What is PTO?

As an employer looking to hire new talent or retain your existing employees, offering various fringe benefits, including paid time off, or PTO, is essential.

Offering PTO is one way you can build a healthy and attractive workplace. When workers are encouraged to take PTO, employee burnout decreases, contributing to higher overall productivity. Forbes lists PTO and flexible work schedules as highly valued employee benefits at your company if you want to stay competitive¹ in attracting top talent

As with 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.

Takeaways from this blog post:

• PTO is a benefit that enables American workers to take time off of work while still getting paid. It often includes leave for various categories like holidays, family leave, personal time, bereavement, and paid jury duty.
• PTO policies can vary by state, city, county, and company. However, employers must comply with federal laws regarding PTO, including providing job-protected leave for certain circumstances like military service or long-term medical conditions.
• PTO payout laws vary by state, with some states requiring employers to pay out accumulated and unused PTO upon termination while others don’t.

What does PTO mean?

PTO describes any time you pay your employees their regular wages when they’re not working. Traditionally, employers would create time-off policies that defined specific time-off categories, such as vacation, sick time, personal days, and paid holidays.

Under this method, employers give employees a designated amount of leave per category. Employees could earn additional time off based on how long they’ve been with the company. For example, an employee could be granted two weeks off when hired, and then earn more vacation time every one, three, or five years.

However, PTO is a more modern workplace approach to traditional leave policies. PTO rolls all paid leave categories—such as vacation days, 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 provides greater flexibility.

What are the common types of PTO?

You can include many 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 different. 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.

Employees usually plan paid vacation days in advance and request time off from a supervisor or manager. Once a manager approves the request, employees can take their planned time off. Employees typically use these days to relax and recharge.

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 advanced 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 common 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 some employers to provide a certain amount of paid sick days. So, checking your state requirements when designing your PTO policy is essential.

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

1. Arizona
2. California
3. Colorado
4. Connecticut
5. Illinois
6. Maryland
7. Massachusetts
8. Michigan
9. Minnesota
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.

Additionally, some cities and counties within these states have their own sick time laws that employers in those areas must follow.

3. Paid holidays

Paid holidays include national holidays or specific days off that an entire company observes. Some states, like Texas, have 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 for a family or medical reason.

However, employers of any size can also offer paid family leave outside the FMLA. Some states, like Washington, 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.” However, 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 medical appointments, bank visits, car repairs, attending a child’s school events, etc.

6. Paid bereavement leave

Bereavement leave is time off an employee can take 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, or manage other post-death arrangements.

Employers typically don’t pay employees for this type of time off. 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.

Additionally, five states require employers to offer bereavement leave:

• California (for employers with five or more employees)
• Illinois (for employers with 50 or more employees)
• Maryland (for employers with 15 or more employees)
• Oregon (for employers with 25 or more employees)
• Washington (only for the death of a child)

7. Paid military leave

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

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 allowed to demand that they use their PTO for the leave³.

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’s optional in most states.

Some states require employers to pay employees, in part or full, for jury duty. In contrast, others prevent employers from creating company 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

One way you can structure your PTO is by defining 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, suppose you offer your full-time employees with less than two years of tenure 13 days of PTO a year. In that case, they will accrue four PTO hours each biweekly pay period if they work a 40-hour workweek. Employees can only use the time they’ve accrued up to the current date.

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

Rollover allowances

If you’ve structured your PTO policy to offer a specific number of days per year, you have the option of 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.

If you’ve decided to allow a PTO rollover, you may want to 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 allows employees 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 because salaried workers receive a standard pay rate 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 time off policy can boost employee morale, attract talent, and improve job satisfaction.

What are the advantages of offering PTO at your organization?

Federal law doesn’t require U.S. business owners to offer paid time off benefits, 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, you must include PTO in your company’s compensation 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 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 unscheduled absences, improves employee well-being, and boosts effectiveness at work.
• Flexibility and employee satisfaction: PTO allows employees to use paid time off when needed. This flexibility goes a long way toward having a healthy 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 legally compliant.

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 aside money 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.
   1. You can decide if you want to give more time off hours for every year an employee remains at your company.
3. When your employee requests PTO, they can only use their accrued amount. You pay them for their time off at their standard hourly rate.
   1. You should hold your hourly employees 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 employees, and temporary workers are typically not eligible for PTO. But you can offer it to these individuals if you want to improve employee retention and lower absence rates.

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, such as if they have exhausted their PTO benefits. You should outline these situations in your employment contracts and company handbook for clarity⁴. Plus, you should check your state’s laws before making any deductions.

Do employers have to pay out 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 some states obligate employers 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 significant 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 as part of your benefits package 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 March 11, 2024.

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://webapps.dol.gov/elaws/whd/flsa/overtime/cr4.htm