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What Is Paid Time Off (PTO) and How Does It Work?

Paid time off, or PTO, refers to the time that employees can spend away from work, but still be paid as if they were on the job. Though you aren’t required to provide PTO, it is common for employers to do so; about three-quarters of all private-sector employees receive paid time off. Simply put, this is a vital benefit that most workers have come to expect from their employers.

Types of PTO Policies

There are several different ways you can structure a PTO policy: 

  • Traditional PTO: With a traditional PTO policy, employees’ available time is placed in specific categories, such as vacation time or sick leave. Employees have a given number of hours in each of these categories and should use their PTO according to the reason they’re going to be out of office. For instance, employees should only use their sick leave if they fall ill and use vacation time for personal reasons. 
  • Flexible PTO: Flexible PTO is far less rigid than traditional PTO. Employees have a single bank of time off that they can use for any reason.
  • Unlimited PTO: As the name suggests, with unlimited PTO, employees can take as much time off as they want. Typically, they need permission from their supervisor to do so. 

In both traditional and flexible PTO policies, employees can be given their time off as a lump sum (such as at the beginning of the year or an annual review), or accrue hours as they work (such as per hour, per pay period, or per month). With either plan, you can also decide if employees are required to take a certain amount of time off each year, if there is a cap on the amount of PTO they can save up, and whether employee tenure impacts the amount of PTO they do receive.

Of course, there are also significant differences between these two types of policies. Flexible policies are much more, well, flexible, a quality that many employees value in their work environments. Under flexible policies, some employees may hoard their time off, as they attempt to save it all for vacations or personal time. Traditional policies allow employees to use the time off they need when they need it.

Though they are growing in popularity, unlimited PTO policies are newer and less common than traditional and flexible policies. Unlimited PTO policies can work, but they require a significant amount of trust from both employees and employers. Many employees struggle to use their PTO; further, according to an Insider survey, almost 30% of employees with unlimited PTO “always” work when they do use it. With this kind of policy, you may have to strongly encourage employees to take advantage of their benefits. 

Should You Offer PTO to Your Employees?

It’s up to you to decide if you should provide PTO to your employees.

It may seem like an obvious choice, given how common these policies are, but there are some flaws in any kind of paid leave system. Primarily, they can be costly for your business since you’re paying employees but they are not completing the same amount of work. Further, PTO can lead to staffing challenges for your business. You may have to deal with being understaffed when multiple employees call out, or, alternatively, hire more employees to ensure adequate coverage.

There are also many potential advantages, both for your employees and your business, to offering paid leave, including:

  • Benefits to employees and their health;
  • Increased employee flexibility and autonomy;
  • Boosted employee morale;
  • Reduced absenteeism;
  • Improved employee attraction, recruitment, and retention.


Of course, you aren’t guaranteed to encounter these issues or benefits if you offer PTO at your business. Further, the way you create and implement your policy will dictate the effects it has on your organization. If you go about it the right way, you can minimize the chance of experiencing negative consequences, while maximizing the benefit it can bring to you and your employees.

How to Create a PTO Policy

If you choose to make a PTO policy, be thoughtful and deliberate about its structure and implementation. This policy will have significant impacts on your employees and business, both now and in the future. It’s worth taking your time and thinking through each part of the policy to ensure this policy is right for your organization.

Look at the Law

Under United States federal law, you are not legally required to give employees any kind of PTO. Depending on where you live, however, you may be required to under state or local laws. 

Familiarize yourself with any local regulations regarding PTO, holidays, sick leave, parental leave, and any other kind of leave to ensure your policy fully complies with them. Make note of any laws that dictate specific aspects of a policy, such as unused roll-over days or paying out PTO to employees who leave the company.

Address Key Questions

Before anything else, think about how would you answer the following questions, as they will be the backbone of your company’s entire policy:

  • What PTO structure (traditional, a bank, accrual, or unlimited) do you want to use?
  • How much time off do employees get each year?
  • Will you offer any other types of time off, such as unpaid time off and holidays, in addition to PTO?
  • Are employees required to use a certain amount of PTO each year?
  • Does PTO roll over to the next year if employees don’t use it? 
  • Do you pay employees out if they leave the company and have not used all of their PTO?
  • Do new employees need to successfully go through a probationary period before they are eligible to accrue or use PTO?

These are just preliminary considerations. Once you have determined your answers to these questions, come up with additional questions your employees may have about the policy. This will help you find flaws in your policy and prepare for unique situations that will inevitably arise once the policy is enacted.

With all that in mind, you can layer in further concerns and complications, such as how the policy could impact your budget, ability to complete deliverables, and staff levels at busy times of the year. It will take time to understand the full impact the policy will have on your business, but it helps to be thoroughly prepared when planning it out.

Make Different Policies for Different Employees

It may be appropriate to outline different PTO policies for different types of employees. Your full-time employees work more than individuals who work part-time, which may make them deserving of better benefits. For instance, perhaps everyone receives paid time off, but full-time employees accrue it more quickly than part-time employees.

Even if they work comparable hours, consider doing the same thing for salaried and hourly employees. Due to the differences in how they are paid, it may make more sense to have hourly employees accrue PTO based on how many hours they work, while salaried employees receive a certain allotment per pay period. You can also structure entirely different types of policies; for instance, you may have hourly employees accrue PTO, while salaried employees have an unlimited PTO policy.

Require Manager Approval and Advance Notice

Regardless of policy structure, you should require employees to get their time off approved by their supervisors. This will allow you to provide more flexibility in your employees’ schedules while still ensuring that your business has enough coverage to run smoothly when the employee is out. 

You’ll have to decide how managers should treat these requests. Do they accept all requests that come in, or are requests accepted on a first-come, first-serve basis? Supervisors do not have to accept all requests that come in but keep in mind that they should never retract an employee’s PTO request once it has been accepted.Similarly, ask your employees to put in their PTO request well before they plan to use it — perhaps two weeks or a month in advance. This gives your managers enough time to account for their absence and put that in the schedule. Make exceptions for unexpected issues or emergencies, such as if an employee wakes up sick and realizes they can’t come into work that same day.

Track PTO

Finally, once you have created your policy, put it into practice. Look for ways to keep track of PTO, such as with a relevant software solution. Not only will this reduce the workload of your HR team, but it will make it significantly easier for your employees and their supervisors to see how much PTO they have and schedule their time accordingly. 

Take this time to tweak the policy and work out any issues you experience. Once it’s finalized, make sure all of your employees have access to it. As long as it is communicated and everyone in your organization understands it, a PTO policy can be a valuable addition to your company’s benefits package.