What is a Reasonable PTO Policy?

Types of PTO policies

There are three basic types of PTO policies to consider for your small business: bank PTO, accrued PTO and unlimited PTO.

Bank PTO

A bank PTO policy pools all an employee’s PTO into a single source they can draw from as they see fit, whether it’s sick time, vacation time or personal time off. This policy generally does not require the employee to provide a reason to their employer unless they’re taking several days off in a row.

• Bank PTO example: On January 1, each employee is awarded 15 PTO days to use at their discretion during the calendar year.
• Bank PTO benefits: Each employee gets the same amount of PTO they can use however they like, creating a sense of trust and responsibility. Employees can also make PTO requests on their first day of work.
• Bank PTO drawbacks: This type of policy may encourage sick employees to come into work to try to save their banked PTO for vacations or personal days.

Accrued PTO

An accrued PTO policy allows employees to earn time off according to how much they work or their years of service. They may earn separate sick days and vacation days or all-encompassing PTO days. Unless capped, PTO days continue to accrue until the employee uses them.

• Accrued PTO example: Each employee accrues one day of PTO for every four weeks of service.
• Accrued PTO benefits: This type of policy can motivate employees to work to earn their PTO and give them a sense of accomplishment when they do.
• Accrued PTO drawbacks: This policy can encourage workers to come in when they’re ill, as they may not want to “waste” their hard-earned PTO days. It can also be demotivating for new employees to start with zero days.

Unlimited PTO

Unlimited PTO, also known as an open policy, operates on a trust basis between the employer and employee. An unlimited PTO policy means there’s no cap on how many PTO days an employee can take, provided their work gets done and the unlimited vacation policy is not abused.

• Unlimited PTO example: Each employee is allowed to take PTO whenever needed, as much as needed, with approval from their supervisor.
• Unlimited PTO benefits: Employees feel trusted and understand that a positive work-life balance is a priority for the company. If an employee quits or is laid off, their employer isn’t required to pay out unused vacation days.
• Unlimited PTO drawbacks: In some company structures, this policy could backfire and be taken advantage of. Carefully consider your workplace culture and whether your employees will treat the policy responsibly.

PTO policy best practices

A good PTO policy benefits the employer, employees and the company as a whole. When a PTO policy is comprehensive, generous and flexible, employees feel valued and cared for, increasing their loyalty to your company and potentially boosting productivity.

“The best PTO policy offers flexible, diverse and portable benefits to mirror today’s workforce,” said Rob Whalen, CEO and co-founder of PTO Exchange. “It’s a win-win if both the employee and the employer are happy and benefiting from the policy.”

Here are some best practices for creating and maintaining a good PTO policy.

1. Create a flexible PTO policy.

Job flexibility has become more crucial than ever, especially for millennials and Gen Zers, who are quickly becoming the largest generations in today’s workforce. Millennials tend to stay longer at jobs that offer more flexible benefits, so ensure your PTO policy meets those expectations. 

Business.com spoke with Whalen and other HR experts who shared the following tips for creating a flexible and open PTO policy.

• Bundle all PTO types. Flexible and open PTO policies bundle all PTO types, allowing employees to choose the type of leave policies they need.
• Accommodate diverse workforces. Flexible and open PTO policies can help you prioritize diversity and inclusion by allowing employees to take off for meaningful religious and national holidays. They also account for alternative days off, such as a mental health day, doctor’s appointment or medical leave.
• Convey trust. Flexible and open PTO policies convey that you trust your employees and don’t run a controlling work environment.

2. Make your PTO policy clear and understandable.

Your PTO program must be clearly defined, with no question as to what is and is not permitted. This clarity protects business owners and helps employees feel supported and informed. 

Your PTO policy should be clearly written, detailed and accessible to everyone employed at your organization. Ensure that it covers all employees and that they know how to request or inform management about PTO days they plan to take.

“Clearly outlining PTO policies and encouraging its use promotes healthy work-life balance, allowing employees to return to work rejuvenated and even more engaged,” said Amy Marcum, manager of HR services at Insperity.

3. Create a PTO policy based on your company culture.

An unlimited PTO policy may look great on paper, but it won’t work out so well in practice if your business doesn’t encourage time off. You must have a good understanding of your business, employees, and company or industry culture to know what policy style will work best.

If you’re unsure what type of policy would work best for your staff, send an anonymous survey to employees to uncover how they view your organization’s time-off culture and what they’d like to see in a PTO policy. Adjust your program based on the responses.

4. Keep your policy compliant with laws and regulations. 

Although no federal law mandates PTO, some states do have regulations regarding time off, such as paid sick leave. Be sure to check with your state guidelines to ensure your PTO policy is compliant with your legal obligations. 

“If you are in a state that requires sick time and [you] combine it with PTO, [then] make sure you state that the amount of time given includes the state-mandated hours for sick time off with pay,” said Jim Chichanski, founder and chief human resources officer at Flex HR.

5. Take into consideration the FMLA.

The FMLA, short for the Family and Medical Leave Act, is a law that requires certain employers to provide eligible employees with unpaid, job-protected leave for qualifying reasons, such as to care for a spouse, child or parent who has a serious health condition. It does not grant team members paid time off. However, employees may be required to use some or all of their employer-provided PTO before being awarded FMLA coverage. 

It’s best to consult with a labor law attorney when developing your PTO policy to determine how it should work in conjunction with unpaid FMLA leave — ensuring you don’t run afoul of Department of Labor regulations.

6. Offer incentives or benefits with your PTO policy.

An oft-criticized PTO policy is “use it or lose it,” where any accrued vacation time is lost if an employee doesn’t use it by the end of the calendar year. While accrual arrangements encourage employees to use their time off, they can be demoralizing when workers feel they can’t or shouldn’t take advantage of their PTO hours — and then lose their unused time when the year ends.

Instead of a “use it or lose it” policy, consider allowing unused PTO to roll over to the next year. However, it’s important to understand how this will impact your company’s finance and accounting team. 

“The amount rolled over must be calculated and entered into the liability of the company’s balance sheet,” said Chichanski. “Note that if [you are] looking to sell the company, new owners do not like to see liabilities on the balance sheet.”

As another option, Whalen suggested building benefits into your PTO policy. “With flexible PTO benefits, employees have the ability to transfer the value of any unused PTO to other priorities and needs, such as funding a 401(k), [paying] emergency expenses, paying down student loan debt or funding a real vacation,” he said.

7. Consider offering opportunities for personal time off.

Many companies provide opportunities for using PTO, such as supporting a charity, doing volunteer work, exploring professional development or taking a sabbatical. For example, McDonald’s corporate employees can take up to eight weeks of paid sabbatical leave every 10 years, while Adobe offers a paid sabbatical to its employees once every five years. 

If you’re not a huge company or your employees don’t need sabbaticals, consider offering PTO for volunteer time. This has the dual benefit of increasing your company’s philanthropic efforts while fulfilling and valuing your employees’ time. Company volunteer days have also proven to be effective at improving teamwork among employees.

8. Encourage employees to use their PTO.

A PTO plan is only good if your employees actually use it. Even if they have available PTO days, many employees feel unable to take time off. In fact, a recent study by Pew Research Center found more than half of employees don’t use all of their PTO days. 

When asked why they don’t take time off, employees reported they are: 

• Worried about falling behind at work (49 percent).
• Feel bad about co-workers taking on additional work (43 percent).
• Think it will hurt their chances for career advancement (19 percent). 
• Think it might cost them their job (16 percent).
• Discouraged from doing so by their manager or supervisor (12 percent).

Taking time away from work is necessary for avoiding burnout, so it’s important that supervisors encourage their staff to take time off. They should also lead by example.

“Regularly encouraging employees to use their PTO through open dialogue, setting clear expectations on policies and leadership leading by example by taking their own PTO, shows team members it is OK to unplug,” said Marcum. “If the current policy does not encourage PTO, it may be beneficial to add in clauses regarding year-end limitations or recommending at least one consecutive week of PTO.”

9. Regularly evaluate your PTO policies.

Just like with any HR policy, it’s important to regularly review and evaluate your PTO policy and adjust it as needed. Consider what you’re offering against current market trends and changing employee needs. You can survey employees to check the pulse on whether they’re still satisfied with what you are offering.

“With the increasing amount of paid sick and paid time off mandates, confirming the policy is compliant regularly is important as well,” said Marcum. 

When evaluating your PTO policy, Marcum suggests taking the following steps: 

1. Review business cycles to identify times when PTO is more manageable for the company and teams.
2. Establish an efficient backup system for employees.
3. Create or update a PTO policy that encourages time off.

Regularly reviewing your PTO policy will help ensure it is the best offering for your company and workforce.

PTO policy sample

The following is a sample PTO policy you can adjust and use for your business: 

At [company name], PTO (paid time off) for each employee begins accruing after a 60-day probationary period following their start date. To be eligible for PTO, the employee must work full time and have a minimum of 32 earned hours weekly. Part-time employees who work fewer than 32 hours weekly are not eligible for PTO. PTO is not accrued during any periods of unpaid leave, disability leave and workers’ compensation leave.

PTO can be taken in increments starting at two-hour blocks. PTO can be used for any purpose. All PTO requests should be submitted directly to your supervisor. PTO requests can be denied based on staffing needs. Advance notice is preferred for PTO requests, but [company name] understands unscheduled PTO is needed from time to time. In nonemergency cases, please notify a supervisor of your PTO request at least 24 hours in advance. If more than three days of PTO are used without prior scheduling, a medical note may be requested by your supervisor. If excessive unscheduled PTO is used by the employee, disciplinary action may be taken by [company name], up to and including termination. Prior to any termination, two warnings will be provided in writing to the employee.

PTO is paid at your normal base rate and is not subject to any overtime rate. Accrual is based on the amount of time you have worked for [company name]. Employees who have worked at [company name] for less than five years earn four hours of PTO for every two weeks of full-time work. Annual accrual will equal 13 days per year. Employees who have worked for [company name] for more than five years earn eight hours for every two weeks of full-time work. Annual accrual will amount to 26 days per year.

Payment of all PTO upon termination is subject to [state] law. After [state-required time period], you will receive payment for all PTO hours you did not use prior to termination, resignation or retirement. Cash-outs of PTO are also permitted for current employees, with a maximum of 40 hours of PTO available annually.

This sample PTO policy can apply to most businesses. However, small companies might want more flexible PTO rules. For example, some smaller organizations don’t give each team member a set number of PTO days annually. Instead, they allow employees to take off whatever time they need as long as the requests are within reason. Some companies also give each employee paid time off for their birthday. The best HR software can help you craft the right policy for your business and manage your team’s time off.

Jennifer Dublino contributed to this article. Some source interviews were conducted for a previous version of this article.