How To Create A Paid Time Off (PTO) Policy – Ultimate Guide with Template

In this guide to Small Business Paid Time Off (PTO), we will walk you through everything you need to know to set up and administer your PTO policy.

To help you understand what a PTO policy may look like, we’ve also created a sample PTO policy template and a checklist that you can modify for your business’ needs. The rest of this article will cover what you need to know the answer the questions in the checklist.

• PTO Policy Template and Checklist (Download Word Doc or PDF)

Please note that this article contains general information only, so you should consult your own legal professional before making any decisions about providing paid or unpaid leave.

What are the Different Types of Paid Time Off (PTO)?

There are 6 kinds of PTO currently being used by companies. They are:

1. Sick Time – The kind of PTO used when an employee is ill (or has an ill family member). Some states like California and Oregon require paid time off.
2. Vacation Time – The kind of PTO used when an employee takes a planned trip or has an unplanned emergency, like a car breakdown.
3. Personal Holidays – A newer kind of PTO that employers are using to cover oddities like personal emergencies or religious holidays that are not celebrated in the US. Even events like a loved one’s birthday or wedding anniversary can be covered under this category.
4. National Holidays (aka Company Holidays) – These are days like Christmas and New Year’s Day when the entire office is closed, but employees are still paid.
5. Bereavement Leave – This kind of PTO is usually for a set amount of time in case an employee’s immediate family member passes away.
6. Jury Leave – This kind of PTO is typically triggered by a court document requesting your employee to serve jury duty.

Is My Business Required to Provide PTO?

Most businesses do not need to provide paid time off for things like vacations. The only exception is employers that do business with unions and are subject to collective bargaining agreements. 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.

Many cities and states do have laws requiring paid sick leave, which we talk about here.

If your business has over 50 full-time employees, you are subject to federal and state regulations around unpaid time off for medical purposes, better known as the Family and Medical Leave Act (FMLA) at the federal level. Many states have specific requirements that add on to FMLA.

Even if you are not required to provide paid leave, many business owners choose to provide PTO for sick leave, vacations, and other events because it is a great value-added benefit for their employees. It helps in recruiting and retaining top talent.

Federal Laws & PTO

Again, there are no federal laws around requiring PTO in any form, be it national holidays like New Year’s Day, paid sick leave, or otherwise.

State/City Laws & PTO

When it comes to PTO, state and city laws have been implemented that may require you to provide some amount of paid leave in specific situations.

If you hire remote employees or have employees in different offices around the country, keep in mind that you’ll need to comply with the laws of your employee’s location. For example, if you hire an employee who works from Chicago, you will need to provide paid sick leave as required by Chicago law, even if your business is located in Arizona.

There are two main situations that some state and city laws address around PTO:

1. Sick leave – Some states and cities have enacted specific sick leave requirements. We’ve created a handy table below to show you what is required in your state or city for sick leave.
2. Accrued PTO pay – Depending on what state your business is located in, if you offer PTO, you may have to pay out leave that the employee has accrued and not used yet if you terminate the employee. We have created a second table to help clear up if you need to comply with this or not.

State/City Sick Leave Laws

Sick leave is a hot topic in the news, and state/city laws around this issue are changing rather frequently. Make sure you’re up to date with what your state or city requires, and consult with your attorney if you have questions.

State PTO Pay-Out Laws Upon Termination/Layoff

This table is meant to serve as a guideline for what you need to do in case you terminate or layoff an employee who has accrued vacation PTO (these laws generally do not mention paying out for sick leave or personal holidays). However, we advise that you also consult with your attorney about your specific situation. As a general rule, paying out accrued PTO is a best practice to prevent legal issues.

How to Track PTO

Whether you use time-tracking software like Zoho People or a simple manual timesheet, you need to make sure you’re staying compliant with state and federal laws and paying out PTO properly.

Gusto is a small business payroll provider that makes payroll a breeze by automatically filing new hire paperwork, and calculating, filing, and paying all local, state, and federal payroll taxes. You also get access to HR specialists who can help you stay compliant with all state employment laws. Click here to try it free for 30 days.

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How Much PTO Are Other Small Businesses Providing?

Except in those areas like sick leave, where legislation can play a role, small businesses have a lot of flexibility in terms of how much PTO and what kinds of PTO to provide. So where do you get started?

To give you some insight, here at Fit Small Business, we offer 10 days of vacation PTO and 5 paid days of sick leave. We also honor the following national holidays as paid holidays (during calendar year 2016):

• New Year’s Day
• Martin Luther King Day
• President’s Day
• Memorial Day
• Independence Day
• Labor Day
• Thanksgiving Day
• Day after Thanksgiving
• Friday December 23rd and Monday December 26th

According to a survey by Paychex subsidiary SurePayroll of 259 small business owners, the vast majority of small businesses offer 10 days (2 weeks) or less of vacation PTO. (Source: KinHR)

At Fit Small Business, we offer 10 days vacation plus 5 days of paid sick leave. We offer a bit more than the average because of the company culture we want to build.

Let’s look more at each type of PTO in order to see what small businesses typically provide.

Sick Time

Sick time PTO is commonly thought of as just that – if you wake up sick, you use sick time to call in your absence and are still then paid for the day.

Sick leave is a hot button issue right now in state and city legislatures. Our table above summarizes requirements in various states and cities. Remember, if you have more than 50 full time employees, you will also need to comply with FMLA, which is basically unpaid sick leave.

While you may have to have a certain amount of paid sick leave, many small businesses simply look the other way when an employee calls in sick, as long as it’s not abused.

For example, if Johnny calls out sick once every 3 months, that is 4 days total per year. Do you want to track these sick days? Or do you want to simply be a supportive employer? To some extent, this is going to depend on the type of business you have. If you employ shift workers, calling out sick can be a big scramble and can be taxing on other employees.

When creating your sick leave policy, you need to think about more than just the employee. What if the employee’s child is sick? Will you count that as sick time or vacation time? FMLA counts a sick dependent as a reason to take FMLA.

There are no shortage of options for sick leave, be it mandated by state/city law or as a custom policy you craft on your own. Remember though – employees are human. They do get sick, and docking pay from an otherwise hard-working employee simply because they fall ill is not a fun thing to do.

Vacation Time

Vacation time is when your employee books a trip to Maui and doesn’t even check email; no work, all play, for a real recharge! Most vacation time is requested ahead of time and planned, like an out of town wedding, a cruise, or a special birthday event. Some companies even offer their employees unlimited vacation/PTO.

However, in the US, 2 weeks or 10 working days (80 hours) is the average amount of paid vacation time that is considered normal. To provide some perspective, in the UK, 20 days or 4 weeks is the norm for an entry level role!

Providing at least 2 weeks of vacation time will probably aid employee productivity and improve your bottom line. According to HealthNet, studies show that employees who take vacation time show:

• Decreased stress levels
• Decreased rates of depression
• Improve productivity
• Decreased heart problems

So do you want healthy, happy employees or resentful ones? The choice should be obvious! Especially if you do not provide performance bonuses or very high salaries, paid vacation time can be an excellent way to budget a benefit into your small business. Some businesses might even consider making a day or two of vacation PTO an incentive/prize in a company contest.

Personal Holidays

Personal 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 3-5 paid personal holidays 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 say that no “reason” needs to be provided for taking a personal day, and it’s a separate box on the requesting PTO form (or in the tracking system).

This is an area which you can assess for your own workforce and see if it is a good option. See our Free PTO Policy Template for more.

Remember, as a business owner, the less you know about your employee’s personal areas (e.g. medical issues, religious preferences, etc.), the better. Personal holidays allow for that barrier.

National Holidays

Most companies offer these standard American holidays off:

• New Year’s Day
• Memorial Day
• 4th of July
• Labor Day
• Thanksgiving Day
• Christmas Day

If the holiday falls on a Saturday or Sunday, usually the preceding Friday or Monday is offered as the holiday.

Many other companies also recognize the following days, or some of them, as paid holidays, depending on their employee base and business services (i.e. if many of your employees have children, you might need to offer them all in order to reflect school holidays):

• Martin Luther King, Jr., Day
• President’s Day
• Good Friday (possibly a half day)
• Columbus Day
• Veteran’s Day
• Day after Thanksgiving
• Christmas Eve (possibly a half day)
• New Year’s Eve (possibly a half day)

If you own a restaurant or fitness studio or retail store, you might want to stay open on holidays to get more patrons. What should you do then? Probably be closed at least on the six national holidays mentioned above to give your employees a break.

Another option for businesses with holidays as potential cash flow times would be to ask the employees if someone wants to volunteer to work on those holidays. Perhaps you can incentivize it with overtime pay (pay times 1.5) or a cash bonus.

Bereavement Leave

Bereavement leave, or leave you would give an employee when someone close to them passes away, is, simply put, the classy thing to do. Period.

Most of us have had the unfortunate experience of losing someone and, as an employer, providing bereavement leave is the right thing to do. Most employers provide 3-5 days paid bereavement leave, sometimes with a clause allowing +1-2 days extra if travel is required.

Since it is 2016, the word “family” has many meanings, some being blood relatives and some not. Some employers feel the need to list out the relatives/people close to someone that an employee can utilize bereavement leave for. Others leave the policy more vague and use their best judgment. We will give you some options in our Free PTO Policy Template.

How to Create a Paid Time Off Policy

So what do you do once you’ve decided to give your employees PTO? You figure out a policy, of course.

Here is a checklist of questions you should ask yourself before you make your PTO policy:

• How many days of paid sick leave are you going to provide, and do you have to provide it by law?
  • Check out our table to see if you must provide sick leave by law.
• How many days of paid vacation leave are you going to provide?
• Will you also provide personal holidays? If so, how many?
• Which national holidays do you want to include?
  • Will they be paid holidays, or will the office simply be closed?
• Will you also have a clause for paid bereavement leave? If so, for how many days and do you want to specify the relationships that qualify (e.g. blood relatives, immediate family members, etc.)?
• Will PTO be accrued or given at a flat rate?
• Will PTO be use-it-or-lose-it, or can unused leave be carried over from year to year?
• Will PTO be offered to all new employees? If not, how long will employees have to work before it is offered?

Let’s take a closer look at the last three items on the checklist.

Accrual vs. Flat Rate

How will your employees acquire their PTO? Most employers use either:

1. An accrual method – The amount of PTO employees have increases the more hours/days they work for you, usually at a rate of about 8-12 hours PTO earned for every 120 hours or 4 weeks worked; or
2. A flat rate – Employees are given a set amount of PTO per year, such as 2 weeks or 10 days, and if someone starts mid-year, the amount is prorated accordingly.

When you consider accrual versus a flat rate policy, you need to consider:

• How are you tracking PTO? Do you have a payroll service provider like Gusto that can help you to track things or where you can auto-set accrual by start date? Having a tracking system in place prevents the accrual method from becoming too difficult to administer.
• How much time do you want to spend answering questions on PTO? Will accrual confuse your employees?

We went over what these might look in policy form earlier in the article when we provided a template.

Waiting Time for New Employees

Some employers require a probationary period to be over, such as 30, 60, or 90 days, before an employee can take PTO. There are some state laws that require sick leave to be available prior to this, but there are no laws that require vacation time at all, so if you choose to have a waiting period for vacation, bereavement, or personal holidays, it is at your discretion.

Rollover vs. Use It Or Lose It

In addition to accrual versus flat rate and a waiting period, you also need to consider the time period of a PTO policy. Companies usually have either a:

1. Rollover policy – a certain amount of unused PTO can “rollover” to the next year and essentially be saved up
2. Use it or lose it policy – employees have to use all their PTO time by a certain date or forfeit it

When you consider a rollover versus a use it/ lose it policy, you need to consider:

• Do you have a PTO tracking system? You might want one if you are going to do rollover in order to keep everything tracked accurately.
• How comfortable are you with your employees “saving” time off? If an employee suddenly asks to take 1 month or more of saved time off, can your business handle that?
• On the flip side, if there is use it or lose it, how comfortable are you having a lot of employees taking time off at the end of the year in order to use their time up? How will you pace them out, and can your business handle that?

Introduction/Policy Guidelines

ABC Company is committed to supporting its employees in as many ways as possible. Studies have shown that time off from the workplace is important to overall employee production and both mental and physical health. As such, we have created the following Paid Time Off (PTO) policy, which is effective on (insert date).

To be eligible for PTO, an employee must have worked for and be in good standing with ABC Company for (30/60/90 days) from their start date. Sick leave, as per our (insert state/city), is eligible from (insert law eligibility date).

All PTO requests must be submitted via (insert tracking system or desired format) by a minimum of (insert time frame) in advance for approval and to cover business operations accordingly. ABC Company reserves the right to refuse all requests for PTO but will do the best to accommodate them when advance requests are given.

Of course, last minute emergencies like sick leave come up and those requests must be made by (insert tracking system such as via mobile app or desired format) by no later than (insert time) on the day of occurrence.

Sick Leave

ABC Company, in alignment with (insert state) law, will provide (insert amount of time) sick leave. Your sick leave will (reset January 1st or reset on employment start date anniversary).

Sick leave is defined as when you are ill and unable to come to work. Sick leave in excess of 48 hours may be subject to a doctor’s note required. Personnel should call in each day of sick leave by (insert time from above).

(Optional) Sick leave may also be used when an employee needs to care for an ill family member, such as a child who is sick. Similar to above, sick leave for a dependent in excess of 48 hours may be subject to a doctor’s note required.

Vacation Leave

ABC Company will be providing the following amount of paid vacation time:

0- up to 3 years tenure = 10 days or 80 hours
3- up to 5 years tenure = 15 days or 120 hours
5 years + tenure = 20 days or 160 hours

(unless otherwise agreed to in your employment contract, which supersedes this policy).

Vacation leave is defined as traditional paid time off where you might use it for a family vacation, an out of town wedding, family reunion, etc… It must be requested (insert time frame from above) and must be approved by (insert person/ system approval) in order to be valid.

If one falls critically ill and sick leave becomes exhausted, vacation leave can then be used.

Vacation leave is (accrued at the rate of XXX from your start date/ provided after 30/60/90 days of employment and prorated to reset January 1st). We are on a (rollover or use it/lose it) system, which means (insert policy).

Personal Holidays

ABC Company will also supply (insert number, usually 2-5) personal holidays, which are meant to be used for personal needs that can include religious holidays, birthdays, family needs, and more. If you or a family member falls ill, this leave can be used after sick leave and vacation leave have been exhausted. Personal holidays may be requested in advance like vacation time or may be requested last minute like sick leave, and are meant as supplemental leave.

Paid Holidays

ABC Company will provide the following paid holidays; should a holiday fall on a weekend day, the preceding Friday or following Monday will be taken in lieu and will be announced a minimum of 4 weeks in advance.

• New Year’s Day
• Memorial Day
• 4th of July
• Labor Day
• Thanksgiving Day
• Christmas Day
• (Add on days from this section as you see fit)

Bereavement Leave

ABC Company would like to provide support for their employees in case of a tragedy. Bereavement leave will be provided in the amount of XXX days, with an additional day if travel out of state is required.

ABC Company reserves the right to request for proof of bereavement leave need on a case by case basis.

Optional clause: Bereavement leave is valid for the following relationships (and then list out what will qualify).

How to Administer a PTO Policy

We recommend that you make sure your attorney reviews your policy before you distribute it to employees if you are in one of the states or cities that has required sick leave. Otherwise, you are probably good to go with what you have written since there are no federal laws around paid time off.

Once your policy is finalized, ensure all employees get a copy and understand it (for example, have a company-wide meeting or a video call). Be prepared on how to explain how they request time off, and have individual balance sheets showing each employee what they currently have in their PTO bank. This will help keep you headache-free and keep things crystal clear for them.

To be more thorough, it is recommended to have every employee sign & date a copy of the policy and document this in their personnel files (electronic or paper files are fine). You can also have them sign and date their individual PTO balance sheet if you’d like.

If you have an employee handbook, the PTO policy should also be added into there and then redistributed to all employees with the updated version.

Best Practices in PTO Policies & Administration

The best practices in having a PTO policy and administering one are as follows:

1. Put it in writing – Have a clear, written policy that employees are given two copies of: one for them to keep, and one for you to keep with their signature and date on it. You can also do this electronically.
2. Be specific – Create a policy, and be clear on who is eligible and for what and when. If all of your employees seem unclear on the policy, rewrite it to be more specific. Check out our template above.
3. Have a process – Employees of all levels should need to follow the same process for requesting PTO, be it calling in sick or requesting time off for a cruise in the Bahamas. Hold people accountable to the process, no matter what their rank. Make sure when an employee is brought on board, you communicate the PTO policy to them in writing in the employment agreement or employee handbook.
4. Use a tracking system – As mentioned above, a small-business HRIS platform like Zoho People can help you track PTO and provide vacation and sick balances for your employees, making managing payroll and time off less of a headache.

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PTO Policy FAQs for Small Business Owners

What are the benefits of having PTO? Won’t it cost me a fortune?

Paid time off is a great way to reward your employees for working hard. 2 weeks, or 10 days, of PTO is worth 3.8% of yearly wages. If you don’t provide bonuses or other performance incentives, PTO can provide a great morale booster.

Are there any cons to having a PTO policy?

As with all HR policies, the few employees who abuse a policy can ruin it for the many. To prevent PTO abuse, ensure that documentation and requests for PTO are followed every time – no “I’ll do it later,” no “I’ll log it when I have time.” That’s how people skate by and get extra PTO, which can lead to a frustrated business owner. Keep the policy and procedures tight, and you’ll be fine!

What about freelancer/contract 1099 employees? Do they get sick leave and vacation time as well if I provide it?

For vacation time, bereavement leave, and other optional paid days off like holidays, the short answer is no. Can you include them in the policy? Absolutely. But you do not have to.

For sick leave, the answer depends on where you are located (which state or city) and what their sick leave laws are.

For example, in New York, if your employee “meets the definition of an independent contractor,” then you do NOT need to provide sick leave. However, if the person in question is not an independent contractor, and perhaps has been working full time for you as a 1099, then you would need to provide paid sick leave.

To provide another example, in California, their state-wide law says that all employees classified as freelancers or independent contractors are exempt from the paid sick leave law.

This is an area where you should keep your eyes on new legislation. Stay abreast of your city and state laws and the changes being made to them.

What if I have remote employees in several states? In other countries?

The rule of thumb in HR-land is that the ruling laws of your employee’s location is what you need to abide by. For example, if you hire an employee who’s located in New York City, you will need to provide paid sick leave as required by NYC law, even if your business is located in New Mexico.

This article hits a few good nails on the head about hiring remote employees. The bottom line is that you’ll want to be informed about local laws where your employees are located prior to hiring them.

What if you have a Jewish or Muslim employee who wants specific holidays off?

This is where those personal holidays can come in handy. You certainly don’t want an employee feeling uncomfortable for taking a faith-based holiday off, nor do you really want them using their vacation time, since that seems a bit unfair. Further, the fewer personal details you know about your employees (such as religious preferences), the less likely you are to accidentally discriminate.

What if someone goes over the provided amount of PTO?

Some employers allow people to go into vacation time “debt”… others do not and then have the employee take unpaid time off. Whatever you decide, just be consistent – don’t play favorites and keep it fair to avoid issues.

Consider other options if there is a pressing need for time off, such as flex time or working from home. This may be appropriate if, for example, someone has an ill family member.

Can you give some employees more time off than others if, for example, they have worked there longer?

Yes, you can. Especially for vacation time, it is very normal for employees with longer tenure or higher ranking roles to have more paid vacation time than more junior or newer employees. For example, if you were to hire a COO, the new COO would probably require more than the typical 10 days off for vacation time. This is a great example of why PTO is a benefit offering!

Over To You

What kind of PTO policy does your small business have and why? Do you provide paid holiday as well? We would love to hear from you about what you are doing for PTO!