What is PTO? Here’s a Comprehensive Guide to Understanding PTO
Updated: Aug 16
Let’s begin by painting a clear picture of what paid time off (PTO) is and isn’t — starting with what it’s not.
In the past, companies would separate their employees' time off benefits into a set number of days for sick leave, paid vacation, personal days, etc. Once you used all the days in a specific category, that was it for the year.
But PTO is totally different now in that it’s an all-encompassing policy.
So instead of having several separate policies, PTO rolls them all into one nice, neat, ‘ all-inclusive plan. It's the one benefit that employees really care about. In fact, it’s one of the top 3 most important employee benefits according to Harvard Business Review.
Want to know more about paid time off? You’ve come to the right place.
In this guide, we will explain:
Table of Contents
What Is PTO?
PTO stands for paid time off.
But what exactly is paid time off? It used to be the norm for companies to offer separate paid time off benefits to employees such as:
Paid vacation leave
Instead of having separate policies, paid time off rolls each of these policies into an all-in-one, inclusive plan.
According to the Bureau of Labor Statistics, 76% of employees from private companies in the US are offered some type of paid time off.
Common PTO Terminology
Paid time off (PTO):
Unpaid Time Off:
Time that employees can take off while still earning regular wages
Authorized time off in which employees will receive no pay or compensation
The cumulative amount of paid time off awarded to an employee each year
The number of paid time off days that either expire or roll over after a specific date
There is no limit to how much paid time off days employees can take
The number of paid time off days that have been earned over a period of time
PTO Definitions in Other Countries
Statutory leave entitlement, Annual leave
What is NOT PTO?
With terminology varying from company to company, it’s very important to establish what paid time off is and isn’t.
Remember that PTO is an all-encompassing policy. Separate policies like...
Personal days; and
… are part of a traditional paid time off policy. Separate policies do not fall in line with the modern PTO model that companies are gravitating toward today.
A great way to think about PTO is this: Vacation leave is paid time off, but not all paid time off is vacation leave.
Want to know your state's PTO regulations?
Download our PTO Playbook
How Does PTO Work?
With a PTO plan, you do not have a set number of vacation days or sick days that you can take. Instead, employees are provided with a singular paid time off plan in which they can allocate time off for whatever reason.
Based on a company’s given policy, PTO hours can be:
Accrued each pay period
Accrued at other designated times throughout the year; or
Received in a lump sum
An employee can then use banked PTO days at their discretion without having to disclose a formal reason.
Are PTO Policies Affected by Law?
In short, yes.
There are several instances in which state law can impact PTO policies, including:
Whether or not an employer can enact a “use it or lose it” policy
Whether or not PTO can be considered earned wages
Whether or not PTO must be paid out upon termination
Whether or not an employer can set the rules for PTO policies
It’s important for employers to issue clear PTO policies while coinciding with state laws. Conversely, it is also important for employees to fully understand their company’s PTO policies.
What is the Purpose of PTO for Employees?
PTO policies offer employees more flexibility and freedom to choose when they can utilize paid time off and for what circumstances. It also allows employees the opportunity to take full advantage of their paid time off.
For example, if an employee working under a traditional leave policy accrues more sick days than they need but doesn’t have enough vacation time to go on a family trip, they cannot allocate their additional sick days to go on vacation.
A PTO policy solves this problem.
With a PTO policy, you can use your banked paid time off at your sole discretion and fully use it without restriction within your company’s policy guidelines.
What Is the Purpose of PTO for Employers?
PTO is often used as a selling point for recruiting or retaining employees since the flexibility of a PTO bank can be attractive to employees. PTO bank systems may also be a cost-effective option for employers, as they may help reduce work absences and boost employee morale.
7 PTO Types That Can Be Included in Your Policy
The type of PTO included in a policy can vary from company to company, as well as within state laws. Here are 7 different types of PTO that can be included in your company policy.
Paid Sick Leave
Paid Personal Time
Paid Bereavement Leave
TIME TO MAKE PTO A WIN-WIN
Improve Employee Wellness While Saving Costs For Your Company
3 Different Types of PTO Policies
Let’s go through the three main types of PTO policies generally offered.
#1: Set Number of Days
This type of policy means that employers earn a set number of PTO days per year.
#2: Accrued Time Off
This PTO policy allows you to accrue a certain amount of time off at a given period, such as a pay period.
#3: Rollover Allowances
Your employer’s PTO policy may allow you to roll over your earned PTO from one year to the next.
3 Advantages of PTO Policies
PTO policies can be advantageous for both employees and employers.
Below we will discuss three pros to utilizing PTO policies vs. traditional time off policies.
#1: Employees Appreciate PTO
The bottom line is that employees truly appreciate the personal benefits and flexibility of PTO.
Employee satisfaction is a win-win for both employees and employers.
#2: PTO Can Facilitate a More Honest Employee/Employer Relationship
Allowing employees to utilize PTO can help facilitate a more honest employee/employer relationship.
Instead of cashing in sick days for vacation, personal time off, or other reasons, employees can simply use their paid time off at their discretion without having to be dishonest.
#3: PTO Can Help Alleviate Last-Minute Employee Absences
Think about it: Would you rather have employees using sick days to extend their vacation last-minute, or have them utilize their paid time off as they see fit in the first place?
When employees are able to allocate their paid time off days accordingly without having to dip into sick days, employers can receive more notice for time off, allowing them to fill in absences without any last-minute stress.