A clear PTO policy is one of the most important documents a small business can create. It sets expectations, prevents misunderstandings, and shows employees you value their work-life balance. Yet many small businesses operate without a formal policy, relying on informal agreements that cause confusion down the road.
This guide covers everything you need to know about creating a PTO policy for your small business in 2025. We'll explain the different types of time off, how accruals and rollovers work, and provide a sample policy you can adapt for your own company.
Whether you're drafting your first policy or updating an existing one, this comprehensive resource will help you build something fair, clear, and legally sound.
What Is a PTO Policy?
A PTO (Paid Time Off) policy is a formal document that outlines how employees earn, request, and use their paid time away from work. It defines the rules of the game so everyone knows what to expect.
A good PTO policy answers questions like:
- How many days off do employees get?
- What types of leave are available?
- How do employees request time off?
- What's the approval process?
- Can unused days roll over to next year?
- What happens to PTO when someone leaves the company?
Without a written policy, these questions get answered inconsistently, often leading to perceptions of unfair treatment and potential legal issues.
Types of Paid Time Off
Most small businesses offer some combination of these leave types:
Vacation Time
This is discretionary time off for rest, travel, personal activities, or whatever employees choose. Vacation days are typically planned in advance and require manager approval.
Common practices:
- 10-15 days per year for most employees
- May increase with tenure (e.g., 15 days after 3 years)
- Usually requires advance notice (1-2 weeks)
Sick Leave
Time off for illness, medical appointments, or caring for sick family members. Many states now have mandatory sick leave laws, so check your local requirements.
Common practices:
- 5-10 days per year
- Often separate from vacation time
- Some companies use "PTO bank" combining sick and vacation
- Usually doesn't require advance notice
Personal Days
Flexible days for personal matters that don't fit neatly into vacation or sick categories. Moving day, family obligations, mental health days, or dealing with home emergencies.
Common practices:
- 2-5 days per year
- May or may not require explanation
- Sometimes combined with sick leave
Unpaid Leave
Time off without pay for extended absences beyond available PTO. This might include extended family leave, sabbaticals, or other personal situations. Define maximum duration allowed, specify approval requirements, and clarify benefit continuation during unpaid leave.
Bereavement Leave
Time off following the death of a family member. This is typically separate from regular PTO and handled sensitively. Common practice is 3-5 days for immediate family and 1-2 days for extended family.
Understanding PTO Accruals
Accrual determines how employees earn their PTO throughout the year. There are two main approaches:
Lump Sum (Annual Grant)
Employees receive their full PTO balance at the beginning of each year or hire anniversary.
Pros:
- Simple to understand and administer
- Employees can take vacations early
- Less tracking required
Cons:
- New hires may take PTO then leave
- Year-end "use it or lose it" rushes
Gradual Accrual
Employees earn PTO incrementally throughout the year, usually each pay period.
Pros:
- Reduces liability if employees leave early
- More predictable for financial planning
- Encourages year-round distribution
Cons:
- More complex to track
- Limits early-year vacations
Example accrual calculation:
15 days PTO per year = 120 hours
Biweekly pay = 26 pay periods
Accrual per pay period = 120 ÷ 26 = 4.6 hours
PTO Rollover Policies
What happens to unused PTO at year's end is one of the most important policy decisions you'll make.
Use It or Lose It
Unused PTO expires at year's end. Employees forfeit any days they didn't take.
Note: Not allowed in some states (California, Montana, etc.). Check local laws.
Unlimited Rollover
All unused PTO carries over to the next year indefinitely. Maximum flexibility but creates growing liability.
Capped Rollover
RecommendedEmployees can roll over some unused PTO, up to a limit. Example: carry over up to 5 unused vacation days.
This is the most common approach for small businesses—balancing flexibility with liability management.
Rollover with Expiration
Carried-over days expire after a set period. Example: unused PTO rolls over but must be used by March 31.
Creating Your PTO Policy: Key Decisions
Before writing your policy, decide on these key elements:
How Much PTO to Offer
Research industry standards for your sector and location. Consider:
- Entry-level: 10-15 days
- Mid-level: 15-20 days
- Senior/Management: 20-25 days
- Consider tenure-based increases
Combined vs. Separate Banks
Combined PTO: All time off comes from one pool. Simpler to manage, more flexibility.
Separate banks: Different pools (e.g., 10 vacation + 5 sick + 2 personal). Ensures sick time isn't sacrificed for vacation.
Probationary Periods
Some companies require 30-90 days before employees can use PTO. Others allow immediate access.
Minimum Increment
Can employees take 2 hours off for an appointment, or must they take a full day? Half-day minimums are common.
Blackout Periods
Are there times when vacations aren't allowed? Be explicit about any restrictions.
Sample PTO Policy for Small Businesses
Here's a template you can customize for your company:
[COMPANY NAME] PAID TIME OFF POLICY
Effective Date: January 1, 2025
Purpose
This policy outlines paid time off benefits available to full-time employees of [Company Name]. We encourage all team members to take regular time away from work for rest, personal matters, and well-being.
Eligibility
All regular full-time employees are eligible for PTO benefits. Part-time employees working 20+ hours receive prorated benefits. PTO is available immediately upon hire.
PTO Allowances
| Tenure | Vacation | Sick | Personal | Total |
|---|---|---|---|---|
| 0-2 years | 10 | 5 | 2 | 17 |
| 3-5 years | 15 | 5 | 3 | 23 |
| 6+ years | 20 | 5 | 3 | 28 |
Accrual
PTO is granted as a lump sum at the beginning of each calendar year. New hires receive prorated PTO based on their start date.
Types of Leave
- Vacation: Discretionary time off for rest, travel, or personal activities. Requests should be submitted at least two weeks in advance when possible.
- Sick Leave: Time off for personal illness, medical appointments, or caring for an immediate family member. No advance notice required, but notify your manager as soon as possible.
- Personal Days: Flexible time off for personal matters. May be used with 24-hour notice when possible.
Requesting Time Off
- Submit requests through [designated system/form]
- Include start date, end date, and type of leave
- Managers will respond within 48 business hours
- Requests are approved based on business needs and team coverage
Rollover
Unused vacation days may roll over to the following year, up to a maximum of 5 days. Rolled-over days must be used by March 31 or they expire. Sick and personal days do not roll over.
Holidays
The following paid holidays are provided in addition to PTO:
- New Year's Day
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- Day after Thanksgiving
- Christmas Day
Termination
Upon voluntary resignation with two weeks' notice, employees will be paid for unused, accrued vacation days up to their annual allowance. Sick and personal days are not paid out. Employees terminated for cause forfeit unused PTO.
Policy Changes
[Company Name] reserves the right to modify this policy at any time with reasonable notice to employees.
Communicating Your PTO Policy to Employees
A policy only works if people understand it. Here's how to effectively communicate your PTO policy:
Include It in Onboarding
Every new hire should receive and review the policy during their first week.
Make It Accessible
Store the policy somewhere employees can easily find it—company wiki, shared drive, or employee handbook.
Send Annual Reminders
At the start of each year, remind employees of their allowances and any rollover deadlines.
Lead by Example
Managers and leaders should take their PTO. If leadership never takes vacation, employees feel pressure to do the same.
Legal Considerations
PTO laws vary significantly by state and locality. Key areas to research:
Important legal considerations:
- State-mandated sick leave: Many states require minimum sick leave for employees.
- PTO payout requirements: Some states consider earned PTO as wages that must be paid upon termination.
- Family and Medical Leave: Companies with 50+ employees must comply with FMLA.
- Consistency: Apply your policy consistently to avoid discrimination claims.
When in doubt, consult an employment attorney familiar with your state's laws.
Conclusion
A well-crafted PTO policy protects your business, treats employees fairly, and sets clear expectations for everyone. Start with the sample policy in this guide, customize it for your company's needs and culture, and make sure every team member understands how it works.
Remember that your PTO policy is also a recruiting and retention tool. Generous, flexible time-off policies attract talent and show employees you care about their well-being beyond the workplace.
Review your policy annually to ensure it remains competitive and compliant with current laws. As your business grows, your PTO needs will evolve too.
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