PTO stands for “paid time off,” and it’s basically any time when employees get paid even though they’re not working. As a small business, how do you design a PTO policy that still lets the business meet its goals while still giving your team work-life balance?
Here are the most important things you need to know about an employee’s PTO as a business owner.
What is a PTO policy?
A PTO policy is a company's set of rules defining how much paid leave employees earn, how it accrues, and how they can request and use it.
PTO can come in a few different flavors, including:
Personal days
Mental health days
Volunteer time
Vacation time
PTO bank where all types of days off are grouped together, as opposed to separating out sick time or personal days from vacation time
Do I need to offer PTO?
Many employers offer PTO because they know how essential it is to the well-being of their team. In fact, 62 percent of workers place a high priority on paid time off, according to the Pew Research Center.
That being said, there aren’t any federal laws that tell companies they need to provide paid days or a specific number of hours for sick time, but be aware of state laws surrounding PTO in your employees’ states.
For example, in Washington State, every employer, regardless of size, must provide paid sick leave. Most employees earn one hour of paid sick leave for every 40 hours worked, with no cap on how much they can accrue in a year, and up to 40 unused hours carry over to the following year. Accrual starts on an employee's first day, though employers can require a 90-day waiting period before the leave is used.
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 require? Some states, like Washington, have mandatory sick time policies you must comply with. Also, reporting requirements differ by state, so check with yours to make sure you stay compliant.
Who is eligible? Decide whether you will offer PTO to part-time, full-time employees, or both.
How many PTO days should my company offer? Consider whether you will provide unlimited PTO or whether you will have it accrue by tenure.
How should my team accrue PTO hours or earn time off? Ask yourself whether you want employees to earn personal time based on how much they work, or if you want to provide a fixed amount. Decide how long new hires have to wait to start using or accruing PTO.
How should PTO be used? Decide if employees need to make PTO requests a certain amount of time in advance, and how they should make their requests. Some companies allow time off to be taken before it has been accrued—decide whether this is right for your company.
What happens with any unused days at the end of the year? Evaluate whether and how many unused days will roll over to the next year, and if you will pay employees out for unused PTO if they leave or are let go.
Who gets PTO?
Some companies provide PTO to both full- and part-time employees, while others only provide it to full-time employees. What you decide depends on the kind of company culture you’re trying to create. The amount of PTO you provide as part of your employee benefits package can let that vision shine through, while assisting with the recruitment and retention of top talent.
How many PTO days should a small business offer employees?
Once you decide who can get PTO, the next thing you need to figure out is the amount you want to offer. But remember, the framework you use should apply equally to everyone.
Some companies go the unlimited vacation route, which opens up a whole new world of possibilities (and approaches) to explore.
According to the US Bureau of Labor Statistics' March 2024 estimates, workers at small businesses (1–99 employees) received this much PTO by tenure, on average:
10 days after 1 year
14 days after 5 years
16 days after 10 years
17 days after 20 years
However, some companies go above that average to show their teams they care about their well-being.
How can employees earn time off?
Next, figure out how your team should be able to accrue, or earn, their time off. With different types of PTO policies, you can either:
Grant your team a lump sum of days, regardless of how long they’ve been at the company.
Set up a PTO accrual policy. This is when employees have to accumulate days based on their tenure at the business.
If an employee hasn’t earned a set number or enough vacation days to take time off, some companies allow employees to borrow against their plans—before they have accrued the time off. This is known as a negative PTO balance.
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.
To determine the accrual rate if you have an accrual policy, you’ll take the maximum amount of time an employee can accrue PTO in a year and divide that by the total amount worked in a year. If an employer can earn a certain number of days off, convert that number of days into hours, so the formula could look like this:
For example, that calculation would look like this for an employee who can earn up to 15 vacation days a year:
What happens with unused vacation days?
According to FlexJobs' Work & PTO Pressure Report, nearly one in four U.S. workers (23 percent) didn’t take a single vacation day in the year prior—even though 82 percent say they have paid time off.
What happens when employees don’t use PTO? 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 the number of days people can earn. Live in California? The state says that the cap must be reasonable. If yours is 1.75 times the total you can earn in a year, then if you give out 20 days a year, your cap would be 35 days. Be sure to check with your state to see if they have any guidance on this aspect.
Carry over days. This is when you let any unused vacation days (or a certain amount) roll over 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 employees work, you may have to provide a PTO payout within a certain pay period, so check in with your state's labor office. (In California, “use-it-or-lose-it” PTO policies are unlawful.)
Once you nail down the plan design, make sure everything—from eligibility requirements to the way you can earn days—is clearly mapped out in your employee handbook. That way, your team will feel confident knowing exactly what their options are.
How to track PTO
Tracking PTO is important, even if you have an unlimited PTO policy. Disputes related to wage or performance may arise where a record of time off would be needed to reconcile matters. While some may use calendars, spreadsheets, or templates for manual recordkeeping, automating tracking time off—whether you have hourly or salaried employees or whether you offer a fixed or unlimited amount of vacation—is efficient and can keep you compliant. See how Gusto can automate these tasks with time tools, including calculating wages.
What are other types of leave besides vacation?
A PTO policy for vacation is separate from other types of leave. You may be subject to government regulation on these leaves, or you may have set your own standards as part of your overall benefits package. Other types of leave include:
Jury duty leave: For doing your civic duty as a US citizen and appearing for federal, state, or local jury service after receiving a summons.
Parental leave: For taking care of a child, whether through birth, adoption, or foster care.
Family leave: For caring for a qualifying family member (e.g., child, spouse, parent) who has a health condition.
Medical leave: For caring for your own serious health condition that makes it impossible for you to work for an extended period of time.
Bereavement leave: For grieving the loss of loved ones and to attend funeral services.
Federal jury duty is protected by the Jury System Improvement Act of 1978, and there could be laws in your area that protect state or local jury service. However, regarding payment while an employee is a juror, the legalities vary based on where you are, so check your jurisdiction.
With parental, family, and medical leave, an employer must follow the rules set by the Family and Medical Leave Act (FMLA), which provides up to 12 weeks of unpaid leave a year with job protection. Employers have to abide by FMLA if the business has 50 or more employees in 20 or more workweeks in either the current calendar year or the previous calendar year. If an employer has fewer than 50 employees, then state laws for family leave and medical leave could still apply.
Even if an employer fits the criteria for a company that must be FMLA compliant, not every employee at that business may be covered by FMLA. Employees who don’t meet the criteria below aren’t eligible for FMLA:
Worked at least 1,250 hours (excluding PTO) during the 12 months before the leave
Been employed for a 12-month period
Worked at a location with 50 or more employees within 75 miles.
As of 2026, six states have enacted dedicated bereavement leave laws: California, Illinois, Maryland, Oregon, Vermont, and Washington. Most provide unpaid, job-protected leave, except for Washington, which offers paid bereavement leave through its Paid Family and Medical Leave program. Several other states, including Massachusetts and New York, have bereavement legislation under active consideration.
Overall, your leave policies should match your company's culture and values, and be consistent with any core pillars you develop. Part of your company’s best practices may include offering paid leave or a longer leave than what state or federal law requires. Even if not legally required, you may still allow PTO to accrue while someone is on leave or vacation.
PTO policies such as these signal to prospective hires and your current staff that you care about people and their physical, mental, and emotional well-being. As additional upsides, PTO could potentially even reduce attrition in the long run, with one study finding it lowers the odds of an employee quitting by 35%.
Want more info on how to design a PTO policy? This human resources expert can walk you through the process.
How to Set up the Right PTO Policy for Your Business
FAQs
How does PTO accrual work?
PTO accrual means employees earn paid time off gradually based on hours worked, rather than receiving it all at once. To calculate the rate, divide the maximum PTO hours an employee can earn in a year by their total hours worked that year. For example, an employee earning up to 15 days a year would accrue about 0.0577 hours of PTO for every hour worked. Instead of accrual, some employers choose to grant a lump sum of days upfront regardless of tenure.
What are common rules for requesting and approving PTO?
Most PTO policies require employees to submit requests a set amount of time in advance, often through an HR system, calendar, or manager approval process. Employers typically outline how far ahead requests must be made and who has authority to approve them. Some companies also let employees use PTO before it's fully accrued, though this varies by policy and should be clearly spelled out in the employee handbook.
Can PTO be used intermittently for partial days off, or only full days?
Whether PTO can be taken in partial-day increments depends entirely on the employer's policy — there's no federal rule requiring either approach. Many companies allow half-day or hourly PTO for flexibility, while others require full-day use to simplify tracking. Employers should specify this clearly in their policy, since it affects both payroll calculations and staffing coverage.
How should PTO be handled for employees on probationary periods?
Employers commonly require new hires to complete a waiting period, often around 90 days, before they can begin accruing or using PTO, even in states with mandatory sick leave laws. During this time, accrual may still start on day one even if usage is delayed. Companies should state their probationary rules explicitly so new employees know when their time off benefits actually become available.
Are there legal requirements for PTO payout upon retirement versus resignation?
Most state laws that require PTO payout treat all forms of voluntary separation the same way, meaning retirement and resignation are generally handled identically under payout rules. The obligation to pay out unused PTO—and how quickly—depends on state law rather than the reason an employee leaves. Employers should check their state's specific rules, since some states mandate payout while others leave it up to company policy.
How does PTO interact with other leave types like FMLA or state-mandated sick leave?
PTO is separate from job-protected leave like the FMLA, which provides up to 12 weeks of unpaid, protected leave for qualifying medical and family reasons at businesses with 50 or more employees. Employers can allow PTO to continue accruing during FMLA leave, even though it isn't legally required. State-mandated sick leave, like Washington's, operates independently too, with its own accrual rules employers must follow regardless of their broader PTO policy.
Do employers have to pay out unused PTO when an employee leaves?
Whether unused PTO must be paid out when an employee leaves depends on state law, not federal law. Some states, like California, prohibit "use-it-or-lose-it" policies and require payout of all earned, unused PTO regardless of why someone leaves. In states without such mandates, it's up to the employer's policy, so businesses should confirm their state's requirements and clearly document their payout rules.
