What is Paid Time Off, and How Does it Work?

Paid time off is an employee benefit that allows team members to earn pay for hours they spend away from the office.

While PTO policies may vary from one workplace to another, state and federal laws do dictate some aspects. For example, federal agencies establish standards for PTO that govern how companies compensate employees for any accrued overtime.

Some companies even create their own employee comp time policy that allows workers to save overtime hours for future use.

Savvy business decision-makers understand how PTO policies impact their companies. If you're hoping to learn more about PTO, this article will cover paid time off policies, legal considerations, and efficient tracking of PTO accrual and usage.

Helping employees balance work and personal activities with paid days off isn't just good for employees. Creating opportunities for staff to achieve a healthy work-life balance through Human resource management policies benefits businesses and their clients.

When employers have paid time off policies, it benefits their mental health, helps to reduce absences, and helps the company improve staff retention rates. Improving in these areas can significantly impact performance, output, and payroll expenses.

The advantages of a paid time off policy don’t stop there either. For example, there’s a direct correlation between prioritizing physical and mental health and economic performance.

Job seekers are actively looking for employers who emphasize their health. The job market is responding to these expectations. SHRM reported that 91% of businesses plan to add mental health incentives into their post-pandemic, return-to-work strategies.

The most common types of PTO include vacation time, sick time, personal leave, parental leave, holiday pay, jury duty, and bereavement leave. Let’s take a closer look at the intricacies of each PTO format.

Sick leave

The Family and Medical Leave (FMLA) Act governs non-paid and certain paid time off policies. The act ensures that people can take unpaid sick leave to care for:

• Children (including adopted and foster children)

• Next-of-kin

• Parents

• Severely injured active duty service members

• Spouses

All paid sick time policies must comply with federal minimum wage and overtime laws and any state/local requirements. Currently, 14 states, almost two dozen cities, and counties have local mandates governing sick leave.

Tip: It is imperative that each company reviews federal, state, and local mandates periodically to maintain compliance.

Personal leave

Personal leave, like PTO for sick days, is not mandated by federal law. However, many companies offer personal time for employees who have exhausted all other PTO benefits. If offered, personal leave may be used for any purpose.

Personal leave is typically limited to a few days per year. A personal leave policy usually specifies the number of days (or the number of hours) offered per year.

Tip: Update your handbook frequently to ensure your workers know the rules and benefits of your policy that conforms to federal and state PTO laws.

Paid holidays

There are countless federal, state, and local holidays around the globe. In the US, a handful of states have enacted holiday pay laws.

For example, Massachusetts PTO for holiday time off is governed under the Massachusetts Blue Laws (MBL). MBL dictates how and when holiday pay is required and how many hours per holiday an employee can work.

MBL regulations also apply to three regional holidays:

• Evacuation Day (March 17)

• Bunker Hill Day (June 17)

• Patriots’ Day (3rd Monday in April)

Regional holiday pay requirements can and do change. ​​Massachusetts plans to phase out holiday pay requirements in 2023.

For remote teams with global employees, leadership will have some decisions to make.

Tip: For remote teams with global employees, leadership will have some decisions to make. Make sure you do everything in your power to celebrate diversity and treat everyone’s holidays equally.

Medical leave

Medical leave is a form of sick leave intended for illnesses or injuries that prevent or reduce a worker's ability to perform typical job duties.

While most sick day policies are limited to a couple of weeks per year, medical leave policies cover physical and mental conditions that often require long-term care.

For example, a medical leave of absence might include time off to enter a drug or alcohol treatment program. To be eligible for FMLA medical leave, an employee must:

• Have worked a certain number of hours in the previous year (1250+ is the current standard)

• Provide a statement from a medical professional that leave is appropriate and necessary

• Work for a company that abides by standard PTO tracking standards for all workers

Tip: Employers should review medical absence requests that may fall under the short-term disability umbrella.

Parental leave

Parental leave (sometimes called family leave) may also fall under the broader umbrella of sick leave, but it’s in its own distinct category.

Parents may request time off to seek medical treatment or advice for their children.

California PTO law allows parents to take eight weeks of paid time off to bond with a new child, participate in certain military events, and care for a family member with a severe medical condition.

At the federal level, employees are entitled to family leave if they’ve:

• Worked for their employer for at least 12 months

• Have logged at least 1,250 hours in that span

• Work at a company that employs 50 or more employees within a 75-mile radius

Some states have implemented their own regulations. New Hampshire has a voluntary program due to launch in 2023. Rhode Island, New York, California, and Connecticut all have laws that ensure parents can take time off with pay.

Conversely, some states like North Dakota are actually banning cities and counties from implementing parental/family leave legislation.

Tip: Organize records by type of PTO:

• Sick days for minor illness

• Medical leave for major health challenges

• Parental leave

• Vacation time accrued based on hours worked during a given period

• Comp time earned

Bereavement leave

Anyone who has ever buried a child, spouse, or parent understands the emotional turmoil team members may experience when a loved one dies.

While not legally required, many companies offer bereavement PTO policies. The idea is to allow employees to take paid time off to make funeral arrangements, attend memorial services, and spend a few days with surviving family members.

Jury duty leave

Serving on a jury is a civic duty. While many states mandate time off for employees to serve jury duty, most do not require paid time off. Some counties require companies to pay employees their typical salary when reporting for jury duty.

In Nebraska, workers must give their employer reasonable notice. And in Indiana, small businesses can ask the court to postpone jury duty when two or more workers will be absent on the same work day.

Tip: ​​Craft your PTO plans based on regional, state, and federal law — and consider how jury duty impacts your team members.

Industry-specific PTO policies

Aside from traditional leave, there are also some industry-specific paid time off policies. The hospitality industry offers a good example of an individualized paid time off benefit.

To boost full-season retention rates, ski resorts may offer an end-of-season cash bonus for employees that worked from day one to the final day of the season. Some companies allow employees with permanent post-season employment to convert the bonus into paid time off.

Tip: 57% of businesses surveyed in the SHRM survey mentioned earlier plan to implement work-life balance components into their workforce management plans. This would be a great opportunity to amplify the work-life balance commitment.

Every organization can craft its own time off policy if it complies with state and federal laws. Some may offer paid vacation leave and sick time but exclude non-mandatory jury duty and bereavement PTO plans.

An ideal PTO policy provides measurable employee benefits and supports business goals. Remember, not every absence needs to use up PTO. Be sure to provide your employees with details about using unpaid time off (UTO).

Elements of a PTO policy

Creating a PTO policy can be overwhelming. Make sure you break the processes up by focusing on specific types of leave. A well-balanced PTO policy addresses the following topics.

Time off allowances

Time off allowances for each PTO policy should include the number of hours and/or PTO days employees can accrue and who is eligible. The company should also outline who is eligible for time off allowances based on seniority, position within the company, years of service, and other factors.

Time off usage policies

The usage section of your policy should address when PTO or comp time can be taken. In some cases, employees are not allowed to take PTO to extend a vacation or long holiday break. Some companies will enforce black-out dates during peak season or when a certain number of employees are off rotation.

Time off request and approval process

A good policy will also explain how employees should request paid time off and how much notice they need to give. Any exceptions to the rules, such as emergency and bereavement leave requests, should also be mentioned. This would also be an excellent place to lay out the most common reasons a request might be denied.

What happens to unused time off

Companies also need to decide whether they’ll allow employees to carry over unused PTO or if benefits expire after a certain period of time. Some organizations require employees to use their unused vacation days, or they’ll lose them.

Types of time off policies

Employees need to understand what type of time off policy the company will implement. While most companies offer finite, limited time off policies, you might consider an unlimited PTO policy for your team.

It’s also important to explain how job titles, number of hours worked, and other criteria might affect an employee’s time off balance.

In general, there are two ways of accruing time off with pay. Your company’s accrual policy should reflect state laws and industry requirements.

The lump sum payment method provides all available paid time off hours at once and resets every year. Employees could even choose to use all their time off at once. Just be sure they know they’ll have to go the rest of the year without paid vacation time.

The employee PTO bank method utilizes periodic deposits and withdrawals. Employees accrue paid time off and can only use hours they've already earned. Any withdrawals from the bank must be requested and approved by management.

A third paid time off option functions without accruing any PTO at all. In this scenario, part-time and full-time employees can" borrow" time off from the PTO bank before they've accrued it.

Of course, requests have to go through management for special approval. Managers can then approve the employee leave based on performance metrics, annual reviews, service years, or other criteria.

Regardless of which types of PTO company policies allow, having an accurate accrual system in place is critical.

An ideal solution automatically tracks employee requests, approvals, and balances for each type of accrued PTO. Some tools offer payroll integrations with platforms like PayPal, Wise, and Gusto.

Hubstaff is packed with time tracking and scheduling features that streamline the approval process. Automated timesheets, simple PTO approvals, and reports help managers address absenteeism and allocate PTO efficiently.

All users can manually edit timesheets and vacation time from the calendar view.

Get real-time PTO balances and insights with Hubstaff. Try a free demo today.