PTO (Paid Time Off) Explained: What It Is, How It Works, Types of PTO Policies & More

What is Paid Time Off (PTO)?

Paid time off (PTO) is when your employer pays you to take time away from work. PTO usually means vacation time, sick leave, and personal time. But it can also include other types of compensated leave, such as parental leave, family and medical leave, jury duty or voting leave, and even volunteering days.

PTO is one of the most popular benefits that a company can offer, after health insurance. The average U.S. worker gets 10-14 paid vacation days per year, plus nine common paid holidays. Employers often give more PTO than the average to entice job candidates and to encourage employees to stay.

How Does Paid Time Off Work?

PTO is typically earned based on the hours you work. For example, you might earn 1 hour of time off for every 40 hours worked (i.e. one workweek). PTO usually combines vacation, sick time, and other types of paid time off into one policy, but some companies choose to maintain distinct PTO policies for different types of leave (e.g. vacation vs. sick time).

There are four types of PTO policy: traditional accrued PTO, unlimited PTO, bank PTO, and flex PTO (discretionary PTO). Each policy type has its own details and nuances, pros and cons.

How Traditional PTO Works

Under a traditional PTO policy, paid time off accrues (is earned) with time worked. For example, you might accrue 1 hour of vacation for every 40 hours you work. PTO usually becomes available to use as it accrues. Alternatively, your employer can front-load your PTO so that you can use it earlier in the year.

A company may separate out vacation, sick time, and other types of leave into their own policies. Each leave type might follow a traditional accrual model, or have its own unique rules and guidelines.

With a traditional PTO policy, your employer sets the:

• Accrual rate
• Minimum and maximum balances
• Waiting periods
• Blackout dates
• Use-it-or-lose-it rules
• PTO payout program
• And other guidelines

Companies with traditional PTO policies have to track accruals and usage to ensure that employees are paid properly. In addition, employers need to stay compliant with local, state, and federal time off laws that regulate the accrual, tracking, recording and reporting of employee leave. 

For example, states with mandatory paid sick leave also require that sick leave accrues with time worked, at a minimum rate established by the law. Employers must be able to prove that their PTO or sick leave policy meets those minimum requirements.

Additionally, if you leave your company, you might be entitled to be paid out the value of your accrued-but-unused PTO. In states that require PTO payout at separation, employers with traditional PTO policies must keep accurate records of time off accrued and used so that they can pay out the proper amount. 

How Unlimited PTO Works

Unlimited PTO is exactly what it says on the tin: as much paid time off as you need, available to take when you need it, with no limits on how much you take. This gives you flexibility and ownership over your work and your time off. In many ways, it’s a vote of confidence in you by your company. 

Companies like unlimited PTO because it’s easier to manage (on paper, at least) and because it eliminates a major financial liability on their books. Unfortunately, it can also create big problems.

Downsides of Unlimited PTO

Unlimited PTO is never really unlimited: there’s always an upper limit on what’s acceptable. But in states like Colorado, an employer that says it offers unlimited PTO but doesn’t actually let its employees take more than a certain amount can be required to pay out unused vacation when an employee leaves.

What’s more, unlimited PTO has to be administered fairly and consistently, but this is very hard to ensure. If one manager approves most of their team’s time off but refuses one employee’s requests, that can lead to resentment, disengagement, and could open the door to a discrimination lawsuit.

Also, unlimited PTO gets extremely complicated when it overlaps with other types of paid leave, such as holidays, sick time, parental leave, and FMLA.

Read more about the pros and cons of unlimited PTO.

How Bank PTO Works

Bank PTO policies lump together vacation time, sick, and other paid leave into one fixed number of days (a PTO “bank”) that you draw on over the course of the year. Your company may grant (front-load) your full PTO balance at the beginning of the year, or require you to accrue leave before you can use it.

In essence, bank PTO policies combine the accrual system of traditional policies with the flexibility of unlimited PTO. They're easy for employees to understand and easy for HR to manage. However, they come with numerous severe drawbacks.

Downsides of Bank PTO

The benefits of bank PTO are balanced against heavy downsides.

• Bank policies incentivize employees to work while sick.
  • If taking a sick day means losing a vacation day later in the year, we're more likely to "shrug it off" and work while sick so we can take a longer vacation later in the year.
• Bank policies effectively encourage employees to take less time off.
  • People naturally tend to hang on to their PTO for fear that we'll need it in the future, leading us to overwork, disengage and burn out in the short-term.
• Bank PTO policies are extremely difficult (nearly impossible) to keep in compliance.
  • States with mandatory paid sick leave laws like Oregon and Maryland require that you regularly inform your employees of their current sick leave balances. 
  • In states that prohibit use-it-or-lose-it for sick leave but allow it for vacation time, bank policies that require employees to forfeit unused PTO are probably non-compliant.
  • States that require PTO payout at separation often have specific rules or guidelines regarding how their payout laws apply to bank policies.

Flex Time Off (FTO) and Discretionary Time Off (DTO)

Flex Time Off (FTO) and Discretionary Time Off (DTO) are uncommon terms that are commonly misunderstood. There is basically no standardization in how they’re used; many FTO or DTO policies could just as easily be called unlimited or bank PTO. That said, there are some differences that set DTO and FTO policies apart from unlimited PTO and traditional PTO:

• Flex Time Off (FTO) means that employees can take time off whenever they need for whatever purpose. But unlike unlimited PTO, FTO policies grant a fixed number of paid time off days that employees draw down from or accrue throughout the year.
• Discretionary Time Off (DTO) policies are similar to flex time, in that it gives employees flexibility and ownership over when and how they use their time off. On the other hand, some companies use DTO as an adjective to describe their traditional or bank policies.

Pros and Cons of Common PTO Policies

Types of Paid Time Off and Leave

Vacation Time

Vacation time is paid time off meant to help you relax and recharge. Most of the time, that happens on vacation (trip to the beach, anyone?) But vacation often serves as a form of “catch-all” PTO that people use whenever they need to take time off that doesn’t fall into another category.

Sick Leave

Sick leave is time off your employer gives you to care for your physical wellbeing (and, increasingly, mental wellness). In theory, sick leave is simple: if you come down with the flu, you call in sick and take sick leave. However, people often use sick leave to care for their family members, which makes it overlap with formal Family & Medical Leave.

Personal Time

Personal time is a general form of paid time off. Some companies lump together vacation, sick, and other types of paid leave under a “personal time” label. Others add personal time as a PTO category that can be used for general life events and activities like non-medical appointments or a child’s sporting event.

Parental Leave

Parental leave is time off given to care for a newborn or newly-adopted child. In the past, parental leave was usually only granted to mothers (maternity leave). Increasingly, however, employers are granting paternity leave to fathers, or expanding their parental leave policies to cover both parents. 

The United States is one of the seven countries in the world that doesn’t require paid parental leave: the others are Papua New Guinea, Micronesia, the Marshall Islands, Nauru, Palau, and Tonga. The U.S. government’s Family & Medical Leave Act (FMLA) provides 12 weeks of unpaid maternity leave, but has strict eligibility requirements. 

21 U.S. states have their own Family & Medical Leave laws, which typically include paid parental leave. Additionally, some American companies choose voluntarily to offer paid parental leave to their employees. But overall, only 21% of private employees in the U.S. have access to paid parental leave.

Family & Medical Leave

Paid Family and Medical Leave (PFML) is time off that your employer gives you to care for yourself or for your family members. For example, you might take extended PFML to care for a spouse who is in hospital, or take one-day PFML to bring an elderly parent to a doctor’s appointment. Family and medical leave can be taken concurrently (many days in a row) or intermittently (a day here and there).

The U.S. Federal government does not require paid family and medical leave. Instead, the Family & Medical Leave Act (FMLA) requires employers to give up to 12 weeks of unpaid job-protected leave to certain eligible employees. HR departments must keep and report accurate records of each and every employee leave taken under the FMLA.

Family & Medical Leave Act (FMLA) Eligibility Requirements:

• Must have worked at the company for at least 12 months,
• Must have worked at least 1,250 hours during that period, and
• Must work at a location where at least 50 employees operate, or within 75 miles of such a location

21 U.S. states have their own Family & Medical Leave laws that build on top of the foundation established by the federal FMLA. Of these:

• 13 states require Paid Family & Medical Leave (PFML)
• Hawaii, Montana, and Wisconsin require unpaid leave, not paid leave
• Alaska, South Carolina, and South Dakota’s laws apply to state employees only 
• New Hampshire and Vermont have voluntary programs

When Family & Medical Leave meets other PTO policies, complications arise. The intersection of unlimited PTO and PFML is especially complicated. Make sure you fully understand and account for the interactions between PFML and other types of leave.

Bereavement Leave

Bereavement leave is time off that your employer gives you to grieve the passing of a family member, close friend, or other loved one. Bereavement leave can be paid or unpaid. Most states do not require companies to give bereavement leave, but many employers choose to do so in order to support their employees during trying times.

Voting Leave

Voting leave is time off that your employer gives you to vote in local, state, or federal elections. Many states require companies to allow time off for voting; a smaller subset of states require paid time off for voting. Additionally, some states allow employers to require advance notice for voting leave, or to require proof of having actually voted.

Jury Duty Leave

Jury duty leave is time off granted to serve on a jury in a local, state, or federal jurisdiction. While federal law does not require employers to grant job-protected jury duty leave, every state prohibits employers from firing or otherwise penalizing employees who take leave to fulfill their jury duty obligations. 10 states (plus the District of Columbia) require paid jury duty leave; 15 states prohibit employers from requiring their employees to use vacation time or other PTO for jury duty.

Civic Leave

Some companies group together Voting Leave and Jury Duty Leave under the name “Civic Leave”. This serves the same purpose of complying with local and state laws that require employers to grant job-protected time off (paid or unpaid) to serve civic duties like voting or serving on a jury.

Sabbatical Leave

A sabbatical is an extended Leave of Absence (LoA) during which an employee is paid to study or travel away from work. Sabbaticals are most common in academic professions, but have spread to other fields. Sabbatical leave is rare: only 11% of employers offer it at all, and only 5% offer paid sabbatical leave.

Volunteer Days

Many companies help their employees give back to their communities by giving a small handful of paid volunteer days. These are PTO days in addition to typical vacation and sick days, that you can use to volunteer with charitable organizations or causes that you care about. For example, you might use a volunteer day to help at an animal shelter, or provide water and snacks to runners at a charity 5K race.

Military Leave

Military leave is an absence from work granted to employees who are also members of the U.S. National Guard or a reserve component of the Armed Forces. Military leave is mandated by the federal government through the Uniformed Services Employment and Reemployment Rights Act (USERRA). In addition, many states have laws that expand military leave benefits beyond the federal baseline.

USERRA and state military leave laws have diligent, and often onerous, administration and reporting requirements. As an employer or as an employee, read up on USERRA and your state's military leave laws to understand your rights and requirements.

Which PTO Policy Should You Choose?

Every PTO policy has its pros and cons. Which one is best for you depends on several factors, some of which are very clear and some of which are harder to define. Here’s what you should consider when choosing a PTO policy for your company:

When to Choose Unlimited PTO

Unlimited PTO policies succeed or fail depending on your culture. They can be great for early-stage companies and smaller teams, where the organization’s culture supports. But as a company grows, it often makes sense to move away from unlimited.

Remember: unlimited PTO is essentially a vote of confidence in your employees. If you can’t trust them to manage their own time off, don’t go with unlimited.

When to Choose Traditional PTO

Traditional PTO policies are “safer”. They’re easier to keep in compliance with time off laws, and the explicit rules and guidelines you set in your policy will help you avoid the culture and operational issues that can come with an unlimited policy. 

However, it’s very important to be sure that your policy grants enough time off for employees to feel supported and satisfied. And to avoid losing hours every week administering your policies, use time off software to automate PTO accruals, balances, tracking, management, and other processes.

When to Choose Bank PTO

Lump-sum policies that group together vacation, sick days, and other time off are easy for employees to understand and simple for HR to manage. This can be an attractive option for overworked HR workers who simply don’t have time for PTO management.

On the other hand, bank policies can discourage time off and bring compliance dangers. If taking a sick day means cutting into your vacation time (and vice versa), employees are less likely to take time off at all. Also, many states with PTO laws also require PTO records to distinguish between leave types.

Why You Should Have Multiple PTO Policies

A very common mistake is to think that you have to choose only one PTO policy for your entire organization. In reality, it rarely makes sense to apply one blanket policy to everyone. Instead, as companies grow, they end up maintaining several policies at once. 

Larger enterprises like to keep traditional policies for their hourly and salaried workers, but an unlimited policy for their executives. This is because highly-paid execs could create a massive PTO financial liability that would have to be paid out at separation. An unlimited PTO policy eliminates this liability, but granting unlimited vacation to all of your workers across the board can create huge risks.

⁠In addition, most companies with front-line or customer support workers have specific rules around black-out dates and ensuring workforce coverage. These rules don’t necessarily apply to other workers, like software developers or marketers. Each department, then, merits its own PTO policy that accounts for the specific needs or requirements of the department and the nature of its work.

Finally, you should localize your PTO policies. Different countries have very different standards around what's acceptable. In the U.S., 11 vacation days is average, but in countries like France, 6 weeks of vacation is the norm. That's on top of legal requirements: the U.S. and Costa Rica do not have the same leave laws, but companies with employees in both countries need to comply with both country's laws.

When to Go From Unlimited to Traditional PTO

Many companies start with unlimited PTO and then move to a traditional policy. The primary factors that lead companies to move away from unlimited PTO are growth and culture, and time off compliance.

Growth and culture: As a company grows in size, its culture tends to become diluted. A company that starts off with a very strong, positive culture around time off may find that usage, tracking and management become unreliable as headcount increases. 

For unlimited PTO to work, you need to be able to trust that all of your people are going to deploy it in a way that is consistent and fair, and which aligns with the goals of your organization. Once you can’t be sure of this, it’s time to move away from unlimited PTO.

Time off compliance: Many federal and state laws come into effect as your company grows. The Family & Medical Leave Act (FMLA), for example, kicks in when a company reaches 50 employees. 

States with mandatory paid sick leave laws apply different standards based on your revenue and company size. A company that expands into a new location has to comply with that state or country’s laws concerning PTO and mandatory leave.

Unlimited PTO is extremely hard to keep in compliance with time off laws and regulations. Over time, it leads to major compliance problems, legal headaches, and even lawsuits. At a certain point, it makes more sense to switch to a traditional PTO policy that is localized to be compliant.

Time Off Compliance: State Laws and SOX

In addition to federal leave laws, many U.S. states have laws that require employers to give paid sick leave, ban “use-it-or-lose-it” policies, require PTO payout at employment separation, or guarantee the right to paid family and medical leave. Each PTO policy type has its own benefits and drawbacks when it comes to time off compliance.

U.S. States That Prohibit Use-It-Or-Lose-It

“Use-it-or-lose-it” policies require you to forfeit earned paid leave if you don’t use it by a particular date. Currently, 16 U.S. states prohibit use-it-or-lose-it for vacation time, sick leave, or both.

Traditional PTO policies must comply with use-it-or-lose-it bans by either carrying over unused PTO from one year to the next, or paying out unused PTO. Some states prohibit use-it-or-lose-it for sick leave but not vacation leave. This unused accrued PTO creates a major financial liability for companies, but PTO payout solves this problem.

Unlimited PTO policies are compliant with use-it-or-lose-it bans by default, and are an effective way to eliminate the financial liability of unused paid time off.

Bank PTO policies are difficult to keep compliant with use-it-or-lose-it bans because many states prohibit it for sick leave but allow it for vacation time. In these states, a PTO policy that groups together vacation and sick leave probably needs to meet the requirements of the most employee-friendly law (i.e. if a state prohibits use-it-or-lose-it for sick leave, bank policies with forfeiture are not allowed).

Read up on the details of your state’s use-it-or-lose-it laws using our interactive map.

U.S. States That Require PTO Payout

Many U.S. states require companies to pay employees the value of their unused paid leave when they leave the company. 20 states require PTO payout at separation for vacation time, and 7 states require it for unused paid sick leave as well. 

Some states require PTO payout under all circumstances, and some states outright refuse to recognize policies that include terms under which an employee forfeits their right to payout at separation (e.g. failing to give 2 weeks’ notice).

Traditional PTO policies must be carefully written to comply with a state’s PTO payout laws. If you want to include forfeiture terms, make sure that you comply with your state’s requirements, such as including the terms in your written PTO policy and requiring written acknowledgement from your employees.

Unlimited PTO policies are usually a compliant way to avoid paying out unused PTO at separation, but some states have laws, Department of Labor guidelines, or court case precedents that apply to unlimited policies in the context of PTO payout at separation.

Bank PTO policies that lump together vacation and sick leave may have to pay out unused PTO if the state requires payout of one leave type. Some states have specific rules or guidelines regarding how their payout laws apply to policies that group together vacation time, sick leave, and other paid leave.

Read up on the details of your state’s PTO payout laws here.

U.S. States with Family & Medical Leave Laws

21 U.S. states have passed Family & Medical Leave laws on top of the federal government’s Family & Medical Leave Act (FMLA) which guarantees the right to unpaid FMLA leave to employees who meet specific requirements. 13 states require paid family and medical leave (PFML), 3 require unpaid leave, 3 apply to state employees only, and 2 offer voluntary programs.

In these states, the law sets a minimum requirement that an employer’s own policies must meet or exceed.

Traditional PTO policies are typically separate from family and medical leave policies. That’s to say, companies that offer family and medical leave usually do so through a PTO policy that is separate from their vacation and sick leave policies. In order to avoid confusion or problems with leave administration, your family and medical leave policy should clearly communicate the circumstances where it applies.

Unlimited PTO policies are extremely difficult to manage in the context of family and medical leave. Employees are likely to supplement their PFML with PTO, or take general PTO in circumstances where a Family & Medical Leave law applies. If you’re not very careful, your unlimited PTO policy can violate FMLA, create huge leave administration headaches, and even open your company to a potential lawsuit. Learn more about the intersection of unlimited PTO and Family & Medical Leave laws here.

Bank PTO policies that include “personal time” can be confusing for employees who, understandably, believe that caring for a family member falls into this category. On the contrary, however, family and medical leave laws usually specify the circumstances under which they apply. To avoid confusion and leave administration problems, your bank PTO policy should clearly define the types of leave it covers, and your other policies should define when legally-mandated family and medical leave comes into play.

U.S. States with Mandatory Paid Sick Leave

⁠19 U.S. states currently require that employers grant paid sick leave to their employees. Each state's law specifies the accrual rate (e.g. 1 hour of paid sick leave for every 30 hours work). State sick leave laws usually include provisions for employers to "bring your own" paid sick leave policy, but each state has different rules and regulations that apply.

Traditional sick leave policies (accrual-based) must meet or exceed the minimum requirements established by the law. Accrual rates and caps, carryover, waiting periods, pay rate, and front-loading are all regulated by the law. 

Bringing a traditional sick leave policy into compliance is usually simple, but requires careful administration. This increases the burden on HR people and managers, unless you use a modern time off manager that automates and streamlines these processes.

Unlimited sick leave policies are subject to specific rules and guidelines, such as requiring diligent records of sick leave requests and approvals. From the state’s perspective, they want to make sure that your employees’ right to paid sick leave is being respected in actual fact, not just in your policy's wording.

A poorly-implemented unlimited sick leave policy can result in liabilities: in Colorado, for example, a company that claims to offer unlimited PTO but in reality is found to place a limit on how much employees can take may be liable for PTO payout at separation.

Bank sick leave policies that lump together vacation time, sick leave, and other paid time off are often out of compliance by default because the law states that employees must accrue paid sick leave with hours worked. What’s more, states like Oregon and Maryland require that you regularly inform employees of their sick leave balances. And New Mexico’s Department of Labor explicitly recommends that you clearly mark paid sick leave in your records, in case you end up being investigated for a wage complaint. 

Sarbanes-Oxley (SOX) and Time Off Compliance

The Sarbanes Oxley (SOX) Act is a U.S. law that requires all publicly-traded and some private companies to implement and report internal accounting controls to the Securities & Exchange Commission (SEC).

Section 404 of SOX impacts many human resources functions, including paid time off records and reporting. Unused accrued PTO represents a major liability, because in certain states it may have to be paid out every year or when an employee leaves the company. PTO liabilities often run into the millions of dollars for mid-sized and larger organizations.

As part of their SOX compliance, organizations must include accurate information on their PTO liabilities in their financial reporting. Misstatement of PTO-related liabilities, even resulting from unseen errors in time off records, can result in severe penalties. 

Where to Learn More About PTO

Read up on PTO laws by state:

• Use-it-or-lose-it PTO
• PTO payout at separation

Learn more about unlimited PTO:

• How to do unlimited PTO right
• Pros and cons of unlimited PTO
• How it works with state PTO laws
• How it works with other types of leave⁠

PTO payout and cash-out:

• What, when and how PTO payout works
• How to add PTO cash-out to your PTO policy