As the owner or responsible of a small to medium business, paid time off is one of the administrative aspects that you will have to deal with across the year. In the mini-guide below, we will deep-dive into the essential aspects of this HR practice and uncover the key myths.

Let’s discover together the key elements that the Paid Time Off Guide will cover:

  1. What is PTO (paid time off)?
  2. Distinction - PTO policy - Vacation policy
  3. Types of PTO
  4. How is PTO calculated?
  5. Factors to consider before establishing a PTO policy
  6. Advantages and Disadvantages of PTO policy
  7. How to manage PTO and avoid abuses of PTO policy
  8. Sample of PTO policy

Each employee has different needs and contractual agreements. There are labor and employee laws defining the paid time off practices and there are company policies that ensure compliance and efficient handling of PTO requests. When it comes to implementing the practices, things start to get a bit more difficult.

Surely, you have heard questions like:

  • How does paid time off work?
  • How many days of PTO am I entitled to?
  • What's the Difference between Vacation and PTO?
  • Do I have to offer my employees PTO?
  • Will they abuse of this benefit?

We put together this guide-book to answer all these questions and much more. In the following pages, you will learn all there is to know about PTO and most importantly, how to introduce and implement a PTO policy within your organization.

#1. What PTO means? Discover the definition of Paid Time Off (PTO)

PTO stands for Paid Time Off

The meaning of PTO or Paid time off is exactly what you assume: compensated time for employees away from the office, used for focusing on their personal matters. So, the employers still pay the check, even if their employees are absent from work.

Depending on each company, PTO can be measured in hours or days.

A big aspect that needs to be determined is the nature of paid time off in every legislation. So, depending on your state (ie California), you will determine if paid time off is mandatory or remains to be negotiated with the future employee. This is why, in order to have a successful organization, you will require a complex plan and meticulous policy.

According to the US Bureau of Labor Statistics, 77% of employees receive paid vacation days, 71% receive paid sick leave, and 78% receive paid holidays.

#2. What is the difference between the PTO policy and Vacation policy?

We need to separate these two types of policies a company can embrace:

PTO policies are those that function on the principle: employees have one bank of paid time off that covers everything: personal days, sick leave, vacation days, holidays and they can use their days for any reason.

Vacation policies institute separate banks for every type of leave: sick leave, bereavement, voting, parental leave, and if one employee would run out of his sick days, he won’t be able to get a paid day off from the parental leave portion, when getting the flu.

#3. Types of PTO

As mentioned above, your state law may or may not compel you, as an employer, to provide paid time off to employees. But keep in mind that you can use this benefit as a way to retain top workers and secure an advantage over your competitors. We will address the most common types of PTO you can include in your Paid Time Off Policy:

Vacation days

The days you offer your employees for traveling, spending time with family or simply for having a break from work, away from the office. This may be seen as a greater benefit than a bump in the salary since nowadays workers have less and less time to allocate to their loved ones.

Sick leave

If labor law provisions do not require you give paid sick leave, consider doing it either way. Employees should be able to have PTO when dealing with an illness or an injury. There is an upside also for your whole team- you prevent other people from getting a virus, or the flu, for example.


The usual paid holidays you can give to your employees are:

  • Christmas Day
  • New Year's Day
  • Labor Day
  • Easter

So in this type of PTO implies that employees are financially compensated during the holidays. Another option regarding holidays is the floating holiday, where the employee gets to decide the specific day he/she will be off work, as part of the holiday PTO. This is usually applied for employees with various religious celebration.

Personal time

These days can be used for various reasons, such as a doctor’s appointment (without using the sick days) or attending a child’s kindergarten event (without using a vacation day). Employers who offer this type of PTO will definitely be in their employees’ good graces.


This PTO refers to employee time off from work offered when a family member, relative, or friend dies. In these unfortunate cases, employees will need time for funeral and burial arrangements and for attending the funeral ceremony. It may also be useful if there are any legal proceedings to be done related to the inheritance of the deceased. By granting these type of PTO, you will reassure your employee that you pay attention to their needs in these times of grief.

Parental leave

This type of PTO comprises maternity leave, paternity leave and also the case of adoption. So with the exception of adoption, this type of leave is linked to the birth of a child and by granting your employees parental paid time off, you will be assuring them that your company is not all about money and success, but also about its people.

Voting time off

This is a special type of PTO and its use is limited since it comes to attention only in times of elections - local ones, presidential or parliamentary. Normally, employers will allocate only a few paid hours for voting since you do not need an entire day for this activity.

Military leave

Employers may also provide paid time off for employees that engage in military action, such as active duty, active duty training, or inactive duty training.

Compensatory time

This is paid time off that employees are offered in lieu of cash payment for working overtime or during national holidays. But you need to be careful with this type of PTO, there are legislations that forbid this practice.

#4. How is PTO calculated?

It’s up to the employer to decide the manner used to calculate PTO. There is a variety of approaches that can be chosen. You surely need to take into account the size of your business and the type of calculation your employees are used to and that they find easy to adapt to.

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How does paid time off work?

The first step, before asking yourself “How does paid time off work?”, you should decide how many paid vacation days per year are you inclined to grant.

One of the options is to offer PTO as an annual ratio, by setting a number of days at the beginning of each year. In this case, one employee, for example, will benefit from 10 paid days off, which can be used in the first 2 months of the year.

The other option is using an accrual system. This means that employees need to earn PTO as they work. You can either implement an accrual calculation based on hours or based on days. For example, based on a 40-hour work week, you can state that for every 100 worked hours, an employee is entitled to 1 paid off day. Therefore, applying this policy to the example, the employee will not be able to get 2 days off in the first month of the year.

All in all, no two organizations are the same, so what your competitor has put in place is not necessarily good for your company. But make sure you have one top-notch leave management because in this area of PTO tracking you need the best staff leave planners to stay on top of your HR activities with ease.

#5. Factors to consider before establishing a PTO policy

If you are certain about replacing sick days, personal days and vacation paid time off with a single paid time off policy, you should be transparent with your employees about the rules.

Usually, small and medium businesses create guidelines regarding how PTO can be used and about the procedure that needs to be followed for the time off requests.

Small organizations start with a minimal number of employees, so if too many request days off at the same time, issues will arise. For this reason, employers may ask that employees request the PTO significantly in advance. Managers and supervisors may even turn down PTO requests if many team members are off work at the same time.

Therefore, transparency and sincerity is the key. Explain your reasons to your employees.

Also, consider that a flexible PTO policy can act as an instrument to recruit and retain top performers, especially these days when the workforce is more driven by benefits packages than the salary itself.

Recent studies have shown that 4 of 5 workers say they’d prefer benefits over a raise.

In the next sections, we will focus on the best practices for PTO policies for small and medium business. Stay with us and discover more.

#6. Advantages and Disadvantages of PTO policy

With a PTO policy, all vacation, sick, and personal days are incorporated into one bank of days for employees to use at their discretion. Many employers nowadays have decided to test the PTO concept and many are satisfied with the system.

Let’s see what are the advantages of implementing a PTO policy in small business:

Control unscheduled absences

When all types of paid time off are separated, employees have the tendency to use their sick leave whether they need it or not, therefore sometimes they may be distrustful. But with one single allotment of days, they will save days to use for vacation. Also, they can play days off, therefore the employer won’t be left without backup. A scheduled coverage is useful for managers since they can delegate responsibilities better, in case one employee is off work.

Flexibility in administration

Since you are dealing with a compressed bank of types of days off, the PTO bank is easier to manage.

Flexibility for employees

PTO policies have invaluable flexibility - employees can use their paid time off when they need it the most - caring for a sick child or solving a matter at the bank.

A key advantage for hiring over competitors

If a company wants to attract top performers, it has to grant competitive benefits. A PTO policy is softer than a traditional one, which divides days off into sick leave, personal days and vacation. Therefore, it may be the reason a candidate chooses your company than your competition.


The PTO bank indicates you respect employees’ diversity by allowing them to celebrate the holidays they choose (religious or not).

Work-life balance at its best

Employers may not be accountable for the work-life balance of their employees, but a PTO package can motivate the staff and encourage them to be more efficient and productive at work.

Lower costs

When you have to deal with unscheduled absences, you may need to pay a temporary worker to fill in. That worker may not be as good as your employee, so deadlines may be missed and this affects your sales. The PTO bank system can prevent all these costs.

Nevertheless, there are some disadvantages to consider:

A tendency to offer fewer paid days

One concern is that by adopting a PTO policy, employers may end up giving their staff fewer paid off days than they used to when the system was based on separate types of leaves.

An increased volume of requests

Employees are likely to use more days off when benefiting from a PTO bank, therefore employers will need to solve scheduling issues and cover all staffing needs.

Refusal to using PTO as sick leave

Employees may show resistance in using their PTO when they are sick. This is because they see all the paid days as vacation and therefore, they prefer to save as much time as possible for the long-awaited summer holiday. This may turn into a dangerous practice because a sick employee in the office will be detrimental not only to himself but to the others also.

Note: All in all, it all comes down to your organization: if you feel your employees are better off with the traditional system of separate leaves, then that’s the road to take.

But keep in mind that PTO is a more flexible option. And this flexibility will emerge in a lot of areas: rewarding, recruiting, retaining top workers and increase employee productivity.

#7. How to manage PTO and avoid abuses of PTO policy

As an employer, you want to create a safe environment and base all your actions on transparency. So you will believe their requests for paid time off are legitimate, as a rule. However, there will always be some employees who may attempt to take advantage of the PTO policy. Here are some tips to help you avoid possible abuses:

Design written policies

If you have it all in writing, everyone knows what to do and what are they entitled to. Make sure the PTO policy includes: number of paid days, who is eligible for PTO, how many days in advance can they request it and what form should the request take.

Ask for advance notice

You should require that your employees give you a “heads up” when the need for leave is predictable. It’s up to you: 3 days, one week etc. When speaking about unforeseeable circumstances, such as a disease, you can require that they inform you as soon as possible.

Keep in touch with employees

If we are talking about an extended leave, it is common practice that employers call regularly the absent employee, to see how is he/she doing and when does he/she plan to return to work. But be careful: too many calls could be seen as badgering. Applying consistently a simple communication plan for these types of situations is key.

Acknowledge concerns

Train team managers and supervisors how to address leave requests, implement PTO policies and report potential abuse. As soon as you suspect abuse, you should initiate an impartial investigation. This should cover some inquiries and a meeting with the employee, in order to examine the reason he/she took the paid time off. You will have to be thorough and present any evidence you have.

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Note:If you end up deciding that the employee abuses of his PTO benefits, make sure you consult with the legal department before starting disciplinary action against the said employee.

#8. Sample of PTO policy

You now know all you need to, in order to implement the suitable PTO policy for your organization.

Below you will find a sample of policy we hope will be of great assistance!

Sample PTO Policy For Businesses

Start using this simple Employee PTO policy sample. The word version is free to use and can be be tailored to your company's needs.


This mini-guide was designed to help you in understanding Paid Time-Off Policies in your small to medium business.We have started with a definition of paid time off, then went into the differences between PTO and vacation policies. A specific section on various types of PTO such as sick leave, parental leaves, and vacation was documented. Since time off policies impact productivity and company budgets, we shared some best practices to consider and to take the right decisions from the beginning. At the end you can download a sample PTO policy that you can use freely. If you found this guide useful, please share it with other HR pro's in your network. If you believe we can make it better, please let us know how to do so. We're here to ease HR tasks and every suggestion counts.

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