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4 Types of Paid Time Off Policies: How to Choose the Right One

February 8, 2023

types of paid time off

While legal requirements vary by location, when it comes to offering your employees paid time off (PTO), maintaining a time off policy is absolutely necessary for companies that are looking to attract and retain top talent.

However, with many of today’s employers offering unlimited PTO as a top workplace trend in a dizzying array of unusual perks, it can be hard to prioritize which policy is the right one for your organization. 

Which time off policies are most attractive to the candidates you’re looking to hire? How can you give employees the time they need to recharge while ensuring business needs are met? 

Types of PTO policies

Whether you’re a tech startup, a retail business, or a non-profit organization, here’s what you should know about choosing the right paid time off policy for your company. First, let's take a look at what your choices are when it comes to corporate time off packages, which can call be organized and administered using benefits administration software.

Before selecting the policy that’s right for your company, it's important to  look at the options available. 

1. Traditional time off policies

Traditional time off policies give employees an allotted set of paid time off for specific categories, like vacation, sick days, and personal days.

These allotments may be offered as days or hours off under each category and can be replenished each calendar year or on an employee’s work anniversary. Many employers incrementally increase time off for employees who stay with the company over a long period of time. 

Pros and cons of traditional time off policies


  • Accurately measure how much time employees are taking and for what purposes
  • Retain top talent by offering PTO for employees with longer tenures
  • Provides attendance information for resource and workforce planning


  • Hours spend tracking and reporting PTO can be a costly administrative burden
  • Unused PTO payouts can be costly at the end of the year or when employees resign
  • May not be attractive to job seekers who value work/life balance and don't see their time divided into categories like sick or vacation.

2. PTO banks

Similar to traditional time off policies, PTO banks offer employees an allotted set of paid time off for the year. However, this type of policy groups days off into one “bank,” where employees can take time off for any purpose, with no delineation between sick, vacation, or personal days.

This option is a good choice for organizations that want to cut back on the administrative burden of tracking PTO while still offering employees a set amount of days off. 

Pros and cons of PTO banks


  • Less administrative burden for HR teams, managers, and employees
  • Gives employees clarity on the number of days they can take off with flexibility in how to use them
  • Provides attendance information for resource and workforce planning


  • Unused PTO payouts can be costly at the end of the year or when employees resign
  • Fewer details to track results in less insight into PTO patterns and trends

3. Unlimited PTO

A growing employer trend is unlimited PTO. It allows employees to take time as they need time with no set number of allotted days.

Whether they’re headed to a spring break trip or need a day off for parent-teacher conferences, this option offers employees the flexibility to take time away from the office with minimal administrative burden.

Often, companies that adopt this policy don’t require employees to track or report their days off to HR or other leadership, and time off approval is at the discretion of each individual employee’s manager.

This trend is especially popular in tech and startup companies that don’t have the HR infrastructure or bandwidth to manage a tracked and accrued time off policy. 

Pros and cons of unlimited PTO


  • Shows employees that they're trusted to take the time they need without strict rules or guidelines
  • Focuses employee-manager conversations regarding time off on job performance and work output
  • Allows sick team members to stay home rather than worrying about using a day of PTO
  • Minimizes paperwork, giving managers and HR teams more time to focus on other business needs and relevant tasks
  • Attractive to job seekers and can be used in recruitment marketing efforts


  • Studies have shown employees take less time off under an unlimited plan
  • Team members with longer tenure are not rewarded for their loyalty
  • Can be unfair or subjective depending on individual manager preferences and likelihood to approve PTO
  • Limits the ability to do resource planning or track patterns in behavior
4. PTO donations

Companies that don't offer unlimited paid time off to their employees may include a PTO donation plan as an "add-on". Sometimes called a leave sharing program, this type of plan allows employees to support their fellow coworkers and team members by donating leave to others should they experience an illness, need to take an extended leave for caring for a family member or a sick loved on, or have been impacted by a natural disaster.

Since many employees don't use all of their accrued time off, a PTO donation policy allows them to put any of their unused hours, or days, to good use instead of wasting them. 

Pros and cons of PTO donations


  • Boosts employee morale and commadrie
  • Requires employees to be precise regarding how much time off they'll need


  • Requires comprehensive guidelines from the HR team regarding who can donate, how many days can be donated, who can request days off from this bank, and how to account for salary differences
  • Employees may feel this is a "band-aid" solution instead of simply offering more or unlimited paid time off

How to choose the right time off policy for your business

Selecting the right PTO policy for your organization starts with asking yourself important questions about business and employee needs. Below are the most important questions to consider when choosing a paid time off policy for your organization.

Where is your business located?

Many cities, and some states, maintain their own laws around paid time off – especially when it comes to sick time. This is important when considering the kind of time off policy to use in relation to where your workforce is.

Do you have employees in cities that require a certain number of paid sick days? Do you have a global workforce and need to consider different PTO policies in different locations? Always consult state and local laws before committing to a paid time off plan.

What type of business do you have?

The PTO policy you choose can vary greatly depending on what type of company you have. When it comes to workforce planning, think about which PTO policy would best serve your business needs.

For example, if you’re a construction company or restaurant with an hourly workforce, you likely can’t offer a paid time off plan that’s not tracked or accrued. However, if you’re a tech startup, unlimited PTO is much more possible due to the collaborative nature of the work, as well as the ability to work remotely.

Should you offer different time off policies for different roles?

Depending on the types of employees at your organization, you may choose to offer different paid time off policies for different divisions or roles.

For example, retail companies may choose to offer different PTO plans for corporate employees versus in-store managers. You may also want to consider offering more time for employees with longer tenure. A more generous PTO policy for long-term team members may be a compelling incentive to increase retention.

Best practices when choosing a time off policy

No matter what paid time off policy you select for your organization, here are a few tips to maximize its effectiveness.

Set expectations for tracking and reporting

It's important to establish boundaries for how employees request and track their time off. 

Create formal guidelines that cover questions like:

  • How many days/weeks notice must employees give their managers before they take time off?
  • Is there a maximum number of days off employees can take at a time?
  • Who needs to approve time off requests? Managers? HR?
  • Can employees cash in their PTO days at the end of the year or when they leave the company? 
  • Do unused PTO days roll over into the next year?

Give employees the tools they need to succeed

Will you require employees to report their time off using a central database or PTO tracking software? If so, make sure employees know how to access and use the software, and how to work with their manager or the HR team if they need to seek time-off approval. 

Establish a chain of command

When employees take time off, it can place an especially large burden on one-person teams who don’t have someone to cover for them.

Make sure these teams feel empowered to ask for time away from the office by establishing a priority list of tasks that still need to happen even during PTO. Then, decide who is responsible for taking care of these tasks when each team member is out of the office.

Set company holidays

While paid time off days are generally at the employee’s discretion, most employers have a set list of company holidays when the office will be closed.

If your business is in the United States, consider adopting the federal holidays calendar for your own organization and supplement with SHRM’s list of standard paid holidays. If you have a global workforce, consider what other holiday schedules you may need to consider based on local culture.

Consider how you will handle FMLA

When deciding your paid time off policy, be sure to consider how your company will treat time off that falls under the Family and Medical Leave Act.

While this federally-mandated leave is unpaid, the law permits an employee to elect to use or the employer to require the employee to use accrued paid vacation, sick, or family leave for some or all of the FMLA leave period.

Some companies design a paid FMLA policy, and some chose to break out different types of leave under that policy – such as maternity or parental leave plans. Whatever makes sense for your business, be sure to include FMLA time in your paid time off policy design. 

Document your paid time off policy

Make sure everyone knows and understands your organization’s paid time off policy — from leadership, to employees, to potential new hires.

Advertise your PTO package as part of your employee benefits on your company career page, and include detailed guidelines in your employee handbook. Making your PTO policy easily understandable and accessible will help your team avoid confusion and reporting errors long-term. 

It's time to unwind!

No matter the paid time off policy you choose for your company, it’s important to factor in your business needs, consider your employees’ well-being, and think about how your PTO plan fits into the rest of your employee benefits offering. 

While you're considering the right PTO offering for your employees, browse top-rated time and attendance software to keep employee time off on track. 

This article was originally published in 2019. The content has been updated with new information. 

benefits administration software Out Of Office!

Find the right benefits administrations software to administer benefits packages that will keep track of employee PTO.

benefits administration software Out Of Office!

Find the right benefits administrations software to administer benefits packages that will keep track of employee PTO.

4 Types of Paid Time Off Policies: How to Choose the Right One Learn the different types of PTO policies and what to consider when choosing the correct policy for your employees.
Jen Meza Jen Meza is VP of People at Yello, overseeing people operations, recruiting, and office management. Yello provides the leading campus recruitment platform and premium recruitment operations solutions for enterprise and fast-growing companies, helping employers build strong brands and hire top employees while maximizing ROI and driving hard cost savings.

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