The PTO Guide: Everything You Need to Know to Create a PTO Policy for Happy, Engaged Employees

What is PTO? Check out our small business owners and HR leader’s in-depth guide on all things related to paid time off.

PTO_Vacation_Perks_Workest
Section 1

PTO and your small business

Vacations are on everyone’s mind this year: Wishing we could take them, wondering when we’ll be able to take them again, and feeling firm in our position that working from home is not the same as a staycation. 

It’s not just vacations we’re thinking of, though. As individuals across the country self-quarantined, cared for loved ones, or recovered themselves, the COVID-19 pandemic elevated conversations about paid leave across businesses of all sizes and industries. 

Paid leave, including sick time, is near-universally regarded as important, but the U.S. lags behind the rest of the developed world in terms of how much paid leave employees receive and our attitudes around it. The United States is the only advanced economy in the world without a federal law mandating paid vacation time or holidays, although 76% of private sector employers do provide it.

Paid leave is a key piece of any healthy, productive, and attractive workplace. Job seekers consistently rate paid leave as one of the most-desired benefits, and we know that employees who take PTO, time off and vacations perform better in the workplace: a 2018 American Psychological Association study found employees who took vacations were more productive and produced higher quality work.

But much like the landscape of other company-sponsored benefits, Paid time off can be confusing. If you’re building or selecting a paid leave or PTO policy for your business, here’s what you need to know.  

Job seekers consistently rate paid leave as one of the most-desired benefits, and we know that employees who take PTO, time off and vacations perform better in the workplace: a 2018 American Psychological Association study found employees who took vacations were more productive and produced higher quality work.
Section 2

What is paid time off, or PTO?

Paid time off can refer to any paid leave program, while the PTO abbreviation generally refers to a type of policy where all paid leave is bundled together into a predetermined number of days. Rather than receive separate allowances for sick days, personal days, and paid vacation time — like under a traditional paid leave policy — PTO is a single pool of paid time off that employees earn and accumulate, or accrue, over time. 

Employees typically “earn” PTO based on hours or days they work, which is then credited to a PTO bank that employees can use as of their date of hire or after an interim period, depending on the policy. It’s important to note that PTO policies, as a whole, are unspecified, and rather business owners decide what the details of the policy will be, whether they offer 20 days plus company-observed holidays, 3-months of vacation, unlimited, accrued, or upon request. 

Proponents of PTO say the uncategorized paid leave gives employees the autonomy to use time off as they’d like, rather than having to decide whether they’re using a personal day or a sick day for the Monday after their vacation, just as an example. And eliminating the need to track various types of leave, PTO policies lessen the administrative burden on HR and managers.

Section 3

How to craft the ultimate vacation policy

What are the types of leave?

The question of whether or not to lump together all paid time off in the form of PTO raises other questions about additional forms of leave. A typical leave policy grants employees 10 days of vacation, 8 sick days, and 2 personal days. Employees are also usually able to access leave for bereavement, civil duty, and parental — albeit unpaid — but separate from the initial allotment of days. 

As PTO is any paid time away from work, employees use their earned and accrued time for everything. Whether they’re taking summer vacations, recovering from a nasty cold, bringing their pet to the vet, it’s all PTO. But in reality, PTO policies vary widely and are individual to every business. Here’s how to address other types of leave when you have a PTO policy.

Bereavement

Companies don’t generally pay employees for time taken for bereavement, but employees can often access it outside of their PTO allotment. A typical bereavement policy may grant employees 2 to 5 days of unpaid time off, after which they’re required to tap into their banked PTO for additional time. 

Medical leave

Family Medical Leave Act (FMLA) requires employers to provide up to 12 weeks of job-protected leave to employees to care for a family member with a serious health condition. This leave is most often unpaid, but again, separate from banked PTO time.

Paternal leave

Many companies choose to offer additional leave to new parents as well. A 2019 WorldatWork study shows 51% of respondents provide separate parental leave on top of PTO banks. Federal law under FMLA requires job-protected leave for qualifying conditions or illnesses, like parental leave, but your state may have parental leave-specific laws as well. For example, California, New York, and Rhode Island all have laws that require paid family leave for new parents to bond with their child.

Section 4

How does PTO work?

It depends. Every PTO plan is different, but while traditional leave policies typically grant employees 30 paid days off per year — 10 days of paid vacation, 8 sick days, 2 personal days, plus 10 paid holidays, most PTO policies give employees between 15 and 20 days plus company-observed holidays, according to the Society of Human Resource Management’s (SHRM) 2019 Paid Leave Benchmarking Report. Depending on the company, employees may be able to earn additional PTO due to their tenure, accrue PTO at specific increments, be allowed to “rollover” unused PTO from one year to another, or be eligible to cash out unused time while still employed at the company.

Granting employees the power to use their time off when and how they’d like builds mutual trust between the employer and employee.
  • Flexibility
  • Easier for HR to manage
  • Reduce absenteeism
  • Some will hoard sick leave
  • You may end up paying out more
  • PTO often means less leave
Section 5

Benefits of a PTO policy

With 52% of employers offering a traditional leave policy and 41% offering a PTO policy, it’s clear there are pros and cons to each. 

1. Flexibility 

PTO gives employees flexibility and autonomy. Workers feel empowered to use their time off as they see fit, without having to ask for permission. In the past, individuals may have been tempted to be untruthful about why they wanted or needed time off. PTO eliminates the need for employees to explain themselves. With a PTO policy, your company sends the message, “We’re all adults. We trust you to take time off as you need it.” Granting employees the power to use their time off when and how they’d like builds mutual trust between the employer and employee. 

2. Easier for HR to manage

As a small business owner (SMB), your HR team may be busier than you think. The people team at your company is handling recruiting and hiring, employee relations, and compliance, on top of benefits administration. Even with a robust HRIS, tracking traditional paid leave can be time consuming, and HR managers can get bogged down trying to keep track of whether or not John Fakey was out sick or using a personal day.

3. Reduce absenteeism

It’s common practice at companies with traditional leave policies for employees to take the Monday after their vacation off because they are “sick.” Because these employees are using a sick day which can’t be approved in advance, employers end up with unscheduled absences, which cost an average of $2,666 per full time employee per year. A PTO policy can help reduce absenteeism; according to research by the Alexander Hamilton Institute, 54% of companies that made the switch to a combined PTO program saw unscheduled absences drop by 10%. 

Section 6

Disadvantages of a PTO policy

1. Some will hoard sick leave

This year has underscored the importance of staying home when sick. Yet because PTO doesn’t differentiate between vacation time and sick leave, under-the-weather employees may be more willing to “tough it out” at the office in an attempt to reserve their PTO for vacations. Sick employees are likely to infect others, leading to increased absenteeism and lower productivity across the organization. Plus no one wants to get sick from their co-worker who wouldn’t just take the day off. 

2. You may end up paying out more 

In many states, employers are required to compensate departing employees for their unused vacation time, but not for sick leave or personal days. However, because the distinction between types of leave doesn’t exist under a PTO policy, employers may end up paying out more. 

3. PTO often means less leave

According to SHRM, employers with PTO policies give employees an average of 17 days, plus company-observed holidays. Candidates may shy away from a company with a PTO policy after doing some quick math that shows they’d have more with a traditional leave plan. 

Section 7

Types of paid leave and PTO 

Traditional leave policies

Traditional paid leave policies give employees specific allotments for vacation time, sick days, personal days, plus holidays. Employees usually earn additional time based on tenure, with increases at 3, 5, and 10 years, for example. HR teams at companies that offer traditional paid leave have access to a treasure trove of data. They can understand why employees are taking time off and spot trends to create HR strategy and plan staffing accordingly. For example, if a call center is experiencing high rates of absenteeism on the Tuesday after Memorial Day, HR can schedule additional employees for coverage. At the same time, traditional leave policies create more tactical, administrative work, which can feel burdensome to HR departments more focused on higher-level strategy. 

PTO banks

A PTO bank is a single pool of paid time off employees earn and can access. It’s what most people are referring to when they say “PTO.” Employees can “bank” time to be used as they like, free of the distinct buckets between vacation, sick, and personal leave. This lump sum of days gives employees the authority to decide how they’d like to use their paid leave. PTO policies look different at every company and can be influenced by state law. Some policies allow employees to rollover unused days, while others permit employees to buy or sell additional time, like under a cafeteria plan. 

Unlimited PTO

Unlimited PTO plan gives employees the freedom to take off as much time as they need or would like, as long as it’s approved by their managers. What started as a perk at top tech employers has steadily grown in popularity: A 2018 survey by Employers Council showed that unlimited PTO is on the rise, up 25% from 2016 to 2018. 

But critics say it’s a marketing ploy to attract top talent, and that underuse is a bigger problem than overuse; with unlimited PTO, employees take less time off. That’s because there’s no template by which to judge an appropriate amount of time away from the office, so employees rely on workplace culture to inform their decisions. If you work for a high-growth startup, there might not be many people taking vacations. Yet, when done right, unlimited PTO can give your employer brand a boost and strengthen relationships between managers and employees, as unlimited PTO concentrates the conversation around time off on output rather than availability. 

Cafeteria plan and PTO buying

Some companies provide employer-sponsored benefits through a cafeteria, or Section 125 plan, which allows employees to take advantage of pre-tax savings on benefits like health insurance or the purchase of additional time off. Cafeteria plans are not a type of PTO, but rather a way companies organize their benefits plans. As part of a company’s cafeteria plan, they may elect to offer a PTO buying plan which lets employees purchase additional PTO for the forthcoming year during open enrollment. Employees “pay” for their additional PTO through salary reductions or flex credits. 

Cafeteria plans tend to be complex, and so are the rules governing the purchase of additional, “elective PTO,” as the IRS refers to it. But the two most important rules to understand are: 

  • No deferred compensation: Requires employees use the “elective” PTO for the year it was purchased. The IRS doesn’t allow this time to rollover to the next year.
  • Ordering rule: Mandates that employees use their non-elective PTO before their elective PTO. 

Together, these two laws essentially require employees to use all of their PTO, elective and nonelective, before the year’s end. 

PTO donation plans

As an add-on, some organizations are including a donation feature as part of their PTO plans. A PTO donation plan allows employees to support coworkerings by donating leave to those experiencing an illness or caring for a family member or loved one who is sick. 

Section 8

How to pick a paid leave policy for your business

man working at a desk

Selecting a PTO policy for your business can be overwhelming. You want to provide enough leave and flexibility to ensure your workforce feels valued, while minimizing the administrative burden on HR, and ensuring that you’re meeting all the relevant compliance requirements and laws. 

Simplify your search by asking a few basic questions.

1. Traditional leave vs. PTO

Do you care how employees use their time off? If the answer is yes, a traditional leave policy makes the most sense since the single pool nature of PTO banks prevents visibility into how employees are using their time off. 

2. Lump sum vs. accrual

If you’re OK with a single pool of PTO, you’ll have to decide whether employees will receive access to their entire PTO bank on the date of hire, or whether they’ll accrue it over the course of the year. If you have an accrual system, will employees accrue their PTO each pay period, monthly, or quarterly?

3. Rollover unused balances vs. use it or lose it

Whether you choose traditional paid leave policy or a bundled PTO policy, you’ll still need to decide whether or not employees can rollover their unused time and ensure you’re compliant with state law. In an effort to encourage employees to take time off — and avoid hefty payouts when employees leave — some companies have a use-it-or-lose-it policy. But certain states, like California, consider paid time off to be a form of earned wages, thus making a use-it-or-lose-it policy illegal in the state. 

4. Payouts when an employee leave

In some states, employers are required to pay employees for unused vacation time, but not sick leave or personal days. This can muddy the waters a little bit when it comes to PTO, as there’s no distinction between types of leave. Generally, because all PTO can be used as vacation time, precedent in most states dictates that employers have to compensate employees for any unused PTO when they leave the company, voluntarily or involuntarily. 

Section 9

How to track PTO

Depending the policy you select for your business, HR could have a lot of work to do when it comes to tracking PTO and managing accrual rates, caps, limits, and payouts. Even with the lower administrative burden of bundled PTO policy, your HR team will need some help and support. Select an HRIS with robust PTO and paid leave tracking and reporting capabilities to support the people at the center of your business. 

Accessible via mobile app or from your computer, Zenefits’ PTO solution makes it easy for HR teams and supervisors to manage PTO in the office or on the go. Zenefits automatically syncs hours and PTO changes with payroll in real time, so HR can avoid the fragmented, piecemeal nature of manual tracking and get back to focusing on what really matters — building happy, engaged workforces and workplaces.

Keeping up with compliance is no easy task, and the stress of managing the various rules across different jurisdictions can quickly bog down an HR team. Zenefits helps your business avoid the stress of manually handling paid leave compliance with fully compliant, pre-configured PTO policies designed to meet your locality’s specific regulations and requirements. And with PTO tracking, Zenefits gives your HR teams at-a-glance visibility into types of leave, like parental leave or sick leave, in order to stay federally compliant with FMLA. 

Accessible via mobile app or from your computer, Zenefits’ PTO solution makes it easy for HR teams and supervisors to manage PTO in the office or on the go.
Section 10

Common PTO accrual rates

The PTO policy you select will determine how often employees earn PTO and when they’re able to access it. Some companies like employees to accrue PTO as they work, while others are happy to grant all PTO to the employee on a specific date, like the beginning of the calendar year. 

Common accrual rates include by the year, hour, day or pay period. 

Yearly

This is the easiest rate to calculate. It also makes sense for employees who have already been with the company for at least a year. Simply subtract the number of hours an employee wants to take off from the number they receive each year. But most companies don’t want employees to have to wait a year to take time off, nor are they eager to give new hires all their PTO as the first day, so they use one of the methods below or a combination. 

Hourly or daily 

These accrual rates make the most sense for part time employees or hourly employees, as the method accurately reflects the number of hours an employee has put in with the company. 

Per pay period

According to SHRM, PTO accrual by pay period is the most common accrual rate with 37% of companies using this rate. Employees start accruing PTO upon their date of hire, but they still must wait a year until they’re able to access all of it. 

Calculating PTO accrual

The calculations all depend on how much PTO employees receive. For example, say a full-time employee receives 80 hours of PTO per year, and they work a total of 2,000 hours per year. Divide the PTO by number of hours worked to calculate your accrual multiplier. 

80/2000=0.04

Then multiply the accrual multiplier by number of hours worked. 

The easiest way to calculate PTO accruals is with an HRIS system that does the work for you. 

Section 11

PTO best practices

Whether you’re designing a PTO plan from scratch for a budding organization or refreshing a business’ existing policy, these best practices will help keep you on track. 

Outline your PTO policy in your employee handbook

The best place to communicate your company’s paid leave policy is in the ding-ding-ding, employee handbook! Some employees want to know the technicalities of how the policy works, while others are only interested in how much time they can take off from work while still being paid — who can blame them? Outline the policy in a digestible paragraph that hits on all the major points, then elaborate on the specifics below so employees can access as much information as they like.

Layman’s terms are always better, so avoid jargon as much as possible. Be explicit in sharing the company policy on unused PTO payouts. Remember, some states require employers to compensate employees for unused vacation time, but not sick time, as long as the policy is clearly outlined for employees. 

Employee handbooks are a good place to definite parental leave beyond traditional or heteronormative constraints. And everyone’s family and circle of loved ones is different, so consider removing conditional definitions for family medical leave all together. Allow employees to take sick leave to care for loved ones whose illness meets the FMLA definition of a serious health consideration. Who is to say that a close family friend or neighbor does not’ constitute family for some? 

Get leadership buy in

We’re known for a lot of things as Americans, but a willingness to take vacations isn’t one of them. Whether it’s in an effort to appear dedicated to upper management or due to a hefty workload, American workers are generally overworked, overstressed, and under-vacationed. 

But again and again we see evidence that taking time off from work is good for the employee and the organization. According to a 2017 report by the U.S. Travel Association, employees who take vacations are more likely to get promoted, and time off is routinely linked to decreasing burn out.

Employees also may shy away from taking time off from work because it’s not reflected in the company culture. In a company where teams routinely work nights and weekends and seldom take a day off, employees aren’t encouraged to take advantage of their PTO. 

As a company leader, take your PTO and don’t apologize for it. You’ll get the time you need to recharge and employees will see company values and messaging reflected in the actions of upper management. 

Section 12

See a sample PTO policy

A well-articulated and carefully planned PTO policy will help you provide your employees with the flexibility to better manage their time off. Use the following policy as a guideline. Contact an employment lawyer in your state to ensure your business complies with all the relevant state and local laws governing PTO. 

This example policy is not intended as legal guidance. 

Sample Paid Time Off (PTO) Policy For Small Businesses

The purpose of PTO is to provide you with paid time off to use as you’d like. We think flexibility is the key to work-life balance, and we’ve selected PTO as our paid leave program because we want you to have the autonomy to manage your time away from the workplace as you see fit. 

?

PTO is offered in place of vacation days, sick days, and personal days. Rather than separate categories like you may have had with previous employers, PTO provides a single pool of paid time off to use for all of your personal needs — vacation time; child, pet, and elder care; medical and dental appointments; personal business or emergencies; etc.

?

We give all our employees a minimum of [20 days of PTO per year]. You may earn additional PTO based on your tenure with the company [insert specific company policy on tenure here]. 

?

PTO does not need to be used for parental leave or sick leave, which are offered separately and in compliance with FMLA. Additional leave for bereavement and civil duty is considered on a case-by-case basis. PTO does not need to be used for the company’s holiday schedule. 

?

You earn PTO for every hour you work. This PTO is added to, or accrues, [bi-weekly when your paycheck is issued]. You’re able to use PTO by the hour, day, or for a stretch of time off. Please provide at least 2 weeks notice for requests longer than [3 days]. You can enter your request for PTO through our HRIS. 

?

Please do your best to manage PTO for your personal needs throughout the year. Additional paid time off will not be granted, although unpaid leave may be granted depending on the circumstance. Unused PTO from one year [may/may not] be rolled over into the next. Upon leaving the company, employees [will/will not] be compensated for unused PTO. 

?

Lastly, please use your PTO. We provide it for a reason. We understand the importance of time away from the workplace to disconnect, as well as to manage the demands of life outside the office. We will certainly be using ours!

Section 13

PTO laws and compliance

The laws governing paid leave and compliance vary by state. Employers are not required to provide any paid leave under federal law, but they are required to provide job-protected (unpaid) leave for specific instances under FMLA. 

States, however, are a different story. State law governs aspects of paid leave like whether employers are required to pay out unused vacation time, if employers are required to provide paid leave, and whether or not employers can enforce use-it-or-lose-it policies. 

There is no state law requiring employers provide vacation time, but several states require employers to provide paid sick leave. If you offer an umbrella PTO policy, you usually do not have to provide additional paid sick time, as the lump sum of days can be used for any paid leave. 

HR teams can find information on state-specific laws by researching employment laws and paid leave by state. Alternatively, use the table as a guide below. For the most accurate legal information, contact an employment lawyer in your state.

PTO Guidelines State by State

wdt_ID State Are use it or lose it policies permitted? Are you required to pay out unused PTO time when the employee leaves?
1 Alabama Yes No
2 Alaska Yes No
3 Arizona Yes No
4 Arkansas Yes No
5 California No Yes
6 Colorado Yes Yes
7 Connecticut Yes No
8 Delaware Yes No
9 D.C. Yes No
10 Florida Yes No
State Are use it or lose it policies permitted? Are you required to pay out unused PTO time when the employee leaves?
Section 14

PTOs FAQs

How is a paid leave policy different from PTO?

Paid leave policies are traditional leave policies where employers differentiate between vacation time, sick time, personal days, and holidays. PTO is a single pool employees can use as they see fit. 

Should we credit time for paid holidays that land in the middle of an employee’s vacation?

Yes. Best practice is to credit employees for that day or days. If an employee takes a week of vacation during the week of Thanksgiving, and the Thursday and Friday of that week are paid holidays observed by your company, credit back the employee 2 days. 

Do we have to provide PTO to contractors or part-time employees?

Technically, organizations don’t have to provide PTO to anyone. In many states, employers are required to provide paid sick leave, but not necessarily PTO. Many organizations consider part-time employees or contractors as exempt from the full benefits package the company provides, which is why we see this class of workers excluded from company-sponsored health insurance plans or retirement savings plans. But as work keeps changing and individuals want more flexibility, many “traditional 9-to-5 workers” are creating a mosaic of jobs and work, taking on work as contractors or going freelance. The face that these nontraditional workers can deliver serious business value is appreciated today more so than in the past. The more attractive you can make your company, the more likely you are to attract these highly skilled nontraditional employees.

Should we let employees cash out their unused time?

Some states require employers to pay out for unused vacation time upon termination, but should organizations allow employees to get paid for their unused time even if they aren’t leaving the company? It depends. Offering a cash-out option comes with additional administrative work and employers have to decide whether or not they’ll compensate workers at their regular rate or a discounted one.

Do we have to pay out unused PTO or vacation time when employees leave the company?

Maybe. Some state laws, like California, Massachusetts, and Rhode Island, to name a few, require companies to pay out employees for unused vacation or PTO time whether they leave voluntarily or are dismissed. Other states, like Minnesota, Ohio, and South Carolina, among others, require employers to pay out unused PTO unless stipulated otherwise in the employment agreement. See the chart above for state-by-state information. 

Can we require that employees take time off?

Not exactly. But by building a culture and workplace where employees feel comfortable to take the time they want and need away from the workplace is a way to encourage workers to unplug. Some employers lean on use-it-or-lose-it policies to reinforce the importance of time off, but with 20% of employees leaving time on the table despite use-it-or-lose-it policies, it’s clear that it’s not the most effective way to do so.

Should we let employees “borrow” from their PTO bank?

It’s a wise consideration. For businesses with a new hire waiting period before their PTO begins accruing, allowing employees to borrow from a future PTO credit lets employees honor any previous commitments they may have. 

We offer unlimited PTO. What are our obligations to pay out when an employee leaves?

Employers and employment lawyers aren’t 100% sure. Unlimited PTO hasn’t been around long enough for a legal precedent to exist. Common knowledge and the internet say no, you do not have to pay out anything. But if your company is considering an unlimited PTO policy, speak to an employment lawyer who knows the various contours of your state’s law. 

How far in advance should we ask employees to schedule their requests?

Best practice is 2 weeks for PTO requests that extend beyond 2 or 3 days. PTO helps businesses cut down on unscheduled absences, so ask employees to submit requests ahead of time to manage staffing and workload appropriately. 

Section 15

Wrapping it up

Every company has its own needs, and selecting a paid leave policy will come with specific considerations for that business. Traditional leave policies make the most sense for companies who want to understand how employees are using their time off, while PTO is a better choice for businesses happy to grant employees more autonomy. 

Ultimately, we can’t help but favor the latter. 

And that’s because work is becoming more flexible in every avenue. Remote working arrangements were on the rise before COVID and it’s clear they’re now here to stay. Part-time employees and contract workers are contributing in more meaningful ways than ever before, with the traditional workplace now understanding these workers can contribute serious business value. We’ve moved away from glorifying the ever-accessible, always-on workplace culture in favor of work-life balance and clear boundaries. We think PTO better supports that mission.

But more important than the paid leave policy you select is that your company encourages employees to take time off. A company culture where employees feel encouraged to take a vacation or a mental health day makes for an engaged, happy, and productive workforce.