PTO Policy Template: Free Sample, Accrual & State Rules

(Disclaimer: This article is for general informational purposes only and should not be considered legal advice.)

Picture a 30-person design agency in Denver in the middle of December. Three people want the same week off between Christmas and New Year’s. A project manager who just resigned wants to be paid for the 12 vacation days she never used. And a new hire wants to know whether his sick days come out of the same bucket as his vacation days.

The founder goes looking for the PTO policy and finds a two-line Slack message from 2022: “Take time off when you need it, just give your manager a heads-up.”

That message is a nice sentiment, but it isn’t a policy. It can’t decide who gets the holiday week. It can’t answer the sick day question. And it certainly can’t settle the payout question, because in Colorado the law already has: earned vacation counts as wages, so those 12 days get paid out no matter what the Slack message said.

So what should a PTO policy actually say? Here’s the short answer. A PTO (paid time off) policy explains how employees earn, request and use paid time away from work, and what happens to the time they don’t use. Most PTO policies combine vacation, personal and sick days into one bank of hours. A good one covers eligibility, accrual, carryover, scheduling, payout at separation and how the policy meets any paid sick leave law that applies to your team.

Below, we’ll walk through each of those pieces, the state rules that trip employers up, and a free PTO policy template you can adapt for your handbook.

What is a PTO policy?

A PTO policy is the section of your employee handbook that sets the rules for paid time off. It answers the questions employees really ask: How much time do I get? When can I use it? Will I lose it at the end of the year? Do I get paid for it if I leave?

No federal law requires private employers to offer paid vacation. The U.S. Department of Labor treats vacation pay as a matter of agreement between an employer and its employees. That’s exactly why the written policy matters: in most states, your policy is the agreement. Once you promise PTO, though, state wage laws decide how some of those promises are enforced, especially when someone leaves.

PTO bank vs. separate vacation and sick leave

Before you write a single rule, decide which model you’re using. Here’s how the two most common options compare:

A combined bank is the most popular choice for small and mid-size employers because it’s simple: one balance, one set of rules and fewer awkward conversations about whether someone is “really” sick. The catch shows up in payout states. If your state requires you to pay out unused vacation, a combined PTO bank usually counts as vacation, so the whole balance can be payable when someone leaves.

Separate banks take more tracking, but they keep sick time for actual sick days and, in many states, let you limit payout to the vacation balance alone.

How much PTO should you offer?

Since there’s no legal minimum for vacation, think in terms of what the job market expects. According to U.S. Bureau of Labor Statistics benefits data, private-industry workers typically receive about 11 paid vacation days after one year of service, rising to about 15 days after five years. That’s on top of paid holidays and paid sick leave.

A common small-business approach is 10 to 15 days of PTO in the first years, increasing with tenure. Here’s a sample accrual schedule for full-time employees paid biweekly (26 pay periods a year):

A few rules of thumb before you settle on your numbers:

1. Accrue per pay period: Earning PTO a little at a time, instead of all on January 1, protects you when someone leaves early in the year, and it’s easy to show on a pay stub.
2. Use a cap, not a forfeiture rule: A maximum balance, such as 1.5 times the annual amount, keeps your liability in check and works even in states that ban use-it-or-lose-it policies.
3. Check your sick leave laws first: If your PTO bank doubles as paid sick leave, the amount and accrual rate must meet the most generous sick leave law that covers each employee. Many state laws require at least one hour of paid sick leave for every 30 hours worked.

What to include in a PTO policy

Whichever model you choose, a complete PTO policy answers nine questions:

1. Eligibility: Which employees earn PTO (full-time, part-time, temporary) and when they can start using it.
2. Accrual or front-loading: Whether PTO is earned per hour worked or per pay period, or granted in a lump sum at the start of the year.
3. Caps and carryover: The maximum balance and how much time rolls over into the next year.
4. Requests and approval: How far in advance to ask, who approves requests and how you settle conflicts when two people want the same dates.
5. Unplanned absences: How to report an illness or emergency, kept consistent with the notice limits in sick leave laws.
6. Increments: The smallest amount of PTO an employee can use, such as one hour.
7. Holidays and leaves: How PTO interacts with company holidays, FMLA leave and state leave programs.
8. Separation: Whether unused PTO is paid out when employment ends, consistent with state law.
9. Rehire: Whether balances are restored when former employees come back, which some sick leave laws require.

State laws that change your PTO policy

Federal law stays out of vacation pay, so the states have filled the gap, and they haven’t filled it the same way. These four rules cause the most trouble. If your team works in more than one state, our guide to multi-state employee handbooks explains how to handle the differences without writing ten separate handbooks.

Payout when an employee leaves

Several states, including California, Colorado, Illinois, Louisiana, Massachusetts, Montana, Nebraska and Wyoming, generally require employers to pay out earned, unused vacation when employment ends. Because a combined PTO bank usually counts as vacation, the full balance may be payable. In most other states your written policy decides, which means a vague policy can cost you money.

Use-it-or-lose-it policies

California, Colorado, Montana and Nebraska generally prohibit policies that make employees forfeit earned vacation. In those states, use a reasonable cap on accrual instead: once employees hit the cap, they stop earning more until they use some time. The California Labor Commissioner’s vacation FAQ explains how a cap differs from forfeiture.

Paid sick leave laws

A PTO policy can usually satisfy a state or city sick leave law if it provides at least as much time, can be used for the same reasons, and follows the law’s rules on notice, documentation, carryover and non-retaliation. Some laws, such as those in Illinois and Maine, already allow leave for any reason. The National Conference of State Legislatures tracks which states require paid sick leave.

Exempt employees and partial days

Employers may generally require exempt employees to use PTO for partial-day absences. What you shouldn’t do is reduce an exempt employee’s salary for a partial-day absence once their PTO runs out, because that can put the employee’s exempt status at risk under the Fair Labor Standards Act.

Want to see how these rules apply where your team works? Our guide to employee handbook requirements by state breaks them down one state at a time.

Free PTO policy template

Copy and adapt this sample PTO policy. Replace the bracketed text, delete the options that don’t apply to your company, and have an employment attorney review the final version.

Paid Time Off (PTO)

Purpose. [Company Name] provides paid time off so employees can rest, take care of personal matters and recover from illness.

Eligibility. Regular full-time employees accrue PTO beginning on their first day of employment. Regular part-time employees accrue PTO in proportion to hours worked. Temporary employees [do / do not] accrue PTO, except as required by law.

Accrual. Full-time employees accrue PTO each pay period according to the following schedule: [0–2 years: 4.62 hours per biweekly pay period (120 hours per year); 3–5 years: 6.15 hours (160 hours per year); 6+ years: 7.69 hours (200 hours per year)]. PTO does not accrue during unpaid leaves of absence, except as required by law.

Maximum balance. Employees may accrue up to [1.5 times] their annual PTO amount. Once an employee reaches the maximum, no additional PTO accrues until the balance falls below the maximum.

Requesting PTO. Submit requests for planned PTO at least [two weeks] in advance through [system]. Requests are approved based on business needs, and when requests conflict, [seniority / the order received] will be considered. For unplanned absences, such as illness, notify your manager as soon as practicable, and before your shift starts when possible.

Use. PTO may be used in increments of [one hour]. PTO may be used for vacation, personal needs, your own illness or medical care, care of a family member, and any other reason covered by applicable sick and safe leave laws. Where state or local law provides greater rights, [Company Name] will follow that law.

Holidays and leaves. Company holidays that fall during scheduled PTO are not counted as PTO. Accrued PTO [will / may] run concurrently with FMLA and other leaves of absence to the extent permitted by law.

Separation. [Unused, accrued PTO will be paid at separation.] OR [Unused PTO is not paid at separation, except where required by state law.] If you are rehired within [12 months], your previous balance will be reinstated where required by law.

Questions. Contact [HR contact] with questions about your PTO balance or this policy.

Common PTO policy mistakes to avoid

1. Forfeiting earned vacation where state law treats it as wages: California, for example, doesn’t allow use-it-or-lose-it policies. Use a reasonable accrual cap instead.
2. Docking an exempt employee’s salary for a partial day: You can take the hours from a PTO bank, but federal salary-basis rules generally don’t let you cut the salary itself.
3. Leaving payout at separation unclear: In states where the policy controls, your handbook wording decides whether unused PTO is paid out, and unclear wording tends to be read in the employee’s favor.
4. Making the bank too small to cover sick leave: If your PTO bank is your sick leave, it has to meet the most generous sick leave law that applies, for every employee in every location.
5. Applying the policy unevenly: If one manager approves every holiday request from a favorite and denies everyone else, the policy stops being a policy. Write down how conflicts are decided, and follow it.

PTO policy FAQs

What is a standard PTO policy?

There’s no legal standard, but a typical policy gives full-time employees about 10 to 15 days of PTO a year to start, accrued each pay period, with more time after a few years of service. It also sets a cap on the balance, a notice period for requests and a rule for what happens to unused PTO at separation.

Is PTO required by law?

No federal law requires paid vacation or PTO. However, many states and cities require paid sick leave, and a PTO policy can often satisfy those laws if it meets their requirements.

Can my employer deny a PTO request?

Generally yes, for scheduling reasons. Employers can require advance notice and approve or deny requested dates based on business needs, as long as the policy is applied consistently and doesn’t interfere with legally protected leave, such as state paid sick leave or FMLA leave.

Do employers have to pay out unused PTO?

It depends on the state. California, Colorado, Illinois, Louisiana, Massachusetts, Montana, Nebraska and Wyoming generally require payout of earned vacation or PTO. In many other states, your written policy controls.

Can I cap PTO accrual?

Yes. A cap on the total balance is generally allowed, even in states that prohibit use-it-or-lose-it policies, because employees stop earning only until they use some of their time.

Can I require employees to use PTO when they are sick?

Generally yes, if your PTO bank also serves as your sick leave and complies with the sick leave laws that apply. Some of those laws limit when you can require documentation or advance notice for sick time.

Does 3 weeks of PTO mean 15 days or 21 days?

It usually means 15 working days (three five-day workweeks), or 120 hours on a 40-hour schedule, because PTO is normally counted in workdays or hours. Your policy should say whether PTO is tracked in days or hours.

What are the PTO laws in different states?

States differ on three main points: whether unused vacation must be paid out at separation, whether use-it-or-lose-it policies are allowed, and how paid sick leave laws interact with PTO. California, Colorado, Montana and Nebraska are the strictest because they require payout and ban forfeiture. Most other states let your written policy decide, as long as it’s clear and applied consistently.

How can Handbooks.io help you create a PTO policy?

Handbooks.io includes a ready-to-use PTO policy, adapted for each state where you have employees, inside a complete employee handbook developed and reviewed by U.S. labor attorneys. Instead of stitching together templates and guessing at state payout rules, you get policy language that fits where your team actually works.

When the law changes, your federal, state and local policies get updated, and built-in e-signatures let you collect acknowledgments without chasing paper. If you’re starting from scratch, our guide on how to create an employee handbook walks you through the rest of the process, and our employee handbook acknowledgment form helps you document that every employee received it.