Q: How Do I Set Up a PTO Policy?

PTO stands for “paid time off,” and it’s basically any time when employees get paid even though they’re not working. PTO can come in a few different flavors, including:

  • Sick days
  • Vacation days, and
  • Holidays

The question is, how do you design a PTO policy that lets your team collect and use those hard-earned days off when and where they need it? Here are the most important things you need to know about PTO as a business owner.

First off, do I need to offer PTO?

There aren’t any federal laws that tell companies they need to hand out paid vacation or sick time—but there are a ton of state laws you’ll want to brush up on.

That being said, many employers still offer PTO because they know how essential it is to the well-being of their team. In fact, 63 percent of employees view paid time off as one of the top three benefits that influences their job satisfaction, the Society for Human Resource Management found.

Okay, I’m game. How do I design a PTO policy?

Start by reflecting on what matters to your company. Do you want to give your team a lot of autonomy? Do you want people to feel like true owners? Your answers should be grounded in what makes sense for the type of business you run.

Before you start setting up your own PTO policy, here are the main things to think about:

  • What does my state say? Some states, like California, have mandatory sick time policies you must comply with. Also, reporting requirements differ by state, so it’s important to check with yours to make sure you stay compliant.
  • Who is eligible?  
    • Full-time or part-time employees, or both?
  • How much time off should I give?  
    • Unlimited? Two weeks of flexible vacation and sick time?
  • How should my team be able to accrue, or earn, time off?  
    • Do employees earn PTO based on how much they work or is it a fixed amount?
  • What happens with any unused days?  
    • Do unused days roll over to the next year or get paid out if an employee is let go?

Who gets PTO?

Some companies provide PTO to both full- and part-time employees, while others only serve it up to full-timers. It really depends on the kind of company culture you’re trying to create and how your PTO policy can let that vision shine through.

How much time off should employees get?

Once you decide who can get PTO, the next thing you need to figure out is the amount you want to dole out. But remember, that amount should apply to everyone across the board.

Some companies go the unlimited vacation route, which opens up a whole new world of possibilities (and approaches) to get familiar with.

According to the U.S. Bureau of Labor Statistics, the average private industry worker in 2017 received 10 days of vacation after the first year of service. For those who worked for five years, they received 15 days of vacation. However, many companies go above that average to show their teams they really care about their lives outside of work.

How can employees earn that time off?

Next, figure out how your team should be able to accrue, or earn, their time off. With your PTO policy, you can either

  • Grant your team a lump sum of days, regardless of how long they’ve been at the company, or
  • You can set up an accrual policy. This is when employees have to accumulate days based on their tenure at the business.

If an employee hasn’t earned enough vacation days to take time off, some companies also allow folks to borrow against their plans.

If you go the unlimited PTO route, your team doesn’t technically have to earn any days, but you should still write out your expectations (like how employees should communicate their plans), so no one is left scrambling in the eleventh hour.

What happens with unused vacation days?

It’s extremely important to encourage your team to use their PTO. Project Time Off found that in 2017, over half of Americans didn’t redeem all of their vacation days. But what happens with all of those days that go unused? As an employer, it’s up to you. Here’s an overview of the options you have:

  • Capping days. This is when a company puts a cap, or limit, on how many days people can earn. Live in California? The state says that the cap can be 1.5 times the total you can earn in a year. So if you give out 20 days a year, your cap would be 30 days. Be sure to check with your state to see if they have any guidance on this aspect.
  • Carrying over days. This is when you can let any unused vacation days dip into the following year.
  • Paying employees out for unused days. If an employee doesn’t use all of their vacation days, many companies pay out the amount they earned when they leave the company. Depending on where your company is located, you may have to do just that, so definitely check in with your state’s labor office. (In California, “use-it-or-lose-it” PTO policies are illegal.)

For example, let’s say someone earns $400 a day and has eight days left of unused PTO. In that situation, they would get a check for $3,200 when they leave.

Once you nail down the plan design, make sure everything—from eligibility requirements to the way you can earn days—are clearly mapped out in your employee handbook. That way, your team will feel confident knowing exactly what their options are.

Want more info on how to design a PTO policy? HR expert Katie can walk you through the process:


  • Kelly Anne Fitzpatrick

    How do I change my PTO policy? I have unpaid time off- I added a time off policy to track time off – but now I cannot delete it and GUSTO has updated it to look like paid time off. HELP.

    • Gusto Editors

      Hi Kelly — Gusto does not currently support unpaid time off policies and you’ll have to manually subtract hours or earnings. As for deleting your PTO policy, you can go through our Help tab in your Gusto account to contact us and we can walk you through your options for removing it!


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