Paid Time-Off Policies: Best Practices and Benefits

Paid time-off policies are a key component of an organization’s overall benefits package. Leveraging PTO policies can demonstrate a company’s values to their workers; attract, retain and motivate top talent; and provide healthier employee/employer relationships. To construct an effective PTO policy, you must consider:

• your corporate values
• your business needs
• your employee compensation structure
• your employees’ demographics and priorities
• compliance regulations applying to your workers
• financial liability
• the labor market relevant to your industry

That is a lot to consider, but we’ve made it easy! Read our complete best-practices guide below to demystify each component as you work to construct and implement a customized PTO policy that works for your unique organization.

What is a PTO policy?

A PTO policy is a written description of an employer’s paid leave offerings. This policy should cover the different types of PTO, who is eligible to receive PTO, as well as the use and approval criteria for these benefits. These policies have many different components and need to be periodically reviewed and revised to ensure they continue to serve the best interests of the business and the employees utilizing it.

Types of PTO

PTO refers to any company-provided time off where employees still receive pay while they are not working. Employers may use the term PTO to encompass all paid time off, or they may differentiate between various types, such as:

Vacation time

Paid time off for employees to use to take vacations. May also be used for additional purposes if an organization does not provide other PTO, such as for illness or appointments.

Sick time

Paid time off for employees to use if they are sick or need to care for sick family members. Some states/localities have requirements for employers to offer a certain amount of sick time each year.

Personal days

Paid time off for employees to use for personal matters that aren’t covered by vacation or sick leave. This could include things like attending non-medical appointments, handling family or legal matters, or celebrating a non-company holiday.

Bereavement leave

Paid time off for employees to grieve the loss of a family member or friend. Most employers will specify the type of relationship eligible for paid bereavement leave and may or may not require substantiation, such as a memorial program.

Parental leave

Paid time off for employees who become new parents, which can include birth, adoption or foster of a child.

Military leave

Paid time off for employees who are unable to work due to military training obligations or deployment.

Volunteer time off

Paid time off for employees to volunteer at approved organizations within their communities.

Company paid holidays

Paid time off for designated federally recognized or banking holidays.

Types of PTO policies

Here are a few different types of PTO accrual policies you can apply based on organization, industry and company policy.

PTO accruals

When PTO accrues, it is most often earned over time versus being awarded in one lump sum. PTO accruals may be based on pay periods, hours worked or specific milestones (e.g., years of service with the company). For example, a long-tenured employee may earn eight hours of PTO for every 80 hours worked. Salaried employees are typically assumed to work 40 hours per week for hourly PTO accrual purposes.

Organizing PTO based on accruals allows employers to limit how much time off employees can access at any given time. This helps ensure business continuity and encourage PTO utilization throughout the year instead of all at once. Additionally, organizations can implement a “waiting period” for new hires to use PTO, which allows for successful training and onboarding when joining a new company.

Accruals also help limit companies’ exposure to large PTO payouts for employees with shorter tenures or those who leave soon after receiving their annual PTO award. However, some states have specific laws or requirements regarding PTO payout.

Accrued PTO also benefits employees by allowing them to calculate and anticipate their available paid time off so they can plan vacations or appointments more effectively.

Lump sum

A lump-sum PTO policy awards employees their entire time-off benefit for the whole year in one big sum. This sort of policy most often refills on an annual basis, either on the employee’s anniversary or on Jan. 1. In plans that renew on the calendar year, new hires are typically given a prorated amount of PTO based on the amount of time they will work for the company in the current year or have worked for the company in the preceding calendar year.

For example, if a company gives 20 days of PTO annually and an employee joins the team July 1, they would be given 10 days of PTO upon hire and a subsequent 20 days on Jan. 1. When a lump sum is awarded on an employee’s start date or at the beginning of the calendar year, it is referred to as a “front-loaded” PTO policy.

Unlimited PTO

Unlimited PTO is a policy where employees can take time off as needed. Time-off amounts are not restricted, and employees are trusted to take time off as long as it doesn’t interfere with their professional goals and responsibilities. For unlimited-PTO policies to be effective, organizations should:

• create detailed supporting documents so there are no misunderstandings about how and when unlimited time off can be used
• require employees to request time off and have managers deny or approve them to ensure business continuity
• track utilization to assess program strength and trends

While ambiguity can lead to policy abuse, unclear unlimited-PTO policies can also result in employees using less time than they would under a traditional PTO setup.

When employees don’t understand the expectations around PTO use, many err on the side of caution and take too little time off. Leaders failing to take time off openly and model desired work-life-balance behaviors also contribute to ineffective unlimited-PTO policies.

Tracking the reason for time-off requests is also important if employers want their policy to only be used for vacations as opposed to covering protected leaves of absence. Due to the administration requirements, many employers prefer to keep paid sick leave, FMLA, ADA and other types of protected leave (paid or unpaid) separate from their unlimited-PTO policy. A key aspect of unlimited-PTO policies is to define the max PTO allowed consecutively and the appropriate use of the PTO.

PTO and overtime

Your organization’s approach to PTO and overtime may differ, but when calculating overtime, the common practice is to only include hours worked for non-exempt employees. Likewise, if PTO is awarded based on hours worked, a 40-hour workweek is assumed to be the standard.

However, these are simply the most common guidelines. Your organization may choose to implement a different policy.

PTO policy best practices

Clearly communicate your PTO expectations

Historically, PTO is an area of the business that has been unmanaged due to a lack of clarity and expectations. There is a saying: “When you think you are communicating too much, you might just be communicating enough!” This is a good rule of thumb when communicating PTO policies and practices. PTO policies should be included in employee handbooks, posted on intranets, discussed in company meetings and celebrated when they are used correctly. This is particularly important when managing an unlimited-PTO policy. When the rules are more open to interpretation, it is important to communicate how the policy is used and when it is appropriate to take time off.

Reward and reinforce desired PTO behavior

Workers following your company’s PTO policy correctly should be acknowledged and celebrated. Companies like Google reward adherence to their time-off request procedure with additional PTO. When their employees request time off well in advance, they get an extra day of PTO.

Other companies reward employees for taking enough consecutive days off with a vacation bonus to spend on their vacation. Some organizations have a PTO buy-out option that allows employees to “sell” a portion of their PTO accruals if they have already utilized a certain amount within the year.

Managers should be trained on PTO policies to ensure they fairly and consistently apply the correct request and approval rules to all team members. Companies also support managers by leveraging technology to minimize the possibility of human error and bias. Time and attendance solutions like Paycom’s GONE^® automate approvals and denials based on the rules of your company’s time-off policies.

Assess PTO program effectiveness

Track PTO usage and payouts

Collecting data is the most important part of any analysis, and your PTO process is no exception. Even when an organization has an unlimited-PTO policy, it is important to track the use of the plan to ensure it’s being used correctly and that the company is getting the desired effect.

Relying on manual tracking systems or failing to collect data on PTO usage may lead to business disruptions due to excessive time off. Employers may also discover that their employees are not taking enough time to have a comfortable work-life balance, which could lead to burnout and turnover.

To refine your PTO strategy and ensure it’s working effectively for your organization, consider tracking these key datapoints:

• Time usage: How much PTO are employees using throughout the year, and are there any trends or patterns emerging?
• Year-end balances: What are employees’ ending balances, and how much are they rolling over to the next year?
• Termination payouts: What’s the average amount being paid out to departing employees, and is it having a notable impact on the bottom line?
• Accrual limits: How often are employees hitting their accrual limits, and is this resulting in lost time or additional costs?
• Rollover losses: Are employees losing time during the annual rollover, and if so, what adjustments can be made?

Solicit manager and employee feedback

Information about plan usage is not the only data to consider when evaluating the strength of a PTO plan. Manager and employee satisfaction with PTO plans can be a strong indicator of whether a plan is achieving the desired outcomes.

Whether feedback is collected annually, monthly, quarterly or even informally during conversations with employees, their perspective matters. Employers who are hoping to create a positive work environment that includes policies supporting their employees should always be collecting feedback and, when feasible, making changes based on the feedback they receive. A powerful survey tool can help HR easily generate, collect, review and report on workforce feedback.

Audit for employment law compliance

Time-off regulations often change according to different jurisdictions or work locations. In order for an organization to remain compliant, employers should audit their PTO policies regularly. Hiring employees in a new state or new city, new laws, and changes in local employee head count can all require employers to update their time-off policies.

Revise and roll out changes

PTO policies should be updated when there are new business objectives to support, as workforce demographics shift, when morale or retention needs a lift, if industry benchmarking shows the plan is outdated, or when regulations require changes. Changes should be communicated effectively with as much notice as possible so employees and managers are able to plan for the changes.

How to create a well-designed PTO policy benefitting your business

Learn PTO policy requirements in your state

PTO requirements may differ by work location, state or city. Make sure your policies are compliant with all applicable state and local PTO laws wherever you have employees. To remain up to date and compliant, conduct an annual review of your PTO policies and make sure you’re aware of any new regulations relating to paid time off.

Determine the total number of days off

The key decision for employers is how many PTO days to offer employees. There are a variety of ways to establish the number of days off to offer in your policy. We will discuss two common ways to determine PTO days.

One method is to benchmark your offering against peers within your industry or labor market. You may choose to lead (give more than the average), lag (give less than the average) or match what is considered standard in the market. Depending on your business strategy, each of these options may present distinct benefits or disadvantages to attracting and retaining top talent.

For example, if you are an established organization that has no problem attracting new hires and retaining your team members, you may choose to lag the market because you can afford to give less time off while still accomplishing your business goals. Conversely, if your company is not well known or is in an industry that is difficult to hire for, you may choose to lead the market and offer a more generous policy to entice new hires to join your team.

Another way to choose the amount of PTO you provide involves more in-depth business analysis within your own company to determine how much time you can afford to pay your employees when they’re not productive. From a business perspective, you are paying for something (in this case, their time), but you are not receiving services from that time. How much of this can your business sustain based on your business model and projected revenue? Any PTO policy should be designed to balance the employee experience and bottom-line impact.

For example, a web design firm may charge their clients by the project but pay their employees a fixed salary or hourly rate. Employees who take paid time off, in this case, lose the company revenue for undelivered projects on top of the normal payroll expense. Your organization may be able to calculate how much time off you are able to afford, either enterprisewide or by department, and then build the most appropriate package.

PTO rollover and use-it-or-lose-it policies

PTO rollover occurs when employees carry over some of their unused PTO into the following year, up to a certain cap. Use-it-or-lose-it policies are the opposite of PTO rollover, where employees’ PTO balances are reset to zero at the end of the year. Each of these practices has its own benefits and drawbacks.

PTO rollover is great for employees who would like to save some time and take a longer vacation after one or more years of saving up PTO hours. This also allows employees more flexibility around how they use their time and doesn’t penalize employees who must prioritize critical business projects during a peak season. It is important for leaders to ensure employees understand how much time off is available after they complete a project so they don’t experience burnout or a poor work-life balance.

Use-it-or-lose-it policies encourage employees to take their available time off. This also allows employers to plan for the use of time more consistently, as employees are not able to save up PTO over the years and take extended time off. This also protects employers from having to pay out excessive policy accruals when an employee exits the company. On the negative side, employees may feel cheated if they don’t have the chance to take off the time they have been given because it was erased at the end of the year. Clear communication, regular monitoring of accruals and timely reminders can help ensure employees understand how to maximize their PTO.

PTO policy considerations and key points

There are many different factors to consider and components you can choose from when designing your PTO policy. The choices you make on the following policy components will depend on your team’s needs, the way your teams are compensated, your business directives and the culture you are building. When designing your PTO policy, consider each of the following components so you can craft a complete, intentional policy.

It is important to remember that when crafting your policy, you must adhere to the local laws and regulations around pay and PTO. If your organization or groups of employees are subject to union agreements, those contracts must be considered as well.

Who should be eligible for PTO?

Your policy should clearly outline who is eligible to earn and take PTO. There may be some workers on your team who get PTO, some who can only take unpaid time off and some who do not qualify for PTO depending on their status, tenure or level within the company.

In most instances, it is permissible to have different policies for different employee groups. For example, an employer may choose to have an unlimited-PTO policy for salaried employees and an accrual policy for hourly employees.

Let’s look at this example of a PTO policy: Within your organization, a 20-day PTO policy that accrues in regular intervals by pay period may be the best policy for hourly, in-store retail teams. Crafting unique PTO policies within an organization to suit the culture, objectives and scheduling requirements of different teams is appropriate as long as both policies are lawful and are communicated effectively.

Once your PTO policies are in place, Paycom’s GONE assists in efficiently automating them. You can easily assign separate policies to different employee populations or departments, making it easy to enforce policies quickly and fairly with GONE’s automated approvals.

What types of absences does PTO usually cover?

When crafting your policy, it is important to decide and communicate what types of PTO are covered. Many types of leave may not be earned or accrued, such as parental leave or an absence related to jury duty and military deployments. Employers should be clear in their definitions of what is acceptable for each type of accrual, limits to consecutive days off, and if any documentation is required to substantiate the PTO. Some recommendations are included below:

• bereavement — time off to mourn the death of a loved one, make necessary arrangements, attend memorial services or handle estates
• sick time — time off for personal illness, illness of an immediate family member, doctors’ appointments, or when bereavement leave is exhausted and additional time is needed
• vacation time — Time off that is traditionally planned and requested in advance for travel, staycations, or whenever time away from work is needed to recharge or handle personal commitments
• holidays — federal or state holidays that you may choose to observe as a company or that employees can take off as a part of their PTO package

Employers may outline acceptable use for their different PTO types but should ensure rules are applied consistently across the organization.

When should employees start earning PTO?

Your PTO program may include a waiting period where employees do not begin accruing PTO or are unable to use accrued PTO until they have reached a certain length of time with the company. This type of stipulation is designed to protect the company against new hires joining the team and immediately taking time off before they are trained or have begun to contribute meaningfully to the team. Your policy should clearly state all critical dates, including when accrual begins, so that there is no confusion or room for misunderstandings. Some candidates may negotiate existing time off during their offer process, and employers should determine if that time will be paid or unpaid.

How should PTO accrue?

PTO may accrue at different rates or intervals depending on the way employees are compensated. If employees work hourly shifts that vary week to week, it might be best for them to earn time off based on hours worked. This way, the time off they accrue corresponds with the number of hours they put into the business. On the other hand, for teams that work consistent hours or those that are paid a salary, it may make more sense for time off to accrue based on regularly occurring intervals or payroll cycles.

Are employers required to roll over PTO?

Some states have explicit laws that prohibit employers from having a use-it-or-lose-it policy. As a result, employers must allow employees to carry over accrued but unused vacation to the next year or pay employees annually for the unused time. Allowing PTO to roll over from one year to the next gives employees the flexibility to take time off or to save it for future purposes. Employers may allow employees to roll over all accrued time or set a cap on the amount that can be carried over from one year to the next.

Should there be a maximum balance for a PTO rollover?

For policies that allow PTO to roll over from one year to the next, employers should consider implementing a cap on the maximum amount of PTO an employee can save to guard against heavy payout responsibilities or employees taking an unusually extended leave. Under a policy of this type, an employee would lose any additional accruals over the imposed maximum days if they did not use them by year-end or the rollover date.

For example, an employer who gives 10 days of PTO per year and allows employees to roll over 10 days from one year to the next may consider a 20-day limit on the total amount of time an employee can roll over in future years. Employers should be mindful of each work location’s PTO maximum balance requirements, as some states that prohibit use-it-or-lose-it policies require max balances to be reasonable.

How much notice should employees give?

Some organizations do not have strict regulations around advance notice periods of intent to use PTO, and for others, it is imperative to know about absences far in advance for planning or scheduling purposes. Employers may require that employees provide advance notice for some types of paid time off, such as vacation. Others may be taken without much or any notice, such as sick leave. As with most policies, clear documentation is advisable so expectations are clear and employees understand their obligations when requesting time off.

When designing your policy, consider the scheduling and coverage needs of your business. If expectations and regulations are not clearly documented, norms will be decided by the unspoken aspects of your culture and may not be regulated enough to support the requirements of the business.

What is the time-off request procedure?

The time-off request procedure is the process by which your employees request to use their accrued or awarded paid time off. A clear procedure with step-by-step instructions should be created and documented so employees understand exactly how to request time off, how time off is approved and by whom, the appeals process for a denied request, where their time is tracked and how to plan for future leave based on accrual rates.
Investing in effective tech is the most efficient way to provide accessibility and visibility to PTO policies for employers and employees. Paycom’s tools, like Time-Off Requests featuring GONE, simplify the process of using and managing time-off policies and empower employees to make the most of their time.

When should unused PTO be paid out?

You may be required by law to pay employees for the PTO they have earned but do not use, or you may choose to voluntarily include unused time-off payouts in your PTO policy. This time should be paid out to employees who resign or are terminated. For employees paid on an hourly basis, the payout is often calculated by multiplying the employee’s hourly rate by the number of unused PTO hours. For salaried employees, the process may involve determining the daily or hourly rate based on their salary and then calculating the payout similarly. Employers should also differentiate between the types of PTO that will be paid out upon separation from the company. For example, vacation time may be paid out but not sick time.

How does PTO interact with other leave types?

Employers should be prepared for employees to try to maximize their paid time off whenever possible. For example, they may ask to stack paid sick or vacation time on top of paid parental leave. Employees may request to take time off they have not yet accrued as unpaid, or to go into the negatives in their accruals. Employers should have clearly documented rules regarding these scenarios and outlined processes for exceptions, if any.

Why an effective PTO policy matters

Crafting effective policies is a cornerstone of a total rewards philosophy. In this exploration of best practices for PTO policies, we delved into the importance of clarity, accessibility and relevance in policy design. As businesses navigate an ever-changing landscape, adopting a proactive approach to PTO not only ensures compliance with legal standards but also cultivates a positive and transparent work environment. By involving stakeholders, fostering continuous communication, and regularly reviewing and updating policies, organizations can adapt to emerging challenges and evolving employee needs.

A robust policy framework serves as a guide to allow organizations to effectively manage PTO, align teams, mitigate risks and promote a culture of accountability and shared values. Through thoughtful policy creation and implementation, companies can set the stage for sustained growth, employee satisfaction and long-term success.

But how do employers effectively maintain this policy, let alone adapt it in the face of new employment laws and business needs? With automation, it’s easier than you might think. Using decision-making criteria that is customized to your policy, organizations can automatically approve and deny time-off requests, sparing supervisors and admin staff from a time-consuming, error-prone and generally unmanaged process.

The benefit of time-off automation isn’t just speculated — it’s proven. A commissioned study conducted by Forrester Consulting on behalf of Paycom reveals how a composite organization of interviewed clients benefited from the technology of GONE. Beyond receiving a projected three-year ROI of up to 821%, the organization also annually saved:

• each manager nearly a workweek of unproductive hours*
• HR, finance and admin staff nearly 200 hours
• up to 240 hours in avoidable overtime

And not every benefit was clearly quantifiable. For example, the organization found automated time-off tech made it significantly easier for managers to incorporate and enforce changes to their time-off policies. Plus, employees enjoyed a better experience overall, since their time-off requests were quickly and clearly answered.

PTO policies: FAQs

Is PTO required by law?

PTO is not required by federal law. Some state laws regulate PTO and other types of leave. It is important to understand state and local legislation as it pertains to your PTO policy.

Does PTO need to be factored in when calculating overtime?

Companies are not required to count any time other than hours worked toward overtime pay calculations for non-exempt employees. This means that, in most cases, PTO hours are not used for overtime calculation purposes.

What is a front-loaded PTO policy?

A front-loaded PTO policy means an employer awards time up front versus an employee accruing paid time off.

Should the PTO policy be the same for salary and part-time employees?

Some organizations may choose to have multiple types of PTO that are assigned to different departments or positions depending on their needs and the specific conditions of those roles. Whatever the makeup of your organization, the structure of your PTO policy is at your discretion, although it’s important to make sure you adhere to state and local regulations.

What are the benefits of a PTO policy?

Giving employees PTO is part of an organizations overall total compensation strategy. PTO allows employees to rest, recharge and be more productive during their working hours. PTO reduces burnout and improves morale.

*Refers to up to 30 hours out of a traditional 40-hour workweek.

A commissioned study conducted by Forrester Consulting on behalf of Paycom (October 2024). Results are for a composite organization based on interviewed clients with a three-year projected ROI of 102%-821% and include annual savings of up to 192 hours for HR, finance and admin teams.