How to Create a Paid Time Off (PTO) Policy + Free Template
Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
Jennifer Hartman is an HR Specialist and staff writer for Fit Small Business, with over 15 years of experience in accounting, payroll, and human resources.
Knowing what to include in a paid time off (PTO) policy is one of the first steps to attracting and retaining quality talent. It should include a variety of time off, including sick leave, vacation, holidays, bereavement leave, and more. While some PTO policies combine vacation and sick time into a single bank of paid days off, keep in mind that there are many states that require a specific amount of time to be allocated directly to sick leave.
We created a free PTO policy template that you can download and customize based on your business’s needs.
Types of PTO to Include in Your Policy
Legally speaking, employers do not need to offer vacation time to their employees. However, offering a robust PTO policy can help you attract and retain top talent. Keep in mind also that sick time, which falls under the umbrella of PTO offerings, may be a requirement in your city or state. Below is a list of PTO types you may want to consider when creating your policy.
Employers that partner with unions and are subject to collective bargaining agreements may have stipulations that speak to both vacation and sick leave requirements. If you do business with a union, speak to your union delegate or attorney to make sure you understand how much PTO you are required to provide.
Sick Leave
Sick time is defined as a day taken off work due to illness. This can be illness for the employee, or to care for an ill family member. Traditionally, employers offer around three to five paid sick days per year. However, when creating your sick leave policy, be sure to follow state and federal guidelines, as these may require a specific number of days per year to be allotted for sick leave. Some states like California and Oregon require companies to offer paid time off for employees’ sick time, even if they do not have PTO benefits/policies.
If your business has over 50 full-time employees, you are subject to federal and state regulations through the Family and Medical Leave Act (FMLA) regarding nonpaid time off for medical purposes.
State/City Sick Leave Laws
Make sure you’re up to date with what your state or city requires for sick leave. The Workplace Fairness Organization offers a list of all state, city, and local sick leave laws to date.
Vacation Leave
Vacation leave is when an employee schedules time away from the workplace for reasons other than illness. In some cases, emergencies are also covered by PTO such as a car breakdown or a meeting with a home repair person in the middle of the workday.
While there are no federal regulations regarding the amount of vacation leave a company must provide, Indeed suggests that in the US, two weeks or 10 working days (80 hours) is the average amount. These amounts typically increase based on the number of years of service with the company.
Years of Service | Average Paid Vacation Days (Full-Time Employees) | Average Paid Vacation Days (Part-Time Employees) |
|---|---|---|
1 Year | 10 days | 8 days |
5 Years | 15 days | 12 days |
10 Years | 18 days | 14 days |
20 Years | 20 days | 16 days |
(Source: Indeed)
Providing at least two weeks of vacation time can increase employee productivity and improve your bottom line. Some companies even offer their employees unlimited vacation/PTO.
State PTO Pay-Out Laws Upon Termination/Layoff
Be sure to include in your policy what happens to PTO once an employee leaves a company. Some states require that any accrued but unused PTO and sick time be paid out to the employee upon termination. In states that do not require payout, if you have a policy in place to pay out unused PTO upon termination, you must adhere to your policy regulations.
States Included | PTO Pay-Out Requirements |
|---|---|
California, Colorado, Nebraska, West Virginia, Wisconsin, Wyoming | Employers in these states must pay out PTO upon termination or layoff. Additionally, there is a ban on use-it-or-lose-it policies. |
Alabama, Florida, Georgia, Indiana, Kansas, Mississippi, Nevada, New Mexico, South Dakota, Virginia, Washington (state) | Employers in these states are not required to pay out accrued PTO upon termination or layoff. |
Idaho, Illinois, Maine, Montana, Oklahoma, South Carolina | In these states, your business must pay out accrued vacation PTO in the final paycheck. It is advisable in these states to not have a rollover policy for PTO as it is difficult to administer and you could find yourself having to pay out a large amount of money. |
Arizona, Connecticut, D.C., Hawaii, Iowa, Kentucky, Louisiana, Maryland, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Utah, Vermont | You are not required to pay out PTO in these states; however, your business, no matter what size, should have a clear policy statement on whether PTO will be paid out upon termination or layoff. If your business is in one of these states, and you do not have a policy in place, then you must pay out any unused accrued PTO at the time of termination. |
Delaware, North Dakota, Rhode Island | In Delaware, PTO is viewed as a guaranteed benefit and must be paid out upon termination or layoff in employers of three or more employees. In North Dakota & Rhode Island employees must be paid for PTO after one or more years of service. |
Most states | State laws often defer to the employment agreement, if there is one, as long as the agreement is more generous toward the employee than the governing state law. |
(Source: PatriotSoftware)
Personal Leave (Floating Holiday)
Personal leave days (or floating holidays) are a new trend in the ever-changing world of human resources. As workplaces continue to become more diverse, having personal holidays is how many businesses are supporting employees’ needs that don’t fit neatly into the other PTO buckets.
Many businesses now include three to five paid personal days that are meant to be used at the employee’s personal discretion, be it for a religious holiday, children’s school conference, or even their own birthday. Most policies don’t require employees to provide a reason for taking a personal day, and it’s a separate box on the PTO request form (or in the tracking system).
Company Recognized Holidays
These are holidays like New Year’s Day, Memorial Day, Thanksgiving, and Christmas when the entire office is closed, but employees are still paid. Although there are no federal requirements to maintain paid holidays, many companies offer a bank of six to 12 paid holidays a year.
Companies can pick and choose the holidays they wish to offer as paid days off for their employees. Some of the most common include:
- New Year’s Day
- Martin Luther King, Jr. Day
- Good Friday
- Memorial Day
- Fourth of July
- Labor Day
- Veteran’s Day
- Thanksgiving Day
- Day after Thanksgiving
- Christmas Eve
- Christmas Day
- New Year’s Eve
Generally, if the holiday falls on a Saturday or Sunday, the preceding Friday or following Monday is offered as the holiday.
For businesses that have peak sales during traditional holidays (such as retail or restaurants), it may not be feasible to be closed. In this case, you can offer the option for employees to make time-and-a-half (overtime) during these days as an incentive to work.
Bereavement Leave
Bereavement leave is paid leave available to an employee upon the death of a family member. Typically this leave is taken to be with family and attend the funeral. Although not required by federal law, most businesses offer an average of one to five paid days for this type of leave. Be aware that there may be state laws in place that you should consider. For instance, in Oregon, employers are required to provide bereavement leave; however, it can be in the form of unpaid leave.
Many employers offer this leave to their employees in increments based upon the relation to the employee:
Type of Family Member | Average Number of Paid Leave Days |
|---|---|
Immediate Family Members (parents, grandparents, spouse, children, siblings, etc.) | Three to five paid days |
Extended Family Members (aunts, uncles, cousins, in-laws, etc.) | One to three paid days |
Jury Leave
This kind of PTO is typically triggered by a court document requesting your employee to serve jury duty. Although you are required to adhere to these court callings by allowing your employees time away from work, you are not required to pay them. The developing best practice, however, is that a couple of days of paid jury duty signals to employees that you support their civic service duties. Regardless of your approach, retaliation laws prohibit employers from threatening or intimidating employees from participating in jury duty.
Maternity/Paternity Leave
Maternity leave refers to the period of time that a new mother takes off from work following the birth of her baby. Most often, maternity leave is made up of a combination of PTO benefits that include sick leave, vacation, holiday time, and personal days, as well as short-term disability and unpaid family leave time (FMLA). Paternity leave is a period of time when a father takes time off from work to bond with his new baby. This time is typically less than that of maternity leave (average of two weeks).
For companies with 50 or more employees, leave is governed through the FMLA and/or state equivalent leave laws (note that state laws often address employers with fewer than 50 employees, such as Oregon Family Leave Laws). FMLA law sets the maximum allowed leave at 12 weeks (includes all paid and unpaid leave).
Details to Include in Your PTO Policy
When creating your PTO policy there are specific policy guidelines you should include, like determining how your employees will receive their PTO. Additional things to consider are whether PTO is carried over to the next year, who is eligible under the plan, and if there is a waiting period for new employees.
Accrual Method vs Flat-Rate Method
When it comes to paid time off, most employers use either an accrual method or a flat-rate method to determine how PTO is allotted to their employees. Although either is fine to use, which one you decide on is determined by your preference and work culture.
Whether you choose an accrual or flat-rate PTO policy, consider a payroll service provider like Gusto that can help you track both accrued and flat-rate PTO, including auto-setting PTO accruals by start date.
Waiting Period for New Employees
Some employers require their employees to pass an introductory period, such as 30, 60, or 90 days, before they can take PTO. There are some state laws that require sick leave to be available before this, but there are no laws that require vacation time to be available immediately. Choosing to have a waiting period for vacation, bereavement, or personal holidays, is at your discretion.
Rollover vs Use-It-or-Lose-It
As you are creating your PTO policy, you must decide how remaining PTO will be allocated at the end of the year. There are two options: roll over PTO to the next year or lose any remaining PTO.
- Rollover policy: Employees can roll over up to a certain amount of unused PTO to the next year. You can decide how much total PTO can be rolled over to the next year and how long that PTO is available. For instance, some policies state that you can roll over up to 10 PTO days, however they must be used or lost by June 30.
- Use-it-or-lose-it policy: Employees have to use all their PTO time by a certain date, usually within a calendar or fiscal year, or forfeit it. For example, if an employee has five remaining accrued PTO days at the end of the year and does not use them, they will be forever lost and unavailable in the next calendar year.
Be sure to check your state and local laws concerning PTO. Some states, such as California, do not allow use-it-or-lose-it PTO policies; however, a cap can be put on accrued PTO that is rolled over.
Eligibility
Be sure to include who is eligible for PTO in your policy. Not all employees you hire will be eligible for PTO; however, that is at your discretion.
- Full-time employees: Full-time employees, whether paid by salary or an hourly wage, are typically part of the worker class automatically eligible for PTO.
- Part-time employees: Part-time employees (those paid on an hourly basis and working less than 35 hours per week) are not generally eligible for PTO. However, if you decide to include this working group in your PTO policy, make sure you clearly spell out how much time they have available per year.
- 1099 contractors: 1099 contractors (those not on your payroll for tax purposes and typically paid by the hour or piece) are not generally eligible for PTO.
Again, we recommend that you check with your state and local laws as some require sick time be available to different classes of employees.
Best Practices for a PTO Policy
As you are creating your PTO policy be mindful of the following best practices to make your policy clear and understandable:
- Put it in writing: Have a clear, written policy that employees understand. It is also a good idea to have this policy in your employee handbook and in an online format for easy reference.
- Have a process: Employees on all levels need to follow the same process for requesting PTO. Make sure when an employee is brought on board, you communicate the PTO policy and process to them in the employment agreement or employee handbook.
- Use a tracking system: A time and attendance platform can help you track PTO and provide vacation and sick balances for your employees, making payroll management and time off less of a headache. Whether you track time, attendance, and leave on your own or through a partner, be sure that it is consistently done for all employees.
Bottom Line
Paid time off is an excellent benefit to offer your employees and can help you retain top talent. A top priority when creating a PTO policy is to determine the amount of PTO you want to offer your employees and the different types that will be included in your policy. Be sure to also check your state and local employment laws so that you remain in compliance. Download our PTO policy template to use as a reference to creating your own.
