PTO Meaning (Paid Time Off)

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


Each employee has different needs and contractual agreements. Labor and employment laws are 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 procedures, things start to get a bit more complicated.

Indeed, 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 guidebook 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 significant 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 decide if paid time off is mandatory or remains to be negotiated with the future employee. This is why, to have a successful organization, you will require an elaborate 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.

If you are interested about the differences in paid time off allowances across different countries, the team at Statista, put toghether an interesting graphic.

#2. What are benefits from PTO for employees?

There are many benefits that employees get when companies offer them this opportunity. Some of them are more obvious, however some of them are not always straight forward, due to indirect consequences. In the list below we share the key ones that we found most valuable:

  1. You get paid even when you are not working
  2. Improved mental and physical health
  3. Improved productivity
  4. Lower healthcare costs
  5. Better morale
  6. Stronger family ties
  7. Increased engagement.

#3. What is the difference between the PTO policy and the 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.

#4. 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 having a break from work are away from the office. Vacations may be a more generous 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 to 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.


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 celebrations.

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 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 attend the funeral ceremony. It may also be useful if there are any legal proceedings related to the deceased's inheritance. By granting these types 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, except for adoption, this type of leave is linked to a child's birth and by granting your employees parental paid time off. In this way, you will be assuring them that your company is not all about money and success, but also about its people.

Voting time off

Voting time off is a particular type of PTO, and its use is limited since it comes to attention only in times of elections - local ones, presidential or parliamentary. Usually, 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

Compensatory time represents a paid time off that employees are offered instead of cash payment for working overtime or during national holidays. But you need to be careful with this type of PTO. Some legislations forbid this practice.

#5. Types of PTO Policies

Most commonly, there are a few ways you can implement PTO policies in your business.

A. Traditional leave policies

With this type, popular among small companies, managers provide a specific allotment of each kind of time off for each employee. This way, the employees receive the allowance for the type (Vacation, Sick, Personal, etc.) in one go and can use it when needed. By using this type of policy, employees will be able to plan time off confidently, and you will be able. To track the different types of requests per 

B. Lump Sum PTO/ PTO Bank / PTO Plan

The PTO bank is a common PTO policy out there. Employees receive only one bucket, usually once per year, and then they can decide to use it as they want. You need to be aware of one aspect: if the employees use all the PTO days, and then they get sick. 

C. Accrued PTO

Another way to deal with the PTO allowances is to accrue the monthly leave amount. In this way, the employees will not be able to abuse the time off. For example, by gradually giving up 1.5 days of PTO per month, the employee will earn 18 days of PTO per year. You can find more examples in the section How is PTO calculated?

D. Unlimited PTO

When companies set such policies, employees can book as many days as they want. Usually, such companies are very flexible and have very few restrictions.

#6. 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.

1. Annual PTO / PTO Bank / Lump Sum

The annual PTO type is probably the easiest to deal with. Let's say Andrew starts with 10 days of PTO (80 hours) and decides to take a 3 days vacation (3 days x 8h = 24h). Now subtract the number of days used from the annual time off allowance. In Andrew's case, 10-3=7 PTO days remaining or 80-24 = 56 hours of PTO left.

Companies setting such policies - called usually PTO bank or PTO plan policies offer to the employees the lump sum upfront, at a specific period of the year, for example the begining of the year ie January 1, or at the begining of the fiscal year. Alternatives exist, for example at the employement anniversary.

The selected ammount for the employees can also increase, especially based on tenure in the business. For example after 3 years in the business, Andrew gets one more day of PTO.

2. Working PTO Accual

This method asigns a specific ammount of PTO for each hour worked by the employee. Let's take a specific example. The year has 2080 working hours (52 weeks * 40 hour week).

If Andrew receives 80 hours of PTO per year, then for each hour worked, he gets 80/2080 = 0.038 hours of PTO.

If Andrew worked from the beginning of the year till the end of February (168 hours in Jan + 160 hours in Feb = 328 hours), then he will be entitled to 0.038*328=12.46 hours of time off.

3. Daily PTO Accrual

The daily PTO accrual method is generally used among knowledge workers (Monday - Friday, 8 hours of work). More exactly, if Andrew receives 80h and he is expected to work 50 out of 52 weeks per year, then 50 x 5 days per week = 250 days per year. If we follow the same logic, 80/250 - 0.32h per day worked.

Once again, at the end of February (20 + 19 business days in January and February), Andrew earned 0.32 * 39 = 12.48 hours of PTO.

4. Weekly PTO Accrual

The way this type of PTO calculation works is similar to the daily one. If Andrew receives 80 days per year and is expected to work 50 weeks, then he is earning 80h/50 weeks = 1.6h of PTO per week.

Following this reasoning, at the end of February, this means at the end of week 9, Andrew will have gained 9 * 1.6 = 14.4 hours of PTO.

5. Unlimited PTO

Unlimited PTO allowance has become more popular among the technology giants like LinkedIn, Netflix, Oracle and Sony.

Here you don't need to do any calculations, as the employee can take as much time-off as needed.

We like to say that this is a privileged benefit for employees, and although there is no limit as to how many days the staff can book, it's good to have a system in place to allow people to schedule their days off and ensure that the colleagues know who can they rely on the office.

#6. Factors to consider before establishing a PTO policy

If you are sure 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 simultaneously, 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 are 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.

#7. 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 the advantages of implementing a PTO policy in small business are:

1. Control unscheduled absences

When all types of paid time off are separated, employees tend 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 a backup. Scheduled coverage is useful for managers since they can better delegate responsibilities if one employee is off work. When you reduce the number of unexcused absences you reduce absenteeism and this will improve costs related with labor.

2. Better organization

You and your workforce will be able to plan time off in advance. In this way, they can ensure business continuity, that there are no time-off clashes, that everyone is informed and that the allowances are respected.

3. 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.

Tip: Your employees might be also interested about flexible working arrangements.

4. A key advantage of 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.

5. Diversity

The PTO bank indicates you respect employees' diversity by celebrating their holidays (religious or not).

6. Work-life balance at its best

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

7. 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, affecting your sales. The PTO bank system can prevent all these costs.

8. Workforce retention

Since employees know that they can take time off for vacations or when they are sick, they are guaranteed that when they need to recharge their energy, or attend some special events, they can do this without being stressed about ongoing work.

Nevertheless, there are some disadvantages to consider:

1. 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 disctint types of leaves.

2. 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.

3. 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 also to others.

4. Need to find back-ups

When someone goes off few days, depending on the job type, you need to have someone to cover the missing staff member. Think about a customer support person, or someone that deals with new orders, or someone leading an event organization. You need to ensure continuity and experienced staff to take over.

Note: All in all, it all comes down to your organization: if you feel your employee s 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.

#8. 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:

1. Design written policies

If you have it all in writing, everyone knows what to do and what they are 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.

2. 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.

3. Keep in touch with employees

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

4. Acknowledge concerns

Train team managers and supervisors on addressing leave requests, implementing PTO policies, and reporting 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 to examine why he/she took the paid time off. You will have to be thorough and present any evidence you have.

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.

Stop PTO abuse guide

The How To Stop Employees From Overusing PTO And Sick Leave? guide, will help you find some answers to issues such as addressing time-off requests from employees asking for too much time-off, abusing sick leave, or submitting last-minute time-off requests.

#8. Sample of PTO policy

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

When drafting a PTO policy within your business, there are crucial elements to reflect on since paid time off impacts employees and overall management.

Remember that the employee handbook is the best way to communicate the company's PTO policy. In this way, the employees will see how the business works, and if there is a particular element that needs clarification, they will know where to search for information. Also, don't heasitate to get leadership buy in before implementing such a policy.

What are the legal implications?

Aspects such as what happens with unused vacation time? Are they carried over, or not, or will those days/hours be paid? Well, it’s up to you and your legal colleagues to clarify it.

How do you assign the PTO allowances?

Will employee get their yearly allowance upfront? Will the PTO allowance be accrued for the number of days worked? Or do you go for the unlimited option? Each method has its pros and cons, so choose wisely.

Do you credit paid holidays?

If your company is offering paid holidays, for example Thursday and Friday for Thanksgiving days, and if the employee books the entire week off, then you should use only 3 days of PTO not 5.

Do you offer loyalty bonuses?

Some organizations, to boost retention, and offer a bonus to their loyal employees, are giving an extra PTO day for every 3 or 5 years in service. Do you provide such bonuses?

Can new hires book PTO during their probation period?

Having a clear set of policies is very important, especially with new hires. You will not want someone hired two weeks ago and then ask for five days off. There are numerous business that durring the probation period they don't allow their new hires to book time off.

If one employee quits, what happens with the unused PTO?

Usually, the remaining PTO is paid in the last paycheck; however, you might have a policy - use it or lose it. Up to you.

Does your business use Blackout days?

There are moments in which work is intense and deadlines very strict. In those moments, people will not be allowed to take time off. Do you have such situations, and how do you enforce them?

Some additional questions to reflect on are:

  • How will overtime will impact PTO?
  • What are the policies for maternity, paternity, sick, compassionate, and bereavement leave?
  • How many days can be carried to next year? (do they have an expiry date?)
  • How many days can be accrued?
  • Can take PTO if some of your other colleagues are out in the same time?
  • Can you book more days than your allotment (borrow gainst the PTO bank?)
  • How far in advance do PTO requests need to be submitted?

Tip: With LeaveBoard you can setup blackout days so that employees can't book PTO in very busy periods such as upcoming events, project releases or peak sales season.

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 tailored to your company's needs.

How to Track PTO?

We all love vacation days, right? The perfect time to unwind, spend time with family, take a trip, or relax. The thing is, for managers and employers, hearing: “I’m on vacation from tomorrow” may be the start of a stressful period. They know that with one employee gone for a few days, the challenge is not only to fill his position but also to make sure the whole team works the same way it usually does.

Many companies use outdated methods for tracking paid time off, like informal emails, one-on-one discussions, Excel spreadsheets, or post-its. Poorly tracking your paid time off will cost you and your business a lot of money.

PTO tracking should be as carefully treated as the financials of your organization. We strongly recommend you waste no more time and start using paid time off tracking software. Below, we will present a short guide for you to follow in your quest for your company's adequate PTO tracking software. We will also explain what such a tracker is, what value it can add to your organization, and convince you to implement one as soon as possible.

What is PTO tracking software?

A PTO tracking software is an automated leave management system designed to simplify your organization's approval workflow. By tracking paid time off, managers will have a clear view of who is and who will be in the office, who is supposed to replace them, and for how long. It's also useful for the employees because they have it clear who is the manager in charge of handling the leave requests. A PTO software is also great because it allows implementing custom leave policies for every company's needs, and the employees have easy access to them.

Why does your company need a PTO tracking software?

It allows for a centralized process - since all leaves are securely stored in one place, you will benefit from a more stable flow.

Almost all PTO trackers offer flexibility because they can be accessed and used anytime, anywhere, and from every device (on the web, mobile phone, laptop).

You save valuable time by forgetting about a long flow of approval, including a supervisor, manager, and HR staff. A PTO tracker will keep all records up-to-date, and with a few clicks, you will check every information you need.

Cost reduction is a significant advantage. You will save a great deal of money by cutting down on manual intervention and physical paperwork. You will also save money indirectly by making better decisions regarding staffing and scheduling.

Productivity is a big YES since you will spend less time reviewing leave requests and more time focusing on strategic matters as a manager or business owner.

Transparency is also an upside: creating customized leave policies for your organization will tell your employees that you are sincere and open.

How to customize your leave policy in a paid time off tracker?

Here is a short checklist you should use in customizing a PTO tracking software for your company:

  1. Clearly state the standards of eligibility for employee paid time off (for example, if seniority is a plus in acquiring extra days or not);
  2. Specify the maximum days' employees are entitled to take as PTO;
  3. Specify and explain the accrual method;
  4. Present the approval workflow for every team and employee and implement a simple PTO request form;
  5. State if partial days off are allowed and if yes, how to be handled;
  6. Present the methods of payment afferent to all types of leaves.

What should a great PTO software offer you?

A paid time off management software should first make you forget about PTO tracking spreadsheets, prone to human error, and can waste a lot of admin time.

Let’s check out the main characteristics you need to search for in a PTO tracker app to streamline your PTO management:

  • Easy to use for both employees and managers, user-friendly;
  • Accurate;
  • Customizable policy settings;
  • Automated accruals;
  • Simple approval flow;
  • Automatic updates and notifications;
  • An interactive calendar that shows possible conflicts of PTO;
  • Multiple integrations;
  • HR reporting.

PTO tracking can reduce costs in your company and decrease conflicts by supporting managers in handling the time-off requests and all other leave of absence demands. So, get rid of spreadsheets, saved emails, colored post-its, and embrace technology! PTO management software will bring you various advantages that will turn into money.

Check this free guide: 7 Aspects You Need To Know Before Buying Cloud HR Software For Your Business

Frequently Asked Questions on Paid Time Off

What is the difference between Paid leave policy and PTO?

Paid leave policies are separated: i.e. Vacation, Sick leave, Personal days, and Holidays. PTO is one single category that employees can use as they need.

How far in advance should employees book in advance PTO?

A good practice would be two weeks or more. This way, managers will have more time to decide on each request, other colleagues will be able to schedule their requests more confidently, and the planning process, especially during busy periods, will be easier. When PTO is planned in advance, managers avoid the challenges of overlapping PTOs. Moreover, ensuring continuity within the team is easier to handle.


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 PTO types, 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 make the right decisions from the beginning. In 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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