How to design paid time off for a small team: PTO bank vs. separate vacation and sick leave, accrual methods, how much to offer, carryover and payout rules, state sick leave laws and a policy outline you can adapt.
Without a written policy, time off is decided case by case, which feels unfair to employees and creates confusion for managers. It also creates legal risk: in states where earned vacation is treated as wages, an unclear policy can lead to disputes about what is owed at termination. A clear policy helps you attract and keep employees, plan coverage and treat everyone the same way.
| Single PTO bank | Separate vacation and sick leave | |
|---|---|---|
| How it works | One balance for vacation, sick days and personal time | Separate balances with separate rules |
| Simplicity | Simpler to track and explain | More to track |
| Employee behavior | Employees may come to work sick to save PTO for vacation | Sick time is protected for illness |
| Sick leave laws | Can often satisfy paid sick leave laws if the PTO meets all their requirements | Easier to show sick leave law compliance |
| Payout at separation | In some states, the whole bank may be treated like vacation and owed at separation | Sick leave is generally not paid out unless policy or law requires it |
See PTO vs. vacation for a deeper comparison.
There is no single right number. Consider what competitors for the same employees offer, what you can afford in cost and coverage and any legal minimums for sick leave where you operate. Many small businesses offer a modest starting amount that increases with tenure. Part-time employees can receive PTO pro-rated by hours worked. Whatever you choose, make sure it at least meets the paid sick leave requirements that apply in your state and city.
Our PTO accrual calculator shows how quickly time builds up under each method.
A cafe gives hourly employees 1 hour of PTO for every 25 hours worked. A part-time barista works 25 hours a week, about 1,300 hours a year, and accrues 52 hours of PTO, a little over two weeks at that schedule. A full-time cook working 2,080 hours accrues 83.2 hours, about two weeks plus a few days. The same rule treats both fairly in proportion to their work.
Most policies limit how much PTO can build up. Common options are a carryover limit (for example, up to 40 unused hours carry into the next year) or an accrual cap (no further accrual once the balance reaches a set amount). See PTO carryover and PTO accrual cap.
Be careful with use-it-or-lose-it rules. Some states, including California, Colorado and Montana, generally do not allow earned vacation to be forfeited, though reasonable accrual caps are usually allowed. Many paid sick leave laws also require carryover of unused sick time, subject to caps.
Federal law leaves most PTO decisions to the employer:
Because federal law is silent, state and local law does most of the work. Many states and cities require paid sick leave, and some treat earned vacation as wages that must be paid out at separation. Write your policy for the strictest place you have employees.
Federal law does not require paying out unused PTO, but some states require payout of earned vacation at separation, and others require it if your policy or practice promises it. Where payout is not required, a clear written policy that says whether unused PTO is paid out is essential. Our PTO payout calculator helps estimate amounts, and our final paycheck rules guide covers timing.
Spell out the process: how far in advance to request vacation, how to report sick days, how conflicting requests are handled (first come, first served, seniority or rotation), blackout periods for peak seasons and how quickly managers respond. Our time off request form and the guide on managing time off requests help. Note that sick leave laws often limit how much notice or documentation you can require for sick time.
PTO policy checklist complete.
PTO problems often start with balances tracked on spreadsheets that nobody trusts. Employees should be able to see their balance at any time, and accruals should be calculated automatically from hours worked. EZTime handles time off requests and PTO balances, with approval by managers and a record of every request. See also how to track employee PTO.
No federal law requires paid vacation, but many states and cities require paid sick leave, often including small employers. Check the laws where your employees work.
It depends on your market and budget. Many small businesses start with a modest amount that grows with tenure and pro-rate it for part-time staff. Make sure it meets any paid sick leave minimums that apply.
In many states, yes, with clear notice. Some states, including California, Colorado and Montana, generally do not allow forfeiture of earned vacation, though reasonable caps may be allowed. Sick leave laws often require carryover.
It depends on state law and your policy. Some states require payout of earned vacation; others require it only if your policy promises it. Put your rule in writing.
Often, if the PTO policy provides at least as much time and meets all the law’s requirements on accrual, use, carryover, notice and documentation. Review the specific law carefully.
It can work for salaried teams with a culture of taking time off, but it often leads to people taking less leave, not more. For hourly teams with coverage needs, a defined accrual is usually clearer. Check state rules too, since unlimited policies can complicate payout and sick leave compliance.
Under federal law, no. Paid time off for a holiday, vacation or illness is not hours worked, so it is not counted toward the 40 hours that trigger overtime.
As soon as you have hourly staff, two jobs take more time than most owners expect: recording hours accurately and building a schedule everyone can see. Under the federal Fair Labor Standards Act (FLSA), employers must keep accurate records of hours worked and pay non-exempt employees overtime for hours over 40 in a workweek, and some states add daily overtime or meal-break rules. This is general information, not legal advice.
EZTime covers all three with a time clock app, employee scheduling and payroll-ready exports, from $2 per employee per month. See pricing and start a 14-day trial.
EZTime tracks time off and PTO balances, and employees request time off from the app, so balances and approvals stay in one place.