2024 in Review—Sneak Peek at 2025
HR Glossary  /  Paid Time Off (PTO)
Paid Time Off (PTO)5 min read
Table of Contents:

What is Paid Time Off (PTO)?

If your company is looking for the best strategies to attract and retain talent, a comprehensive benefits package is a must. A key component of this package should be Paid Time Off (PTO). Six out of 10 employees consider PTO as one of the most important benefits when considering a job offer.

This guide will provide a comprehensive overview of PTO, explaining what PTO stands for, its core benefits, how PTO works, and best practices for coming up with an effective PTO policy for your particular organization.

What does PTO mean? Paid Time Off (PTO) is a formal benefit that allows employees to take a set amount of time away from work while still being compensated for it. This benefit promotes work-life balance and allows employees to address various personal needs without financial costs through a flexible approach. Employees are allowed to use their personal time for a variety of approved reasons, including vacation, personal time, illness, or family emergencies.

The details of a PTO policy, such as the amount of time offered and accrual rates, will vary depending on the company's size, industry, and overall benefits structure. However, the core concept remains consistent: PTO provides employees with paid time away to recharge, address personal matters, and ultimately return to work feeling refreshed and ready to contribute.

What’s the Difference Between PTO and Vacation?

Let's clarify a common misconception: PTO is not synonymous with vacation time. While vacations are a primary reason employees use PTO, PTO policies cover a broader range of absences—such as sick leave, paternity leave, and other types of paid leave.

In essence, all vacation time is PTO, but not all PTO is strictly reserved for vacation. This flexibility enables employees to manage their time off more effectively.

While traditional leave policies separate vacation days, sick days, and personal days, PTO offers a more flexible approach. There are generally three main categories of PTO:

Accrued PTO

This is the most common type of PTO. Employees earn a set amount of PTO hours over a specific period (e.g., per pay period, monthly, or yearly) based on factors like their tenure or the number of hours worked. These hours are then entered into a virtual PTO bank, which employees can “draw” from when they take time off.

PTO Bank

PTO banks provide employees with a predefined number of PTO days at the beginning of a year or upon hire. These days can be used for any approved reason throughout the year. Some companies allow unused PTO days to roll over to the next year, while others may offer cash-out options or have them expire.

Unlimited PTO

A newer concept, unlimited PTO, allows employees to take off as much time as needed, within the boundaries of reason, without a predefined limit on days or hours. This approach builds upon trust and focuses on results achieved rather than hours worked. However, it's often underscored by expectations of managing workload competently and bringing about minimal disruption during absences—which can be physically and mentally very demanding for employees and, thus, damage your company’s employee morale. When a company offers unlimited days, they also avoid paying out the unused days when an employee leaves. Since this has been a sort of blind spot, it has tainted the image of this policy. Even so, 27% of surveyed employees prefer unlimited PTO.

It's important to note that some companies may still offer separate PTO categories for specific reasons, such as bereavement leave or parental leave, even within an overall PTO framework.

There are also several methods for calculating accrued PTO, which will, again, vary depending on your company's peculiarities and preferences.

These are some common methods:

  • Accrual based on work hours: Employees earn PTO hours based on the number of hours they work. For example, an employee might accrue 1 hour of PTO for every 40 hours worked. This method is often used for hourly employees or those with fluctuating schedules.
  • Accrual based on pay period: Employees earn a set amount of PTO per pay period (e.g., bi-weekly, monthly). This is a popular option for salaried employees with consistent schedules.
  • Accrual based on tenure: The amount of PTO an employee earns may increase with their length of service at the company. So, a career impacts how much paid time off the employee has. It can be a valuable incentive for employee retention and loyalty.

Additional Aspects To Consider

In addition to the accrual method, your PTO policy should also outline details such as:

  • Carryover: Whether unused PTO can be carried over to the next year.
  • Minimum/maximum accrual: Any limits on the total amount of PTO that can be accrued.
  • Request and approval procedures: The process for requesting and getting PTO approved.

Setting up an effective PTO policy requires balancing employee flexibility, clear expectations, and promoting a positive work-life balance. To successfully combine all these factors, here are some key best practices to consider:

Adjust the policy to your company culture

A startup environment might prioritize flexibility with an accrued PTO system, while a more established organization might benefit from a structured PTO bank approach. Consider your company's overall spirit and how a policy can best support it.

Understand your workforce demographics

Younger employees might value travel and flexibility, while older employees might prioritize cash-out options for unused time. Establish a policy that considers what your employees want and like.

Maintain clear communication

Develop a well-organized policy document outlining all aspects of PTO, including accrual rates, rollover allowances, procedures for requesting time off, and blackout periods (if applicable), so that employees can comfortably use their PTO avoiding misunderstandings.

Set clear expectations

Define what constitutes acceptable reasons for PTO usage and establish guidelines for responsible use to prevent abuse. However, still try to promote a healthy work-life balance by encouraging employees to utilize their PTO and avoid working while on leave.

Implement HR software

HR software makes PTO management easier by automating accrual tracking, leave request workflows, and providing real-time visibility into leave balances.

As we’ve advanced in the last section, robust HR software can truly strengthen a PTO policy’s success and improve “PTO satisfaction” by allowing employees to request time off in self-service portals. In turn, HR professionals can see who’s out with automatic calendar updates. HR software can work as a PTO calculator and as a PTO generator.

Here are some key features to look for:

  • Automated accrual tracking: This feature eliminates manual errors and gives you accurate PTO balances by automating accrual calculations based on your defined policy.
  • Leave request workflows: This simplifies the PTO request process with a user-friendly system for employees to submit requests and for managers to review and approve them.
  • Real-time balances: The system must provide employees and managers with instant access to up-to-date PTO balances.
  • Team calendar integration: Integrate PTO requests with team calendars to visualize team availability and avoid scheduling conflicts.
  • Mobile access: If the software has a mobile app, employees can submit PTO requests and view their balances on the go-through from anywhere—which is especially useful for remote and deskless employees.
  • Reporting and analytics: Generate reports that provide insights into PTO usage patterns, helping you identify trends and improve your PTO policy over time.

How is PTO accrued, and what are common accrual rates?

PTO accrual methods vary. Common options include fixed annual days, accrual based on work hours or pay period, or tenure-based accrual. Additionally, accrual rates typically range from 3 to 10 hours per pay period.

Can employees carry over unused PTO to the next year?

This depends on your company's policy. Some allow unused PTO carryover, while others may have limits or cash-out options.

What are the pros and cons of unlimited PTO?

Unlimited PTO offers flexibility but can be challenging to manage. Before implementing it, consider the potential for abuse and the difficulty of tracking time off.

Cut the clutter in HR tasks, and grow
your business faster