What Is PTO? How to Create a PTO Policy To Meet Your Business Needs

Creating a paid time off (PTO) policy for your business? Learn how PTO works, accruals, policies, and more.

The availability and convenience of paid time off plays an instrumental role in a prospective employee's interest in your business as well as your ability to retain your current workforce. Establishing a paid time off policy can also help set clear employee expectations during the recruitment and onboarding process. If you're considering adding a paid time off benefit, it's helpful to understand the components that go into developing and implementing a paid time off policy, including compliance with applicable laws and documenting how this time is earned and utilized.

What Is Paid Time Off (PTO)?

Paid time off is an employer-provided benefit that allows employees to take a specified amount of paid time away from work for personal reasons, vacation, or illness.

How Does PTO Work?

Paid time off policies outline how employees earn, request, and use paid leave. While details vary by employer, the general process typically includes the following steps:

1. Accrual: Employees build PTO over time, either by the hours they work or the length of time they've been with the company. Hourly staff usually earn time off based on actual hours worked, while salaried staff often earn a set amount each pay period.
2. Requesting Time Off: Many employers ask employees to request PTO ahead of time, either through a manager or an HR system. This helps keep schedules covered and prevents conflicts.
3. Usage: PTO can typically be used for vacation, personal days, or illness, depending on your company's policy. Some businesses allow PTO to be taken in hourly increments, while others require partial or full-day use.
4. Payout: Depending on state law and company policy, unused PTO may or may not be paid out when an employee leaves the company. Some policies also allow unused hours to roll over into the next year, while others have a "use it or lose it" approach.

Clearly outlining these elements in your PTO policy helps employees understand the rules, keeps the policy in line with the law, and allows time-off requests to be managed without interrupting business operations.

Generally, employers can either frontload an annual allotment of PTO or allow employees to accrue PTO based on time worked. Paid time off can also be applied to holidays, community service, and paid family leave, in accordance with federal, state, and local laws. The permissible uses are usually listed in an employer's PTO policy.

Why Should You Offer PTO to Employees?

Offering paid time off can be good for both employees and employers. From an employer's side, the benefits of PTO can include:

1. Improved Work-Life Balance: People need time away from work. PTO gives them space to rest, take care of family matters, or deal with personal tasks. When they return, they're more likely to be ready to work.
2. Lower Administrative Burden: Tracking vacation, sick days, and personal time separately takes extra work. Combining all leave into one cuts down on paperwork and approvals, so HR has more time for other tasks.
3. Improved Employee Retention: Competitive PTO policies can be a deciding factor for employees choosing whether to stay with your company. Employees who feel supported by benefits like PTO are more likely to remain engaged and loyal to the organization.
4. Improved Employee Satisfaction: Generous and flexible PTO programs signal that you value employees' time and well-being. This can lead to higher morale, stronger engagement, and better overall team performance.
5. Reduced Absenteeism: Allowing employees to schedule time off in advance can cut down on last-minute callouts or unplanned sick days. Planned breaks make it easier to keep staffing steady and work on track.
6. Stronger Employer Brand: Companies known for offering competitive PTO often find it easier to attract high-quality candidates. A reputation for respecting personal time can be a differentiator in competitive job markets.

A PTO policy that balances employee needs with business goals can boost performance, improve retention, and build a more committed team.

At its core, the employee–employer relationship is an exchange of pay for time. Regardless of the reason, when an employee takes leave, the result is the same — they are stepping away from their responsibilities for a period of time, whether it's a few hours, several days, or longer.

Smart employers recognize that there are myriad reasons employees need to take a break from work. Time off might be used for illness, caring for a sick family member, observing a meaningful occasion, or simply recharging. PTO provides employees with paid time off to use as they see fit. Need a vacation? Take it. Doctor's appointment? Covered. Just burned out? Go recharge. When people don't have to choose between taking care of themselves and getting paid, they're happier and work better. Simple as that.

Pros and Cons of Paid Time Off

PTO policies come with benefits and drawbacks. Decide what makes sense for your business before putting one in place.

Paid Time Off Pros

Many job seekers expect PTO to be part of the offer, and it's often a deciding factor in whether employees stay. A solid PTO policy can attract and retain employees while offering other advantages:

• Boost Employee Retention: PTO is a desired benefit that can contribute to ongoing retention. Offering competitive paid time off can help you keep valuable employees by showing that their time and well-being are a priority.
• Lower Administrative Costs: Combining vacation, sick time, and personal days into a single PTO bank can streamline tasks and cut related administrative expenses.
• Greater Flexibility for Employees: A well-designed PTO policy gives employees the freedom to decide how to use their time off, enabling them to make choices that best fit their personal and professional needs.

Paid Time Off Cons

Some businesses find that PTO doesn't fit their operations. The points below outline when a paid time off policy may not work for your company.

• Potential for Sick Employees at Work: When sick time is combined with vacation and personal days, some employees may view PTO solely as "vacation" time and avoid using it when they're ill. This can lead to more sick employees in the workplace. To help avoid this problem, the policy needs to spell out that PTO covers sick days and personal time.
• Compliance With Paid Sick Leave Laws: If you operate in a jurisdiction that mandates paid sick leave, you must ensure your PTO policy meets those requirements. Always review relevant federal, state, and local laws before finalizing the policy.
• Higher Payout Obligations at Termination: Some jurisdictions require employers to pay out unused vacation at termination but do not require the same for sick time. Combining the two into a PTO policy could increase final payout amounts when employees leave.

Carefully weighing these considerations can help you decide whether a PTO policy is the right fit for your organization.

Different Types of PTO Available to Employees

Employees often have various personal responsibilities outside of work. To support these needs, PTO plans may specify the days or circumstances under which PTO can be used. These may include, but are not limited to, the following examples.

National Holidays

National holidays are days that are recognized and celebrated to acknowledge their historical, cultural, traditional, or religious significance. Christmas, the Fourth of July, and Martin Luther King Day are all examples of national holidays. Companies may offer PTO, or holiday pay, for national holidays so everyone can participate in festivities, activities, and remembrances associated with each day.

Floating Holidays

Many important holidays are not officially recognized as national holidays. Holidays such as Hanukkah, Kwanzaa, Earth Day, and solstice events are valued by large swaths of Americans. Known as "floating holidays," companies may offer PTO that can be used for these days because they recognize the importance for workers to celebrate the holidays that are most meaningful to each individual employee.

Jury Duty

Jury duty is a civic obligation that requires an American citizen, 18 years or older, to serve on a panel of jurors in a courtroom. Serving on jury duty is fundamental to the U.S. court system and is mandatory by law. In some jurisdictions, employers are required to provide paid time off for jury duty. Depending on the law or the employer's PTO policy, compensation may be a set amount or equivalent to a worker's regular wage for missed hours. It's essential to check with your jurisdiction(s) to make sure your PTO policy is compliant with jury duty laws and regulations.

Personal Time

Every worker needs time throughout the year to tend to personal business. Moving day, taking a friend or parent to an appointment, school obligations for children, or even taking time for mental health are all valid reasons why an employee may need personal time off.

Sick Time

When a sick employee shows up in the office, they put everyone at risk. Even working remotely can delay the amount of time it takes for an employee to feel well and return to full productivity. Sick time may also apply to doctor's appointments or caring for a family member who is ill (e.g., a child who must stay home from school). Even if not required by state or local law, companies may want to offer enough PTO for sick leave, or a separate paid sick leave bank, to help keep their workforce healthy and productive.

Community Service

Not only does a day of volunteerism help make a positive impact in a community, but studies have shown that giving back can also give people a sense of purpose and belonging, which can improve their mental health. Community service can range from cleaning up parks and waterways to serving meals at a shelter or helping plant a community garden. Employers that prioritize PTO for service days are setting the tone as good corporate citizens and helping their employees serve their communities.

Bereavement Leave

In the event of the death of a family member or close friend, it's essential for an employee to take time to grieve, tend to funeral arrangements, and handle other matters related to the loss. Employers should be aware that they might be doing business in a state and/or local jurisdiction that requires them to offer paid or unpaid bereavement leave and this should be reflected in their policies/handbook.

How to Create a PTO Policy

Amanda Gee, Paychex Talent Enablement Partner, shares her approach, "When consulting on PTO policies, I make it a point to ask about existing well-being initiatives that support work-life balance and overall employee health. I assess how the organization approaches workplace flexibility, particularly in situations where employees need to adjust their schedules for personal reasons or take time away for self-care. This understanding helps determine the level of flexibility within their policies, the types of time-off reasons they support, and informs recommendations for additional benefits that promote physical, mental, and financial well-being."

She further explained, "If a business appears to be lagging behind market standards in their offerings, I’ll explore whether they’re experiencing challenges such as absenteeism, employee burnout, or feedback indicating difficulty managing work and personal stress. These insights help assess the effectiveness of current policies and identify opportunities to introduce or enhance benefits that support employee well-being and retention.”

A good PTO policy balances legal compliance with clear, workable rules for earning, requesting, and using time off. The steps below can help you design one that supports business operations and keeps employees informed and engaged.

1. Set the Foundation

Like any new benefit, implementing a PTO policy should involve careful analysis, research, and adherence to applicable federal, state, and local laws and regulations.

Items to address when writing a new PTO policy include:

• Will this policy replace existing time off policies? If so, be mindful of addressing employees' existing available time when transitioning to a new policy.
• How will PTO be earned and used?
• Will employees earn PTO based on anniversary periods, calendar year, or fiscal year? This may impact budgeting.
• How will you track PTO earned and taken to ensure adherence with applicable recordkeeping and notice requirements under laws and regulations where applicable?
• Who qualifies for PTO, and when can they begin using PTO?
• How is PTO earned, front-loaded, or accrued in either days or hours?
• What procedures exist for scheduling time off?
• Will PTO accrued be carried over, expire, or paid out at the end of the year?
• Will PTO be paid out when an employee leaves their job?
• Is the policy in compliance with any state and local mandated leave requirements? For example, sick and safe leave laws where applicable?

You may choose to include specific examples of acceptable PTO use. It’s also helpful to clarify whether PTO can be used for other types of absences, like bereavement. Alternatively, you may opt for a more flexible policy that allows employees to use available PTO without needing to disclose the reason.

2. Determine the Appropriate Number of Days Off

Check whether federal, state, or local laws require you to provide a set amount of time off. Then review your staffing needs and see how your plan compares to what similar businesses in your industry and area offer. Many companies increase time off as employees gain years of service, using it as both a retention incentive and a way to recognize long-term staff.

For example, U.S. Bureau of Labor Statistics data from 2024 shows that private industry workers with one year of service received an average of 7 days of sick leave and 11 days of paid vacation per year. After five years of service, sick leave remained at 7 days, while vacation time increased to an average of 15 days per year.

3. Choose the Right PTO Policy

You may offer an option within your larger PTO policy that allows for the ability to carry over time, pay for unused time, or take unlimited time off. You may also choose to create a PTO policy that is for vacation and personal time off from work but also offers a separate sick leave policy. Consulting with a professional may help you determine what specific leave program matches your needs.

PTO Rollover Option

You may choose to institute a rollover plan, which allows employees to carry over PTO into a new work anniversary or calendar year. Keep in mind that some jurisdictions require a rollover plan for specific types of time off. If you choose this option, you may consider implementing a cap on hours where employees who exceed that maximum number of hours must use a portion of their current balance before they are able to accrue more, where permitted under state law. Employers should be mindful of state and local laws and regulations that may have requirements related to maximum accruals as well.

Use-It-or-Lose-It Option

Some businesses may require that hours not used by the end of the calendar or work anniversary year are lost, and everyone begins the new year with zero hours or a set allotment of hours. However, this approach may prompt a flurry of end-of-year absenteeism by employees not wishing to lose hours. There may also be compliance considerations with this type of plan.

Unlimited PTO Option

Unlimited time off allows employees to use as many days as they require (in terms of a combination of vacation, sick, and/or other days), provided they meet their performance objectives and obtain manager approval for their time-off requests.

PTO Accrual

Employers set their own rules for how people earn paid time off. Some companies base it on hours worked where you get a certain amount for every hour you put in. Others use different methods. Companies also decide whether leftover time rolls over to the next year or expires.

4. Decide on How To Offer PTO

As noted previously, companies generally offer PTO in one of two ways:

• By awarding time at the start of each year, permitting employees to use it throughout the year until they run out.
• By letting employees accrue PTO each pay period, with the ability to use only the amount they've accrued to the present date.

A close look at your business's specific needs can help you make the best decision.

5. Define the PTO Approval Process

A PTO policy that encompasses multiple categories of time off (personal, sick leave, vacation) may increase the likelihood of situations where employees are unable to provide reasonable advanced notice. However, a comprehensive policy should address situations when notice can or cannot be provided.

The policy should state how much notice employees must give before taking time off and who should receive the request, such as a supervisor or HR. You may also want to require a set amount of advance notice for using PTO, except when it isn't practical or when the law says otherwise.

6. Ensure Your Policy Is Compliant With Federal, State, and Local Laws and Regulations

Compliance with applicable federal, state, and local employment laws and regulations is critically important, as other leave laws (as well as wage and hour laws) can impact your policy. Another consideration is that you may need to have variations in your policy if your company has employees in more than one jurisdiction. It is essential to understand these requirements when creating a time-off program. Some states require that any earned but unused PTO must be paid out upon termination/separation. Others may regulate PTO accrual, consider PTO as a form of vested wages, or even require that policies about such leave be provided to employees in writing.

7. Clearly Communicate Your Policy

Once you've crafted a policy, make sure that the terms are communicated to and understood by your staff. From newsletters to staff meetings, rewards statements, and your employee handbook, ensure that employees understand how PTO fits into their overall benefits package and why they should adhere to specific guidelines to make it work for everyone. Openly address the most common questions employees have, such as the amount of PTO time they're entitled to, the methods in which PTO is dispersed, time-off request/approval procedures, and what happens to unused time.

Determining Whether a Paid Time Off Policy Is Right for Your Business

When leadership and employees are on board, PTO can support a healthier workplace and make it easier to attract and keep strong performers. A dependable time and attendance solution can help with the transition by accurately tracking hours and PTO.