Your Full Guide to Paid Time Off (PTO)

Andrew Buck August 17, 2021

As a business owner or HR executive who is managing employees, one of your critical tasks is to efficiently track and coordinate employee leave. 

One of the aspects of managing employee leave is deciding how much paid time off (PTO) you provide your team members, and which types of leaves fall under paid vacation days.

In this article, we’ll cover what is PTO, the different types of PTO leaves, PTO laws you need to consider, and how to calculate paid time off for your employees.

What is Paid Time Off (PTO)?

Paid time off, also interchangeably referred to as PTO, is the time your staff is away from work, but they’re getting compensated as usual.

PTO can cover several different types of leaves, like vacation time, sick days, etc., as we will discuss below.

Do I Have to Provide PTO?

For the most part, you’re not required by law in the United States to provide paid time off to your employees. 

There are a few states that mandate you provide paid sick days, and we will list them below when we cover PTO laws. 

But increasingly, it is becoming more common for companies to provide PTO to their staff to promote employee wellbeing and satisfaction. More vacation time consistently ranks among the top of the list when it comes to the most desirable employee benefits.

Evidence also suggests that providing time away from work to recharge can result in increased productivity and better outcomes for your business.

So even though there might not be legal requirements, it could be in your best interest to provide some PTO to attract and retain top performers, and to get the most out of them.

Ultimately, whether you provide PTO, and how many days, will depend on your time off policy

Based on your policy, every employee (and your HR team) should be clear on how many leave days they get, what types of leaves, and how many of those days are paid time off.

Paid Time Off (PTO) vs. Unpaid Time Off (UTO)

Understand that time off may not always be paid.

As the names suggest, the biggest difference between PTO and unpaid time off (UTO) is that your employees are getting paid while they’re away, and for the other one they’re not.

But the laws are also different when it comes to requirements for how many days you must provide. 

For example, there are certain laws that regulate unpaid time off in the United States, namely the Family and Medical Leave Act

If you’re a company with more than 50 employees, then you might be required to provide up to 12 weeks of maternity or paternity leave for certain eligible employees.

Another thing to consider when thinking about paid vs. unpaid time off for your team is which types of leaves will fall under each category, as we will discuss in the next section.

Further reading: learn how much PTO is average around the world.

What are the Different Types of Paid Time Off?

The different types of leave that are paid days off would depend, for the most part, on your time off policy.

If there are labor laws that require you to provide a certain number of paid days to your team, first you need to cover those to remain compliant.

Once you cover the minimum required by the law, you can then decide which types of leaves would cover any additional paid leave days. 

Here are a few examples of leave types that could fall under paid time off.

Sick leave – If your employees need to recover from an injury or illness, then they’d take sick days off. 

As mentioned previously, there are states in the USA (and other jurisdictions around the world) that require you to provide paid sick days. But you could also opt to provide paid sick leave as a benefit even if you’re not legally required to do so.

Vacation days – More vacation time ranks only behind better healthcare when it comes to the benefits employees desire most as a perk. 

You could use paid vacation days in your time off policy as a recruiting tool. It also boosts employee morale, which means they’re more likely to go above and beyond for you, and contribute to a positive work environment.

Military leave – If you employ military personnel in the USA, and they need to report for active duty, active duty training, or inactive duty training, you might choose to provide them with paid time off. 

Note that you must follow USERRA (Uniformed Services Employment and Reemployment Rights Act) if you have military personnel in your staff. USERRA requires you provide unpaid time off to service members for up to five cumulative years.

Family leave – Family leave is when your employees take time off to take care of a newborn, recover after pregnancy, or to complete an adoption process. Maternity leave and paternity leaves fall under family leave.

You can choose to provide family leave as paid leave, unpaid leave, or as a combination of both. If you employ more than 50 people, you might qualify for FMLA, in which case you’d be required to provide up to 12 weeks of unpaid time off for family leave. 

Sabbatical – Sabbatical is an extended personal leave of absence during which an employee might choose to rest, travel, reflect upon their achievements and make plans for the future, or do work related research. 

A sabbatical can be paid or unpaid, depending on seniority, how long one has been with the team, etc.

Personal leave – You can allocate paid personal leave for your employees. Personal leave is a catch-all term that can cover any type of leave for a team member. 

I could be anything that doesn’t fall under medical leave or vacation time. For example, miscellaneous family matters, running errands, religious matters, official matters like taxes, renewing driver’s license, etc.

Bereavement leaveBereavement leave is time taken to mourn the loss of a loved one, arrange any logistical matters related to the funeral, notify family, etc. 

The typical bereavement leave is between 3-7 days, and you could provide this as a paid time off as a gesture of compassion to your grieving employees.

Jury duty – Some states require that you provide paid time off for your employees that get called for jury duty, as we will list below. 

But for the most part, you won’t be required to pay them for jury duty, unless you include that in your policy.

Paid Time Off Laws

It’s vital to familiarize yourself with any local labor laws surrounding vacation days, or other types of paid time off.

In the United States, there’s no federal requirements to provide paid time off. But if you’re based in the EU, then your employees are entitled to 4 weeks of annual leave.

Once you cover the minimum paid leave requirements in your time off policy, then you can decide if you want to provide additional paid days off, and which types of leave they would fall under. 

Paid Sick Leave

In the United  States, there are 12 states and jurisdictions that require employers to provide paid sick leave to their employees.

Paid Jury Leave

These states require that you allow some type of paid leave for jury duty. 

It could be that you let your employees use vacation time they’ve already accrued, or that you’re required to provide a certain number of paid jury duty days if they get called.

Maine Paid Time Off Laws

Starting in 2021, if you employ more than 10 people in the state of Maine, then you might have to provide paid time off regardless of the type of leave. 

The duration of paid leave will be accrued based on hours and length of employment, but it can be up to 40 hours per year. 

You can check all the details on the Maine Dept. of Labor Earned Paid Leave page.

How is PTO Calculated?

We’ve discussed which types of leave can fall under PTO. But how do you calculate how many paid vacation days each employee gets?

You can use one of the following methods.

Fixed Annual PTO Days

This is the simplest way to manage paid time off.

Every employee gets a PTO bank at the beginning of a specified period, and they can use it up as they please. 

For example, you might provide 20 days paid time off each year, and you can say that PTO can be used for sick days, vacation days, or personal leave days. 

When your employees request leave, they indicate that they’re requesting four paid personal leave days. If the leave is approved, then they are left with 16 paid leave days for the rest of the year. 

The PTO Accrual Method

The PTO accrual method works like this – the more hours/days/weeks your employees work, the more paid time off gets deposited into their bank. 

Your time off policy would state an accrual rate for PTO. 

For example, let’s say an employee works earns 20 days (20*8 = 160 hours) of paid time off for 2000 hours of work during the year (50 weeks * 5 days * 8 hours = 2000 hours).

The accrual rate in this case would be 0.08 hours of PTO per hour of work (160 / 2000 = 0.08). In other words, every time an employee works an hour, they earn 0.08 hours of paid leave. 

You can also calculate accrual based on days or weeks. 

So, if it’s based on days for the above example, then the daily accrual rate would also be 0.08 PTO days (20 days of PTO / 250 days of work = 0.08).

Unlimited PTO

Unlimited PTO means that your employees get unlimited paid time off. In other words, there are no caps on the number of paid vacation days for your team members.

This type of time off policy works on the basic premise that employees are compensated based on their performance, and not their attendance. 

So, as long as your employees meet their goals and expectations, and they perform at a high level, it doesn’t really matter how many days they take off from work.

Unlimited PTO is a relatively newer concept that is gaining popularity among the younger generation of employees who value flexibility and autonomy. 

Read more about unlimited PTO, and if this type of policy is right for your business.

What Happens to Unused PTO?

So, what happens if an employee doesn’t use all their allotted PTO days in a given period?

What happens to unused PTO depends on the following.

Local labor laws – There are no federal paid leave laws in the USA, but if you’re in another jurisdiction, then you should find out if there are regulations about unused PTO.

You company’s time off policy – Once again, it’s your time off policy that would most likely dictate what happens when an employee doesn’t use all of their accrued PTO. 

Most commonly, unused PTO will roll over to the next year. So if an employee has a total of 20 days available, and they only use 15 days that year, the next year they will have a total of 25 days off available.

In most cases, staff can also have unusued PTO days paid out to them. This generally also happens when the employee leaves the company – any unused PTO days will be paid out along with their final pay packet.

Some businesses institute a “use it or lose it” vacation policy, wherein any unused vacation days are lost at the end of the year. This leave policy saves situations where employees rack up huge amounts of accrued leave, which can result in a massive payment when those employees quit or retire.

“Use it or lose it” policies are not likely to be popular with your employees, though, and have come under scrutiny with employee rights advocates (even being banned in some states).

Unlimited PTO is generally a better option if you’re a small business and concerned about paying out huge sums of accrued leave.

How to Effectively Manage Paid Time Off in Your Company

Now we’ve covered all you need to know about different types of PTO, a few laws regarding paid time off, and how to calculate your employees’ PTO allowance, let’s finish with some quick tips on effectively managing your team’s time off.

Smart leave management practices will help make your business run a lot smoother over time, and avoid some common HR and operational issues. Mismanagement of your employees’ PTO can lead to burnt out, unhappy staff, scheduling issues, payroll problems and even legal problems.

Follow these tips for a better organized and better performing team:

  1. Follow all applicable laws.
  2. Make sure your PTO policy is as clear as possible. Employees should know exactly how many days they have available, and how to request leave.
  3. Use a leave management software to handle leave requests and track scheduled absences.
  4. Be generous with your leave allowances. Some business owners feel that vacation days take away from productivity, but in reality they allow your staff to stay healthy and happy, which will result in a better quality of work.

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