Paid Time Off (PTO)

What paid time off (PTO) means

PTO is an employer-provided paid-leave benefit. You can choose how to structure it, subject to applicable state and local requirements.

Some employers combine vacation, sick time, and personal time in one PTO bank. Others maintain separate policies. A combined policy may satisfy a paid-sick-leave law if it meets that jurisdiction's requirements. The FLSA does not require employers to use either structure, but state and local laws may shape how the policy must work.

The structure you choose affects your team and your own responsibilities as an employer.

Why PTO matters for small business owners

For your employees, PTO means they can rest, handle a personal matter, or recover from illness without losing pay. That matters at a five-person company the same way it matters at a 500-person one.

As an employer, you need to track what employees earn, apply your policy consistently, and pay unused PTO when required.

Learn how to build a policy: How to Create a Paid Time Off Policy.

How PTO accrual and payout affect payroll processing

Accrual and how it affects wage calculation

Employers commonly provide PTO by accruing it based on hours worked or pay periods, or by frontloading an allotment at the beginning of the benefit year.

For nonexempt employees, paid leave generally does not count as hours worked when calculating overtime under the FLSA. Different salary-basis rules apply when exempt employees use or exhaust PTO.

Paying out unused PTO when someone leaves

Whether unused PTO must be paid when employment ends depends on applicable state law and the terms of your policy. In some states, accrued vacation must be paid regardless of policy language. In others, the written policy helps determine what is owed.

Learn more about PTO payout and final-pay requirements in How to Issue a Final Paycheck.

If you owe an employee for unused PTO, include the payment when you process their final wages.

Connecting PTO to payroll makes it easier to manage accruals and balances throughout the year. With SurePayroll® By Paychex you can create PTO, vacation, and sick leave policies, assign them to employees, choose accrual methods, and track earned, used, and available balances in the same system you use to run payroll.

Connect time tracking software and hours and leave stay in sync. No separate spreadsheet, no year-end reconstruction.

See plans & pricing

PTO vs. paid sick leave

PTO is a broad employer-provided leave structure that may cover vacation, illness, and personal time. Paid sick leave is leave employees can use for health-related and other legally protected reasons. Some states and cities require it. A combined PTO policy may meet those requirements if it provides all of the leave and protections required by applicable law.

Related resources

Learn more about PTO, vacation, and sick leave in Types of Time Off for Small Business Owners.

Related terms: exempt employee, non-exempt employee, and What Are Fringe Benefits?.