lots of hard work.

• Scheduling issues arise when multiple employees take time off at the same time.
• Employees may either take too much time off or take less time off. They can abuse the policy, or feel uncomfortable taking time off when coworkers don’t.
• You can’t use extra vacation time as a perk anymore.
• Unused PTO payouts can be complicated.

Should companies give unlimited PTO to employees?

• Unlimited PTO suits small teams, businesses, and companies, where it’s easier to build trust, transparency, and culture. Hourly workers don’t benefit from unlimited PTO at all.
• To avoid legal problems, you need to establish a well-written PTO policy, including strict rules and limits, and communicate them clearly to employees.

PTO buying & PTO donation

Employees can buy and sell PTO through a cafeteria plan (called “elective” PTO). But “elective” PTO can’t be rolled over to the next year. Employees have to use them up before the year ends.

Some companies allow coworkers to donate PTO to those in need, for instance, someone suffering from an illness or caring for a sick family member.

PTO policy vs Traditional leave policy

• Traditional leave policy often grants employees 30 paid days off every year, divided into specific categories: paid vacation, sick days, personal days, paid holidays, etc. Tracking each type of leave helps employers identify absenteeism trends and the underlying reasons. But this tracking process can be tiresome and complicated.

• Most PTO policies grant employees a pool of paid leaves. Leaves aren’t categorized, so employees can use them for whatever purpose they want. However, calculating PTO payouts when someone resigns or preventing PTO hoards can be complicated.

Common types of leaves

Although leaves aren’t categorized in PTO policies, in reality, some businesses track types of leaves for compliance or compensation. Below are some common types of leaves that businesses track along with their PTO policies.

Holidays

These are national holidays or special occasions that everyone takes off at the same time. They’re already marked as days off for everyone, so employees don’t have to request time off.

Floating holidays

Unlike regular holidays that everyone takes off, with floating holidays, employees get to decide if they want to take the day off or keep it in their pocket for later. If employees take it off, they get paid for that day. If they save it, they can use it as extra time off in the future.

Paid sick leave

Employees can take time off due to illness or health issues. It could be for a bad cold, a doctor’s appointment, or a day to recover.

Paid family leave

Employees take paid family leave when they need to care for an ill family member, a newborn, or when they participate in a qualifying event due to a family member’s military deployment. Family leave used for caring for a newborn is parental leave. Laws regarding family medical leave vary from state to state.

Paid bereavement leave

Bereavement leave is the time off employees get when someone they’re close to passes away. It lets people plan for the funeral, grieve, and take care of post-death arrangements.

Employees don’t often get paid for bereavement leave, but some companies allow employees to take 2-5 unpaid days off. After that, employees will have to use their PTO bank if they want more time off.

Jury duty

Jury duty is when you serve as a part of a jury in a court case. Depending on the company, employees may get paid or unpaid time off for this.

Sabbatical leave

A sabbatical is a period of time in which an employee leaves work and focuses on their personal purposes. This period of time can range from 3 months to 1 year.

Sabbatical leaves are often granted to employees who have worked at the company for a long time. Employees can be paid full salary or a percentage of the salary, and don’t receive any benefits.

Pros of a PTO policy

Increases engagement and retention

A well-planned PTO policy shows how caring the company is for employees. Staff can feel free to take breaks and recharge, then come back to work feeling refreshed. With adequate time off and freedom, employee engagement and retention are more likely to improve.

Builds autonomy and trust

A PTO policy gives employees the freedom to use their time off without unnecessary control and tracking. Employees don’t have to prove anything to get their days off. They don’t have to make excuses that they’re sick to get one more day off after a vacation.

Reduces admin work

PTO reduces admin work because managers, business owners, and HRs don’t have to track each type of leave.

If you have an effective PTO program with clear procedures, the admin work can actually become much lighter. For example, if you have a system where all time-off requests are in one place, you can quickly approve them and make plans ahead of time.

Attracts potential candidates

Job seekers today prioritize flexibility and work-life balance when considering what company to work for. A well-considered PTO policy can be a great benefit that attracts talents.

Reduces absenteeism

According to a survey by the Alexander Hamilton Institute, 54% of organizations that started a PTO program said unscheduled absences dropped by up to 10%.

There’s just more openness to the fact that people need flexibility, and when they have that flexibility, they are more engaged, more productive and more likely to stay with the organization.

Mikaela Kiner, founder and CEO of Uniquely HR

Cons of a PTO policy

Employees hoard PTO

Because sick days and vacation days aren’t separated, some employees save up their days off by coming to work when they’re not feeling well. This can make them less productive that day and also increase the chance of spreading infections.

Employers pay more for unused PTO

Some states have laws regarding the compensation of unused PTO when employees leave their jobs. You need to be clear about how you pay out unused PTO in your policy.

Not appealing to some candidates

Depending on each business, candidates may have less paid time off in their PTO bank than they do with a traditional leave plan. This can make the position you’re trying to fill less attractive.

How to create a PTO policy

If you’ve decided that a PTO program suits your company, follow these steps to create a PTO policy.

1. Determine how much time off employees can take

How much PTO does an employee get each year? The number should be balanced. It should be enough so employees can have the rest they need. If it’s too much, it may affect your business productivity.

Businesses often offer PTO to full-time employees. Some offer PTO to part-time employees to stand out in the job market and attract potential workers.

2. Determine if it’s lump sum, accrual, or unlimited

Lump sum means employees are given all PTO at the beginning of their employment or a period of time. Decide when they’re gonna receive this. Does it start on January 1st or on their first work day?

Accrual means employees earn and accumulate PTO over a period of time. Decide if PTO accrual will be done per pay period, hourly, weekly, monthly, quarterly, every 6 months, or yearly.

Unlimited means there are no limits to how much time off they can take. Many people can request time off at once, or someone always asks for time off. Set rules to avoid these situations.

3. Determine if it’s rollover, compensation, or “use it or lose it”

When employees don’t use up their PTO, they can:

• Rollover the unused PTO to the next year. To avoid employees building up too much PTO, many employers limit the number of days employees can roll over each year.
• Cash out unused PTO. Some states require companies to compensate for unused PTO. Employees who quit may also receive unused PTO payouts.
• Use it or lose it. Employees have to use up all of their PTO before the year ends. This policy sounds less flexible, but it encourages employees to take time off and helps employers avoid hefty PTO payouts.

4. Decide how you’ll track and approve PTO

To track PTO, you’ll need a system to manage accrual rates, caps, payouts, limits, etc. Besides, asking these questions when finalizing your PTO policy will be necessary:

• How can workers submit time-off requests?
• How will you manage time-off requests and approve them?
• How will you handle unused PTO?
• What if an employee uses up all of their PTO?

Tip: If you’re using a time off management software like Camelo, it’s easy to submit and review the time off requests.

5. Check if your PTO policy is compliant

To avoid legal trouble, make sure your PTO policy abides by the laws. You’ll need to do some research on laws regarding paid leaves, requirements for tracking leaves, rollover limitations, etc. If you’re not sure, consult a professional.

After crafting your PTO policy, you can put it in your company handbook or training materials to make sure it’s accessible to everyone in your company.

PTO laws: Is your PTO policy compliant?

Think about these key questions when you’re looking at PTO laws in your state:

Which pay rate do I use when calculating PTO payout?

Different locations have different laws. In some places, you use the rate employees were paid when they left the job. In other places, you use the rate they were paid when they accrued the PTO. To get it right and pay the correct amount, find out which rate you need to use for the PTO payout.

How much unused PTO do I need to pay?

When someone leaves their job, your state laws may require you to pay out the full amount, part of it, or none of it.

Which PTO law applies to remote workers in another state?

If your workers live in a different state from where your company is based, you might wonder which state’s rules you follow for paying out unused PTO when someone leaves the job.

Here’s the deal: You only need to pay out PTO if the worker lives in a state that requires it.

For example, if you have an employee who lives in Illinois but works for a company headquartered in Alabama. Illinois says companies need to pay out unused PTO, but Alabama doesn’t have that rule. Since the employee lives in Illinois, the company would have to follow Illinois’s laws and pay them for their unused PTO when they leave the job.

FAQs about paid time off

What’s the purpose of PTO?

• PTO allows employees to rest and stop them from feeling too tired or stressed. This makes them feel happier and work better.
• Companies with a good PTO policy are attractive to current employees and potential candidates, which helps with hiring and keeping great workers.

Is offering PTO mandatory?

In the United States, most employers aren’t required by the federal government to give paid time off (PTO).

But there are two cases where they do have to: companies working on government contracts and those tied to acts like McNamara O’Hara Service Contract Act (SCA) or Davis-Bacon and Related Acts (DBRA). If the standard for fringe benefits in an area requires companies to offer PTO, then PTO is a must.

If a company chooses to offer paid time off, they have to follow the rules of the U.S. Equal Employment Opportunity Commission (EEOC). The EEOC states that the company’s PTO policy must not discriminate based on race, age, religion, color, national origin, gender identity, sexual orientation, pregnancy, disability, or genetic information.

Employers can still have different PTO rules based on tenure, part-time vs full-time, etc.

Do I have to pay for unused PTO when someone quits?

There are no federal laws that require companies to pay unused PTO when an employee quits. But if the company promised to do that in a work contract, or the state laws require companies to do so, then companies need to pay out the unused PTO.

Is “personal time off” the same as “paid time off”?

Personal time off is just a part of paid time off. Paid time off usually includes both sick days and personal time off. Some companies even add more types of time off to their PTO policy, like time off for birthday, pet bereavement, volunteering, appointments, and more.

Can a personal day be declined?

If employees are sick or have health issues, the employers can’t say no if they need a day off. It’s the law. But things can be a bit different if it’s a personal day.

Legally, the employer can decline to give a personal day, but they must have a good reason for it. For example, someone else already asked for that day off, or if the employee already said they’d work on that day.

If the employer and the employee have signed a contract stating that the employee can take personal days, the employee can argue if the boss says “no”.

Can a boss ask for the reason for taking a personal day?

Legally, employees don’t have to explain what they do on their personal days. The boss may ask what someone is up to on their day off, but employees don’t have to tell if they don’t want to. Also, legally, employees don’t have to show doctor’s notes if they take sick days.

What is the difference between PTO and FTO?

PTO stands for Paid Time Off, the time employees get paid when they’re not at work. Generally, employees get a specific number of hours or days they can take off.

FTO stands for Flexible Time Off. There’s no limit to how many hours or days to take time off. Employees have the freedom to decide when to take time off, as long as they get their work done.

FTO is less restrictive, but you need to set strict goals and processes to prevent policy abuse—employees taking excessive time off.

Can companies stop PTO on certain days?

Yes, those days are called “blackout periods”. The blackout usually happens when companies expect lots of work or special events, like big holiday sales or new product launches. This is pretty common in retail or customer service industries.

Is a PTO audit necessary?

A PTO audit is reviewing your company’s PTO policies so you can make necessary adjustments
and prevent potential risks.

An audit at the right time can save you from financial loss. For example, imagine all workers used their time off at once. The company might lose a lot of work. Or if the company promised to pay money for unused vacation days, they would need to make sure they can actually do that. And if some people got laid off, the company would need to see if they still need to pay out PTO money.

Manage PTO better with the right tool

Understanding what is paid time off and how to create a PTO policy is just the first step. Take some time to plan and create a PTO program that works for your business.

Also, the right tool can help you implement a PTO policy more effectively. With Camelo, you can manage all employees’ time off in one place, and get employee attendance data for more insights. Sign up for a free account today.