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Feb 22, 2023 Drew Schildwachter

What is PTO? A Guide to Holidays, Vacation & Sick Time

What is PTO? A Guide to Holidays, Vacation & Sick Time

Holidays, Vacation & Sick Time – a PTO Guide For Small Business OwnersConnectPay ConnectPay

Does the idea of managing your workers’ PTO (paid time off) make your head spin?

You’re not alone.

Should you track time off separately? Offer a certain number of days for sick leave and vacation time? Or have a PTO policy and combine all types of leave together?

However you decide to do it, your employees need clear policies and will appreciate transparency. They’ll need time off to recharge or simply take care of ‘life stuff.’ Happier employees are more productive and flexible.

This article will help you decide the best way to manage PTO so you’ll have healthier employees and, in turn, a thriving business.


What is PTO?

PTO is an employee benefit that allows workers to take paid time off from work for any reason. This can include vacation time, sick leave, personal days, and other types of time off.

PTO is generally accrued, meaning that employees earn a certain number of hours per pay period, and then use those hours to take time off when needed.

The benefits of paid time off for you as an employer relates to productivity and team morale.

  • Improved productivity: When employees feel they have enough time to rest and recharge, they are more likely to be energized and focused when they return to work.
  • Reduced absenteeism: PTO plans help reduce absenteeism by giving employees a structured way to take time off when needed, rather than calling in sick for an unplanned absence.
  • Attracting and retaining talent: PTO plans are an attractive benefit that can help attract and retain top talent. Employees are more likely to seek out and stay with companies that offer a comprehensive and flexible benefits package.
  • Compliance: Employers can also use PTO plans to comply with state and local laws mandating paid time off for employees.

For employees, the benefits are clear

  • Increased work-life balance: Employees can take time off when they need it, which can improve work-life balance and reduce stress.
  • Increased job satisfaction: PTO plans can increase job satisfaction by giving employees more control over their time off.
  • Cost savings: Employees can save money by not using their sick or vacation days to cover an unplanned absence.
  • Flexibility: Employees get more flexibility to use their time off for any purpose without needing to specify if it’s for vacation, sick leave, or personal days.

While no federal law requires a business to provide paid holidays, vacation, or sick leave, some state laws exist.

Non-compliance with state laws might lead to legal issues if you run foul of labor laws and regulations. You’ll also upset employees and be less attractive to potential candidates.

Related: How CPAs Can Help Clients with Payroll Compliance in 2023


The Types of PTO

The laws and regulations regarding PTO vary, so it's crucial to familiarize yourself with the laws in your state. Consider the following types of PTO when creating your policies and packages.



Most companies offer paid holidays, even though you’re not required to. You may have a hard time attracting top talent if you don’t. Typical paid holidays include:

  • New Year’s Day
  • Memorial Day
  • Independence Day
  • Labor Day
  • Thanksgiving Day
  • Christmas Day
  • The day after Thanksgiving, Martin Luther King, Jr. Day, and Presidents’ Day are other common holidays.



Employees generally expect one or two weeks of paid vacation per year. You should consider your options regarding how they’ll accrue that time. 

Some employers grant an employee’s entire vacation time immediately upon hiring. Others implement a policy stating the employee must work at the company for a certain number of months before using vacation time.

Another option is to set an accrual formula. For example, you may offer your employees a plan where they gain 8.5 hours of vacation time per month.

Sick Leave

Do you want employees to come in to work sick, possibly spreading their illnesses among your staff and clients? Probably not. Employers should offer somewhere in the neighborhood of five sick days per year. 

Also keep in mind that the Federal Family and Medical Leave Act (FMLA) requires you to offer up to 12 weeks of unpaid leave to cope with a major medical diagnosis, family illness, or the birth of a child.

What about remote employees? Findings show that sixty-five percent of remote American workers feel pressure to work while sick. Of course, some people might have a minor illness and still feel they can work.

But employees shouldn’t feel guilty for taking sick days when needed. Having sick leave in your PTO plan helps alleviate these concerns for employees. 


Personal Days

Personal days are days off that can be used for any personal reason, such as running errands, attending a family event, or dealing with a personal crisis.

You have the flexibility to design your personal day policy in different ways: Some employers allow employees a certain number of personal days per year, while others may allow employees to take personal days as needed, with or without prior notice or approval.

You can set policies around personal days, such as how many personal days are offered per year, whether or not they are paid, if prior notice is needed before taking a personal day, and what documentation, if any, is required from employees who take personal days.

Having a clear policy in place for personal days, and communicating that policy to your employees, is essential.


Unpaid Time Off

Federal law requires employers to offer unpaid time off for jury duty, voting, and military service. You must comply with these requirements, which include:

  • Contract-covered, classified, and professional staff employees in non-temporary positions receive their regular pay, unless they initiate legal actions.
  • Even if an employee is in their probationary period, they are eligible for civic duty time off.

You may also choose to offer more lenient policies regarding unpaid time off if your organization chooses to do so.


Unlimited PTO 

This isn’t for everyone, but here’s an example of how you can essentially shape your company’s culture through your time-off policies. 

Greg Malloy, CEO of Bloomfire, started a “free time off” policy at his firm to put trust and freedom in the hands of his workers. Essentially, there’s unlimited time off, as long as you get your work done.

“When you treat people like mature, responsible adults, they act like mature, responsible adults,” he says. “Our employees love it, and they don’t abuse it. I don’t know how prevalent this is becoming among companies, but I would highly recommend it.”


How PTO is Earned and Used

As long as you comply with state laws, you can decide how to manage PTO. You want PTO to work for your business.

Accrual-based PTO: Employees earn a certain amount of PTO each pay period, typically based on the number of hours worked. This PTO can then be used at any time, as long as the employee gives proper notice and has enough PTO accrued.

Lump-sum PTO: Employees are given a certain number of PTO days for the year, all at once. This PTO can then be used as needed, but once it's used up, employees will not earn more until the next PTO period.

Use-it-or-lose-it PTO: Requires employees to use their PTO days by a certain date, typically the end of the year, or they lose it.

Hybrid PTO: Employers can also choose to offer a combination of these different types of PTO. For example, they may give employees a set number of PTO days each year, but also allow them to accrue additional PTO based on the hours they work.


Communication is Key

Employees might feel more anxious about taking time off if they don’t know what they’re entitled to, how they can request time off, and how they can earn PTO.

Your PTO policy should include procedures for requesting paid time off and the criteria you use to approve it.

Encourage your employees to take time off. Communicate clearly that you care about their physical and mental well-being, and create a culture where taking time off is encouraged and respected.

Communication works both ways. As much as possible, employees should plan their PTO requests in advance, giving you enough time to plan accordingly and minimize disruption.

Emergencies are a different story. You’ll need to be flexible if an employee needs to take time off unexpectedly.

Finally, track and document everything.

  • Maintain accurate records of PTO usage, including the dates and the duration of the leaves, to ensure compliance with the laws and regulations.
  • Stay up-to-date with the laws and regulations regarding PTO to ensure compliance.

  • Regularly review and update your PTO policies to ensure you’re still meeting the needs of your business and employees.

  • Use a PTO tracking system to ensure PTO is being used fairly and that employees are not over or under-using their PTO. Some HR software has PTO tracking features.


What is PTO? How to Strike the Right Balance

Managing paid time off doesn’t need to be stressful, as long as you:

  • Stay informed of the laws and regulations in your state
  • Decide on the policies that work for your business
  • Communicate with employees and set boundaries

You can manage PTO effectively with a robust tracking system and by building a culture of transparency in your business.

At ConnectPay, we support tracking PTO, taxes, Workers’ Comp, and more. Take the guesswork out of payroll and get some clarity with our Connected Guide to Small Business Payroll

Alternatively, if you still have questions about PTO (or anything payroll-related) schedule a call with one of our payroll experts.

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Published by Drew Schildwachter February 22, 2023