Paid Time Off Policy Best Practices

There’s a lot to consider when crafting a new vacation policy. Here are some paid time off policy best practices to get you started.

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While a paid time off policy (PTO) isn’t required by law under the Fair Labor Standards Act  (FLSA), it is a necessary program for employers who want to attract and keep high-level talent. In fact, nearly 90 percent of organizations say that a paid time off program is essential to stay competitive in the labor market, regardless of the industry. Here are some paid time off policy best practices to help you choose the right one for your employees.

Types of PTO Policies

Here some of the most common options, and what you should consider for each one.


Flexible PTO presents employees with a lump sum of PTO days to use however they choose (with management approval). Whether it’s for sickness, a vacation, or a field trip with a child, employees have the freedom to decide how to spend their bank of PTO days.

This is very beneficial for working parents who need to take time off for their children’s activities, or for those who wish to celebrate non-traditional holidays. While this policy is simple to administer, HR managers will still need to track caps, limits, payouts, and accrual rates, as they would for a traditional plan.


This practice is rapidly gaining popularity (especially with tech startups). The unlimited PTO policy is a relatively new concept that gives employees as much paid time off as they need or want with prior manager approval.

Unlimited time off is an alluring option for many potential employees and typically avoids a payout for unused time in the event the employee leaves. On the downside, unlimited PTO can either create a culture of too much time taken or the opposite, in which employees are afraid they are taking too much compared to peers and end up taking less PTO.


Earned, or accrued time off is a policy which distributes paid time off based on how long an employee has worked for the company. While a certain number of days or hours are accrued each month, employers may also choose to give an extra allotment of PTO based on milestones with the company.

This option may entice employees to stay with a company for a longer period of time but comes with the downside of being more difficult for HR managers to track. Employers should consider if they will pay out unused time and if it will expire or roll over at the end of each year.


Traditional PTO offers separate PTO time for sick, vacation, and personal days. Often based on tenure, this policy makes it attractive for employees to stay with a company. On the downside, reporting may be difficult if employees use days outside of their intended designation.

Check Federal and State Laws

One of the most important paid time off policy best practices is understanding what you must offer by law. Federal law doesn’t require employers to pay out unused vacation time or to even offer a paid time off policy in the first place. However, state laws vary widely and you should always check them before choosing a PTO policy.

What do Your Employees Want?

Don’t feel that you need to make all decisions in a vacuum. As you think about paid time off policy best practices, ask your employees for input. Is there a particular policy that will best serve their interests as well as those of the company? By openly communicating with employees and educating them about the chosen policy, you will position your company to attract and keep the best talent.

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