Key takeaways
- No federal law requires paid vacation, but many states and cities require paid sick leave.
- A combined PTO bank is simpler, but in some states it brings vacation payout rules with it.
- Unlimited PTO removes payout liability but needs guardrails, or people take too little time off.
- California prohibits use-it-or-lose-it vacation policies, though accrual caps are allowed.
- Multi-state employers usually need one core policy plus state-specific sick leave rules.
A paid time off policy sets out how employees earn, request, use, carry over, and are paid for time away from work, including vacation, sick time, personal days, and holidays. It has to meet any state and local paid leave laws that apply where employees work.
A 70-person marketing agency switches to unlimited PTO because it sounds generous and saves the accounting headache of tracking balances. A year later, HR notices something odd. The average employee took fewer days off than under the old policy, and the people taking the least time off were the agency's top performers, who now quietly feel guilty about any absence.
The policy also didn't mention sick leave rules for its employees in Washington and New York, both of which have their own accrual requirements.
Time off policy seems simple until it isn't. This guide walks through the choices and the state rules you have to meet.
What the law requires
No federal law requires private employers to provide paid vacation, paid holidays, or paid sick leave, with limited exceptions for certain federal contractors. State and local law is a different story. A large and growing number of states and cities require paid sick leave, including California, New York, Washington, Oregon, Colorado, Arizona, New Jersey, Massachusetts, Maryland, Illinois, Minnesota, Michigan, and others, plus cities such as Chicago and New York City with their own rules.
These laws typically set an accrual rate, often one hour of leave for every 30 hours worked, a minimum annual amount, permitted uses such as the employee's own illness, family care, and in many states safe time for domestic violence situations, carryover rules, and notice and documentation limits. Maine and Illinois go further and require paid leave that can be used for any reason. Check each state where you have even one employee.
Separate banks or one PTO bank
You can track vacation and sick time separately, or combine them into a single PTO bank.
| Approach | Advantages | Drawbacks |
|---|---|---|
| Separate vacation and sick banks | Clear purpose for each; sick time usually doesn't have to be paid out | More tracking; employees may call in sick to save vacation |
| Combined PTO bank | Simple; no need to explain why you are absent | In states that treat PTO like vacation, the whole bank may need to be paid out at separation |
| Unlimited or flexible PTO | No balances or payout liability; signals trust | People may take less time off; still must meet sick leave laws |
Accrual versus front-loading
With accrual, employees earn time gradually, for example a set number of hours per pay period. It is fair, it limits risk when new hires leave early, and it fits naturally with sick leave laws that are written in accrual terms. With front-loading, employees receive the full annual amount at the start of the year. It is simpler for employees and avoids tracking accrual rates, but many sick leave laws require specific front-loading amounts and treatment of carryover.
Many employers accrue vacation and front-load sick leave to meet state minimums, which keeps sick leave compliance simple.
Making unlimited PTO actually work
Unlimited PTO can be a strong policy, especially for salaried professional teams, but it needs guardrails. Set a minimum expected number of days off, and have managers check in when someone hasn't taken time in a few months. Model it from the top, because employees watch what leaders do. Track time off anyway, so you can see who isn't resting and so you can comply with sick leave laws, which still apply.
Be careful switching from an accrual policy to unlimited. In states that require vacation payout, employees' existing balances generally have to be paid out or preserved when the old policy ends.
Unlimited PTO fits poorly with hourly roles where coverage has to be scheduled, and with non-exempt employees whose time off has to be tracked precisely for pay.
Carryover, caps, and payout at separation
California treats earned vacation as wages, so use-it-or-lose-it policies are prohibited there, and unused vacation must be paid at separation. Employers can, however, set a reasonable accrual cap, after which employees stop earning more until they use some. Several other states, including Colorado and Montana, also restrict forfeiture of earned vacation. Many states leave payout to the employer's written policy, so the policy wording matters.
Sick leave laws usually require carryover of unused sick time, subject to caps, but usually don't require payout at separation. Some require reinstating balances for employees rehired within a set period.
Holidays
Private employers aren't required to give paid holidays or pay a premium for holiday work, unless a state law, union contract, or company policy requires it. Most US employers offer between eight and twelve paid holidays. Publish the list for the coming year in advance. Consider floating holidays that employees can use for cultural or religious observances that aren't on the standard list, which also supports religious accommodation obligations.
Partial days and exempt employees
Exempt employees must generally receive their full salary for any week they work, so you can't dock their pay for a partial-day absence. You can, however, require them to use PTO hours from their bank for partial-day absences, as long as their salary isn't reduced when the bank runs out. Our exempt vs non-exempt guide explains the salary basis rules.
PTO for hourly and shift-based teams
Hourly teams need PTO rules built around coverage. Employees want predictable time off, and managers need enough notice to fill shifts. A request window, such as submitting vacation requests at least two weeks before the schedule is posted, solves much of the friction. So does a transparent first-come, first-served rule for popular dates like holidays, with a rotation so the same people don't always lose out. Sick leave has to work differently, because illness can't be scheduled, and most state laws limit how much notice and documentation you can require for sick time. Many laws, for example, don't allow employers to require a doctor's note for short absences. Keep those two processes separate in the policy, so a supervisor doesn't accidentally apply vacation rules to sick leave.
Parental leave and other special leave
Many employers add paid parental leave on top of PTO, often for a set number of weeks for any parent after a birth, adoption, or foster placement. Coordinate it with the FMLA, state paid family leave programs, and short-term disability, so employees understand which benefit pays what and when. Bereavement leave, jury duty, voting leave, and military leave also belong in the policy, and several states require some of them. Our FMLA guide explains how federal job-protected leave fits alongside paid leave.
Getting people to actually take time off
A generous policy does nothing if people feel they can't use it. The signals that matter most come from managers. When managers take real vacations without checking email, approve requests quickly, and plan coverage instead of making people feel guilty, employees follow. Review time-off data each quarter and look for teams or individuals who haven't taken a break in months. Burnout shows up in turnover data long after it shows up in PTO balances.
Writing and running the policy
A clear policy covers eligibility, how time is earned, how to request it and how much notice is needed, approval rules and blackout periods, carryover and caps, what happens at separation, how holidays work, and state-specific sick leave terms. Keep the state rules in a supplement so the core policy stays readable.
Track balances in your HRIS or time system, not a spreadsheet. Show employees their balances on their phones, because "how much PTO do I have?" is one of the most common questions HR gets. See our time and attendance guide and leave management guide.
PTO policy design checklist
Work through this list with your team. The printable PDF version has space to tick each item off.
- List every state and city where employees work
- Check paid sick leave rules in each location
- Decide on separate banks, a combined PTO bank, or unlimited PTO
- Choose accrual or front-loading for each type of leave
- Set accrual caps instead of use-it-or-lose-it where required
- Confirm payout rules at separation for each state
- Set guardrails and a minimum expectation for unlimited PTO
- Plan how existing balances are handled before switching policies
- Publish the holiday calendar and consider floating holidays
- Explain how partial-day absences work for exempt employees
- Write request, notice, and approval rules
- Add state-specific sick leave supplements
- Track balances in your HRIS or time system
Where to go from here
Wherever you are in the process, there is a next step that fits.
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Email templates for this topic
Ready-to-edit emails with subject lines, compliance notes, and a free PDF.
- Holiday schedule announcement email templateShare the company holiday calendar for the year, with pay rules for hourly staff and coverage plans.
- PTO request approval email templateApprove a time-off request clearly and remind the employee of coverage and handoff.
- PTO request denial email templateDecline a time-off request with a clear reason and an alternative, without damaging trust.
- Condolence and bereavement leave email templateOffer sympathy to a grieving employee and explain bereavement leave without making them ask.
Frequently asked questions
Are employers required to give paid time off?
Is unlimited PTO legal?
Can I have a use-it-or-lose-it policy?
Do I have to pay out PTO when someone leaves?
Can I make exempt employees use PTO for partial days?
Sources
We checked the facts in this guide against these primary sources. Laws and thresholds change, so confirm current rules before you act.
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.