What is Paid Time Off, and How Does it Work?

Paid time off is an employee benefit that allows team members to earn pay for hours they spend away from the office.

While PTO policies may vary from workplace to workplace, state and country laws may dictate some aspects of how these policies are governed or applied. Importantly, these laws vary wildly by jurisdiction, so you’ll want to review any legal requirements based on where your company and team members live.

For example, in the US, no federal law gives team members the right to any kind of paid vacation, personal time, or other general-use paid time off. There are laws governing sick time, family leave, and other medical leave, which can make things confusing.

So, this guide will look at paid time off and how some companies create their own employee comp time policies to allow team members to earn, save, carry over, and use paid hours. We’ll also dive into legal considerations, policy options, and methods for efficient tracking of PTO accrual and usage.

Let’s get started with the most essential element: defining paid time off.

Paid time off (PTO) is a policy that allows employees to take time away from work while still getting paid at their regular rate.

PTO can cover vacation, personal days, sick leave, bereavement, and other types of leave, where you’re paid at your usual rate. The goal is to allow employees to step away when they need without fear of losing their job. It’s a core benefit, and many companies are expanding it to support nearly any time out, including mental health days or addressing unforeseen emergencies.

Sometimes, the roof leaks, a family member wakes up with a fever, or the dog escapes the yard. Paid time off lets your team member tackle that challenge without worrying about being punished at work. Instead of letting a home or family issue worsen, they can address it.

The actual implementation of PTO often differs from company to company. An organization may put limits around it, such as emergency notice requirements, a maximum number of consecutive days of PTO, or extended vacations needing approval from management.

Helping employees balance work and personal activities with paid days off isn't just good for employees. Creating opportunities for staff to achieve a healthy work-life balance through Human resource management policies benefits businesses and their clients.

When employers have paid time off policies, it benefits their mental health, helps to reduce absences, and helps the company improve staff retention rates. Improving these areas can significantly impact performance, output, and payroll expenses.

Helping employees balance work and personal activities with paid days off isn't just good for employees. Creating opportunities for staff to achieve a healthy work-life balance through Human resource management policies benefits businesses and their clients.

When employers have paid time off policies, it benefits their mental health, helps to reduce absences, and helps the company improve staff retention rates. Improving these areas can significantly impact performance, output, and payroll expenses.

The advantages of a paid time off policy don’t stop there either. For example, there’s a direct correlation between prioritizing physical and mental health and economic performance.

Job seekers are actively looking for employers who emphasize their health. The job market is responding to these expectations. SHRM reported that 91% of businesses plan to add mental health incentives into their post-pandemic, return-to-work strategies.

Companies should consider how they address unused PTO as well, because this can impact employee morale.

The most common types of PTO include vacation time, sick time, personal leave, parental leave, holiday pay, jury duty, and bereavement leave. Let’s take a closer look at the intricacies of each PTO format.

Sick leave

The Family and Medical Leave (FMLA) Act governs non-paid and certain paid time off policies. The act ensures that people can take unpaid sick leave to care for:

• Children (including adopted and foster children)

• Next-of-kin

• Parents

• Severely injured active duty service members

• Spouses

All paid sick leave policies must comply with federal minimum wage and overtime laws as well as any state/local requirements. Currently, 15 states, Washington D.C., and more than two dozen cities and counties have local mandates governing sick leave.

Three states — Illinois, Maine, and Nevada — not only mandate sick days but require that accrued paid time off can be used for any reason.

Tip: It is imperative that each company reviews federal, state, and local mandates periodically to maintain compliance. Paid sick leave is also a valuable policy for eligible employees.

Personal leave

Personal leave, like PTO for sick days, is not mandated by federal law. However, many companies offer personal time for employees who have exhausted all other PTO benefits. If offered, people can use personal leave for any purpose.

Personal leave is typically limited to a few days per year. A personal leave policy usually specifies the number of days (or the number of hours) offered per year.

Tip: Update your handbook frequently to ensure your team members know the rules and benefits of your policy. Also, ensure that it conforms to federal and state PTO laws.

Paid holidays

There are countless federal, state, and local holidays around the globe. In the US, a handful of states have enacted holiday pay laws.

Let’s look at a crucial example from Massachusetts.

Massachusetts PTO for holiday time off is governed under the Massachusetts Blue Laws. These “Blue Laws” dictate the legal requirements for businesses to operate on Sundays and certain holidays.

Generally, the state prohibits non-retail businesses and manufacturers from operating on Sundays and limits what kind of sales can occur in retail and hospitality operations.

For holidays and Sundays, many retail and other businesses will face restrictions in the state. In most cases, employers cannot require employees to work on Sundays or certain holidays, and they cannot retaliate against a worker who refuses a shift on such a day.

For remote teams with global employees, leadership will have some decisions to make here. Importantly, they must remember these requirements and not force employees to take PTO for shifts impacted by Blue Laws.

Tip: For remote teams with global employees, leadership will have some decisions to make. Ensure you do everything possible to celebrate diversity and treat everyone’s holidays equally.

Medical leave

Medical leave is a form of sick leave intended for illnesses or injuries that prevent or reduce a worker's ability to perform typical job duties.

While most sick days and related policies are limited to a couple of weeks per year, medical leave policies cover physical and mental conditions that often require long-term care.

For example, a medical leave of absence might include time off to enter a drug or alcohol treatment program. To be eligible for FMLA medical leave, an employee must:

• Have worked a certain number of hours in the previous year (1250+ is the current standard)

• Provide a statement from a medical professional that leave is appropriate and necessary

• Work for a company that abides by standard PTO tracking standards for all team members

In some locations, unpaid medical leave must be accrued separately from PTO. This would allow an employee to take extended time off of work during a medical emergency. While they would not get paid, the employee is protected against firing or retaliation.

Tip: Employers should review medical absence requests that may fall under the short-term disability umbrella.

Parental leave

Parental leave (sometimes called family leave) may also fall under the broader umbrella of sick leave, but often it’s in its own distinct category. Parents may request time off to seek medical treatment or advice for their children.

California PTO law allows parents to take eight weeks of paid time off to bond with a new child, participate in certain military events, and care for a family member with a severe medical condition.

Under FMLA at the federal level, employees are entitled to family leave if they’ve:

• Worked for their employer for at least 12 months

• Have logged at least 1,250 hours in that span

• Work at a company that employs 50 or more employees within a 75-mile radius

The FMLA benefit applies to people who work at private companies with 50 or more employees, all public and private school employees, and anyone working at a public agency.

Some states have implemented separate regulations. New Hampshire has a voluntary insurance program that provides workers in the state with 60% wage replacement for up to six weeks per year. Rhode Island, New York, California, Connecticut, and other locations all have laws that ensure parents can take time off with pay.

Conversely, some states, like North Dakota, have banned cities and counties from implementing parental/family leave legislation. North Dakota legislators have also voted against creating a state plan to govern family leave.

However, employers in the state with more than 50 employees must follow federal FMLA guidelines.

Tip: Organize records by type of PTO:

• Sick days for minor illness

• Medical leave for major health challenges

• Parental leave

• Vacation time accrued based on hours worked during a given period

• Comp time earned

Bereavement leave

Anyone who has ever buried a child, spouse, or parent understands the emotional turmoil team members may experience when a loved one dies.

While not legally required, many companies offer bereavement PTO policies. The idea is to allow employees to take paid time off to make funeral arrangements, attend memorial services, and spend a few days with surviving family members.

Jury duty leave

Serving on a jury is a civic duty. While many states mandate time off for employees to serve on a jury, most do not require paid time off. Some counties require companies to pay employees their typical salary when reporting for jury duty.

In Nebraska, team members must give their employer reasonable notice. And in Indiana, small businesses can ask the court to postpone this duty when two or more workers will be absent on the same workday.

Tip: ​​Craft your PTO plans based on regional, state, and federal law — and consider how jury requirements impact your team members. Remember that you typically cannot fire someone selected to be on a jury or force them to use any PTO or sick time to cover days missed.

Industry-specific PTO policies

Aside from traditional leave, there are also some industry-specific paid time off policies. The hospitality industry offers an excellent example of an individualized paid time off benefit.

What if a ski resort wants to boost full-season retention rates? It may offer an end-of-season cash bonus for employees who worked from day one to the final day of the season. 

Other companies allow employees with permanent post-season employment to convert the bonus into paid time off.

Tip: 57% of businesses surveyed in the SHRM survey plan to implement work-life balance components into their workforce management plans. This policy would be a compelling opportunity to amplify a commitment to a positive work-life balance.

Every organization can craft its own time off policy if it complies with state and federal laws. Some may offer paid vacation leave and sick time but exclude non-mandatory jury duty and bereavement PTO plans.

An ideal PTO policy provides measurable employee benefits and supports business goals. Remember, only some absences need to use up PTO. Be sure to provide your employees with details about using unpaid time off (UTO).

Elements of a paid time off policy

Creating a PTO policy can be overwhelming. Make sure you break the processes up by focusing on specific types of leave. A well-balanced PTO policy addresses the following topics.

Time off allowances

Time off allowances for each PTO policy should include the number of hours or days employees can accrue and who is eligible. The company should also outline who is eligible for time off allowances based on seniority, position within the company, years of service, and other factors.

Define how much paid time someone can use, if it has restrictions or can apply to any personal time, and what else may limit paid time.

Time off usage policies

The usage section of your policy should address when someone can take PTO or comp time. In some cases, employees are not allowed to take PTO to extend a vacation or long holiday break. Some companies will enforce black-out dates during peak season or when a certain number of employees are off rotation. Or, they may make people take unpaid time in certain circumstances, such as needing more time off than they accrued in the current pay period.

Time off request and approval process

A good paid time policy will also explain how employees should request paid time off and how much notice they need to give. Any exceptions to the rules, such as emergency and bereavement leave requests, should also be mentioned. This would also be an excellent place to lay out the most common reasons a request might be denied.

Be as clear as possible about how employees submit paid leave requests, how they can utilize PTO, PTO blackout periods, and what may cause leave to not be approved.

What happens to unused time off

Companies must also decide whether to allow employees to carry over unused PTO or if benefits expire after a specific time. Some organizations require employees to use vacation days or lose them at the end of a calendar year.

Give teams ample options to make PTO work. Unused vacation time can play a role in burnt out employees.

Types of time off policies

Employees need to understand what type of time off policy the company will implement. While most companies offer finite, limited time off policies, you might consider an unlimited PTO policy for your team.

It’s also important to explain how job titles, number of hours worked, and other criteria might affect an employee’s time off balance.

In general, there are two ways of accruing time off with pay. Your company’s accrual policy should reflect state laws and industry requirements.

The lump sum payment method provides all available paid time off hours at once and resets every year. Employees could even choose to use all their time off at once. Just be sure they know they’ll have to go the rest of the year without paid vacation time.

The employee PTO bank method utilizes periodic deposits and withdrawals. Employees accrue paid time off and can only use hours earned. Any withdrawals from the PTO bank must be requested and approved by management.

A third paid time off option functions even when someone has not yet earned PTO. In this scenario, part-time and full-time employees can" borrow" time off from the PTO bank before accruing it.

Of course, requests have to go through management for special approval. Managers can then approve the employee leave based on performance metrics, annual reviews, service years, or other criteria.

Remember that your PTO policy will impact employee morale and job satisfaction. So, consider offering personal days that are flexible and unused PTO policies that are generous.

An accurate accrual and tracking system is critical regardless of which types of PTO company policies allow.

An ideal solution automatically tracks employee requests, approvals, and balances for each type of accrued PTO. Some tools offer payroll integrations with platforms like PayPal, Wise, and Gusto.

Hubstaff is packed with time tracking and scheduling features that streamline the approval process. Automated timesheets, simple PTO approvals, and reports help managers address absenteeism and allocate PTO efficiently.

All users can manually edit timesheets and vacation time from the calendar view.

Get real-time PTO balances and insights with Hubstaff. Try a free demo today.