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What is PTO?

Employee Benefits • July 14, 2023 at 8:52 AM • Written by: Elizabeth Walker

As an employer looking to hire new talent or retain your existing employees, it’s important to offer a variety of fringe benefits, including paid time off, also known as PTO.

Offering PTO is a crucial element of a healthy and attractive workplace. When employees take PTO, your organization’s productivity increases while burnout decreases. In fact, Forbes1 lists PTO as a highly valued employee benefit to have at your company if you want to stay competitive.

If you’re not currently offering your employees a time off benefit, you may struggle to attract new workers and retain your current staff. But like other employee benefits, the ins and outs of PTO can be confusing at first.

In this article, we’ll walk you through how PTO works, common types of PTO benefits and strategies, and why making a generous PTO plan a priority at your company is advantageous.

Want to read more about fringe benefits? Check out our guide for more information

What does PTO mean?

PTO describes any time you pay your employees when they’re not working. Traditional paid leave policies typically include a few different categories, such as vacation and sick time, personal days, and paid holidays.

Under this method, employers give employees a designated amount of leave per category. They can earn additional time off based on how long they’ve been with the company. For example, an employee can earn more vacation time every one, three, or five years.

However, PTO is a more modern approach to the traditional way of offering leave. PTO rolls all paid leave categories—such as vacation, sick time, personal time, holidays, and more—into one category.

Employees receive a certain number of PTO days each year, which they can use on whatever they choose. According to our 2022 employee benefits survey, 79% of small and midsize employers surveyed offer PTO.

Some companies may prefer a traditional leave policy if they want to understand how employees use their time off. But for employers willing to give their employees more freedom to choose for themselves, PTO better provides that flexibility.

What are the common types of PTO?

You can include many different types of paid leave categories in your PTO policy. While you can choose whichever works best for your business and employees, we’ve listed eight common types of leave you can include in your PTO policy in the sections below.

1. Paid vacation

Many people use the terms PTO and paid vacation policies interchangeably, but they’re not the same. PTO is any time you pay an employee while away from work, not just on vacation. Simply put, vacation time is PTO, but not all PTO is vacation time.

Paid vacation days are usually planned in advance, requested, and approved by a supervisor or manager. Employees typically use these days to relax, recharge, or take a few days off from work.

Your PTO policy should include guidelines on when your employees can take vacation time (if your industry has specific requirements or blackout periods), how early they should give notice to their supervisor, and who should manage their work in their absence.

2. Paid sick leave

Paid sick leave is another PTO benefit that’s just as popular as paid vacation time. It allows sick employees to take time off to recover from medical conditions, like an illness or an injury.

On the federal level, no requirements mandate you to offer paid sick leave. However, many states now require employers to provide a certain amount of paid sick days based on company size or how many hours an employee has worked. So it’s essential to check your state requirements when designing your PTO policy.

The following states have laws requiring private employers to offer paid sick leave2:

  1. Arizona
  2. California
  3. Colorado
  4. Connecticut
  5. Illinois (specific to just Chicago and Cook County, IL)
  6. Maryland
  7. Massachusetts
  8. Michigan
  9. Minnesota (specific to Duluth, Minneapolis, Saint Paul, MN)
  10. New Jersey
  11. New Mexico
  12. New York
  13. Oregon
  14. Pennsylvania (specific to Allegheny County, Philadelphia, and Pittsburgh, PA)
  15. Rhode Island
  16. Vermont
  17. Washington
  18. Washington D.C.

Maine and Nevada require employers to provide a certain amount of accrued PTO that employees can use for any reason.

3. Paid holidays

Paid holidays include national holidays or specific days off that an entire company observes. Some states, like Texas, include state holidays as paid holidays for state employees.

Employees don’t request time off for paid holidays since they’re usually already considered paid days off for the whole company. If a holiday falls on a weekend, employers can designate the previous Friday or the following Monday as the paid day off to observe the holiday.

4. Paid family leave

If you’re an employer with 50 or more employees, the federal government regulates how you handle family leave. The Family Medical Leave Act (FMLA) requires you to provide up to 12 weeks of unpaid, job-protected leave to eligible employees to care for a family member with a serious health condition.

However, employers of any size can also offer paid family leave outside the FMLA. Some states, like Washington, also require paid family medical leave.

This leave is usually for employees who must care for a family member, such as a newborn baby, a newly adopted child, or someone with severe medical issues. Maternity and paternity leave can often fall under this bucket as well.

5. Paid personal time

Like vacation time, “personal time off” is often used interchangeably with “paid time off.” But personal time off is a category that falls under the PTO umbrella. Personal time includes any time an employee takes off to handle short-term activities, like doctor's appointments, bank visits, car repairs, attending a child’s school events, etc.

6. Paid bereavement leave

Bereavement leave is time off taken by an employee due to the death of a close individual, usually a family member. Employees take this leave to grieve for a loved one, attend a funeral, and/or manage other post-death arrangements.

Employers typically don’t pay employees for bereavement time. They may instead offer a few days each year of unpaid time for bereavement. However, you can provide a certain number of days for paid bereavement leave in your PTO policy if you choose.

7. Paid military leave

Military leave is time off for an employee to serve on active duty or attend military training. To be eligible for military leave, the employee must offer advanced notice, written or verbal, of the upcoming military service or training.

Federal military leave policy doesn’t require employers to pay employees while on military leave. Employees can use their PTO for military-related absences if they wish, but employers aren’t allowed3 to require that they use their PTO for the leave.

Additionally, employers must maintain the employee's position and restore all pay and benefits when the employee returns from leave.

8. Paid jury duty

Many companies provide paid time off for employees to report for jury duty. However, it isn’t mandatory for most states.

Some states require employers to pay employees, in part or in full, for jury duty, while others prevent employers from creating policies requiring employees to use their PTO for jury duty. Many states also prohibit employers from docking pay or PTO when an employee serves jury duty.

Each state has its own jury duty service laws, so ensure you understand your area's laws.

How is PTO typically structured?

There are a few ways you can structure your organization’s PTO policy. We’ll explain what those are in the sections below.

Set number of days

The first way to structure your PTO is with a set number of days per year. For example, you may allow employees 20 days of PTO upfront starting on January 1 of a given year for them to use whenever they wish, whether for sick leave, personal time, or a vacation.

If you want to delay PTO benefits for new hires, that’s also an option. You can place new hires on a probationary period for a certain amount of time, like their first 90 days of employment, before they receive their 20 days of PTO for the rest of the year.

You can also increase the number of PTO days for employees who have been with your company longer.

Accrued time off

Accrued time off lets employees accumulate a certain amount of PTO for each pay period. It’s often used with hourly workers, so they can earn PTO based on how many hours they worked during a given period of time.

For example, if you offer your full-time employees with less than two years of tenure 13 days of PTO a year, each biweekly pay period, they will accrue four PTO hours if they work a 40-hour workweek. Employees can only use the time they’ve accrued up to the current date.

Employers often choose to let all unused accrued PTO expire at the end of the calendar and reset their employees at the beginning of the year with a zero-hour balance. This is known as a “use it or lose it” policy.

Rollover allowances

Another way of structuring your PTO is by allowing rollovers from one year to the next. This gives your employees a chance to use their unused PTO days the following year if they didn’t have the opportunity to use them in the current year.

For example, if you have an employee who has only used ten of their 15 days of PTO one year, five days would roll over to the following year. If you give a set amount of PTO at the start of each year, your employee may start the new year with 20 PTO days.

However, you may set a cap on how many hours employees can roll over each year before they start to lose unused hours.

Unlimited PTO

Lastly, there’s an unlimited PTO policy, the latest form of PTO. It gives employees the freedom to take off as much time as they want if their supervisor approves it and they complete their work on time beforehand.

Employers typically give unlimited PTO to salaried employees over hourly employees. This is because salaried employees receive a standard rate of pay regardless of the time they take off. Some employers believe their employees will abuse the unlimited policy and hesitate to use this strategy.

But if used correctly, an unlimited PTO policy can boost employee loyalty, attract talent, and improve job satisfaction4.

What are the advantages of offering PTO at your organization?

Federal law doesn’t require U.S. business owners to offer paid time off, but that doesn’t mean you shouldn’t do it. Offering PTO at your company is an excellent way to stay competitive in the job market so you can hire and retain the best workers.

Part two of our employee benefits survey found that most employees, particularly younger employees, consider PTO a “very important” benefit, with 93% of employees valuing it strongly. So it’s essential to include PTO in your company’s benefits package.

Other advantages offering include:

  • Improved manager/employee relationships: Instead of cashing in allotted sick days for vacation time and other personal matters, employees can use their total PTO allotment at their discretion without being dishonest or their employer looking down on their reason for taking time off.
  • Greater transparency: Employers typically receive more notice about scheduled vacations and can plan for adequate coverage. When employees can allocate their PTO days accordingly without using sick days, employers have more notice for time off, allowing them to fill in absences without any last-minute stress.
  • More productivity: A positive and inclusive company culture encourages the use of PTO so employees can take breaks and return to work more refreshed and productive. It also reduces absence rates and helps employees be more effective at work.
  • Flexibility and employee satisfaction: PTO allows employees to use paid time off when they need it most. This flexibility goes a long way toward greater work-life balance, making employees feel more satisfied with their jobs.

How does PTO work with hourly and salaried employees?

PTO can work for both non-exempt and exempt employees. But managers need to know how to process time off requests accurately. Employers pay hourly employees for hours worked, but salaried employees receive their salaries regardless of time worked.

Let’s look at how you can manage these two groups at your company so you remain in compliance with federal law.

Hourly employees

The accrual method is the best way to allot PTO for your hourly employees. This is because companies with a significant amount of hourly workers tend to have a high employee turnover.

Budgeting your PTO with an accrual policy may be easier than setting the money aside at your employee’s start date. That way, you won’t lose out on productivity if the employee decides to leave soon after.

The following is a step-by-step method of PTO for hourly employees:

  1. PTO for hourly employees will accrue every biweekly pay period.
  2. Employees earn an hour of PTO for every 30 hours they work.
    • You can decide if you want to give more hours of PTO for every year an employee remains at your company.
  3. When your employee requests PTO, they can only use their accrued amount. They’ll be paid for their time off at their standard hourly rate.
    • Hourly employees should be held to the same time-off request standard as salaried employees, such as requesting time off in a reasonable amount of time so someone can cover their work during their absence.

Interns, independent contractors, part-time workers, and temporary employees are typically not eligible for PTO.

Salaried employees

If you have salaried employees, you must pay them for their full workweek, typically 40 hours, regardless of PTO. You can deduct used hours of PTO from their balance if you don’t have unlimited PTO, but their total pay rate remains the same.

This is because the Fair Labor Standards Act (FLSA) requires you to pay your exempt employees a fixed weekly salary which you can’t reduce based on the quality or quantity of the employee's work.

However, pay deductions are permissible under FLSA regulations for salaried employees in specific situations, like if they have exhausted their PTO benefits. You should outline these situations5 in your employment contracts and company handbook for clarity. Plus, you should check your state’s laws before making any deductions.

Do employers have to payout an employee’s PTO if they leave their organization?

No federal laws mandate you to pay out your PTO; however, PTO payout laws vary by state. This means that some employers are legally obligated to pay out PTO upon employment termination, but some don’t.

Without a state law or company policy requiring you to pay out PTO, you don’t have to pay your employees for unused PTO if they leave your business.

Some states, like California, require employers to pay out accumulated and unused PTO when they terminate an employee unless the employer shows the employee had the opportunity to use the vacation time before termination.

Because each state is different, it’s essential to check your state’s PTO payout laws to ensure your payout structure meets all legal requirements.

Conclusion

PTO programs give your employees more power and flexibility when determining their work-life balance, which makes the benefit a major selling point for today’s workforce. It’s an excellent way to recruit top talent, increase productivity, and encourage your employees to take time off to recharge and recover—without worrying about losing pay.

How you structure your PTO will vary based on your business needs, size, state, and industry. But it’s worth taking the time to implement and outline a policy in your employee handbook. Whatever method you choose, your employees will surely value your company’s commitment to creating a strong company culture where they feel appreciated.

This article was originally published on October 12, 2022. It was last updated on July 14, 2023.

  1. https://www.forbes.com/sites/carolinecastrillon/2022/10/02/top-ten-most-valued-employee-benefits/?sh=7541613221ac
  2. https://www.paycor.com/resource-center/articles/paid-sick-leave-laws-by-state/
  3. https://www.ecfr.gov/current/title-20/chapter-IX/part-1002/subpart-D/subject-group-ECFR445761424bb812c/section-1002.153
  4. https://www.betterup.com/blog/unlimited-pto
  5. https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/fs17g_salary.pdf

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Elizabeth Walker

Elizabeth Walker is a content marketing specialist at PeopleKeep. She has worked for the company since April 2021. Elizabeth has been a writer for more than 20 years and has written several poems and short stories, in addition to publishing two children’s books in 2019 and 2021. Her background as a musician and love of the arts continues to inspire her writing and strengthens her ability to be creative.