How to choose the best small business paid time off policy

Federal law doesn’t require paid time off for small businesses, or businesses of any size for that matter. Only a few states and cities require it across the country. Still, a small business paid time off policy is a great benefit to help attract top talent and keep your employees happy and healthy. 

It’s important for both your employees and the success of your business that your team has time to focus on their personal lives. As Homebase’s Head of People, it is my job to ensure that we have an effective paid time off policy in place that works for the company and gives each individual employee a chance to take a break. 

Types of paid time off


Paid vacation days are provided by business owners to give employees some time away from work, whether that is to travel, or just have a personal day. Paid vacation time is typically planned and some employers request that employees provide a minimum amount of notice before taking vacation days.


Sick time is intended for employee absences caused by the employee’s own illness or injury or to care for a sick or injured family member. Due to the nature of sick time, it is often taken with little to no advanced warning. Several states and cities have laws mandating sick leave for employees.


Bereavement leave is sometimes offered to allow employees time-off following the loss of a friend or loved one. Some employers offer additional bereavement days for employees who have lost a member of their immediate family.

Jury duty

Many employees will be required to take time off to fulfill their civic duty of jury service. Jury duty is included in the average paid time off small business owners offer. Some employers will offer to pay employees for this time off during a pay period, though they typically cap the number of days as the length of service on a jury can be unpredictable.

Paid time off (PTO)

PTO is a single bank of time-off which can be thought of as combining vacation and sick time. Employees can use their bank of PTO time for illness, travel, personal projects, care for family members, and more. PTO allows employees greater flexibility in how they manage their time away from work. You can find out more about the differences between PTO vs vacation and sick time in one of our latest blog posts.


Many companies offer employees paid days off for some or all national holidays. In the US, this may include days like Memorial Day, Independence Day, Labor Day, or Thanksgiving. Employers may also offer less traditional holidays such as those that align with the company’s mission or origins. 

When developing a paid time-off policy, there are a few strategies you can choose from. Let’s weigh the pros and cons of a few of the more common ones and focus on the vacation and sick-leave components, so that you can decide which strategy best suits your needs. 

What small businesses need to know about time off policies

As I mentioned before, there are currently no federal paid time off policy small business laws for most businesses outside of the temporary laws that were stipulated under the Families First Coronavirus Response Act

The government does require an unpaid time off policy for small business under the Family and Medical Leave Act. Your state may also require additional unpaid leave, so be sure to check your state laws to find out what type of small business time off policy is required in your area. 

However, the Paid Sick Leave Executive Order requires companies with certain types of federal government contracts, also known as “covered contracts,” to provide paid sick leave, which is available for short-term health needs and preventive care. Learn more about covered contracts by visiting the Department of Labor’s page on sick leave

Another important legal matter worth noting: PTO policies can be configured differently for different types of employees based on objective criteria such as their tenure or their classification as exempt or non-exempt employees, but it is illegal to discriminate between protected classes. 

PTO payout

In many states (24 in total) employers are legally obligated to pay out an employee’s unused PTO balance when that team member leaves your business. States with laws that ensure employees receive PTO payouts include: 

Alaska, Arizona, California, Colorado, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island (after one year of employment), Tennessee, West Virginia, and Wyoming, and the District of Columbia. 

Paid sick leave laws by location

There are many states that have their own paid sick leave requirements. Be sure to check out what the laws are in your area when it comes to providing paid time off. 

Those states include: 

The following are some of the cities and counties that also have their own paid sick leave laws. Both your state and city or county may have paid sick leave laws in place. You must follow the one that is more beneficial to the employee. 

Many states, cities and counties may have implemented additional laws related to paid time off during the COVID-19 pandemic.

Even though you may not be legally required to provide this employee benefit, most jurisdictions require you to adhere to whatever plan you have laid out in your official policy. Failure to do so could mean a potential lawsuit in the future. So be sure to stick to whatever benefit you decide to offer your employees. 

Now, let’s review some of the different types of paid leave plans and consider the pros and cons of each option. 

Separation of time-off types

A traditional time off policy gives employees a set amount of time off for each of the different categories such as vacation, sick days, or jury duty. You can offer these under each category as days or hours.

Vacation days


With a set amount of time for each paid time-off type, you can accurately measure not only how much time each employee is taking off, but also what exactly they are using it for. 


If employees have run out of vacation days but still have sick days, they may call in “sick” rather than giving advance notice for a day off.


Many employers combine sick and vacation time into a single PTO plan. Rather than distinguishing between the various paid time-off types, employees are given the freedom to use allotted time off as they choose. It is left to the discretion of the employee if they want to use their PTO time for vacation, personal projects, or to take a break when they are ill.


All in one PTO banks give employees greater flexibility to manage their time-off throughout the year.  It allows employees who don’t use sick time often to take that time for vacation instead, which is popular with many employees.

There are no questions for employers about which accrual type to apply to an employee’s time-off request. 


Without dedicated sick days, employees may try to come to work when they are ill, rather than “wasting” a day that could potentially be used for vacation in the future.

Time off accrual 

Time off accrual means that you as the employer allot a certain number of total days that an employee can take off over the year for sick and vacation time and the employee earns those days on a prorated basis throughout the year. For example, an employee might earn 2 hours of time off for every week they work. This is the most common time-off strategy and the one we use here at Homebase. 


When employees earn their PTO, they feel more entitled to take it. When employees actually take their PTO, you’ll have less burnout among your team, and you can encourage them to take the days they’ve accrued. 

A common way businesses encourage teams to take the earned days—and also prevent a large financial liability on the books in terms of required PTO payout upon termination—is to add an accrual cap to the plan. That way your employee won’t be able to accrue any more days until they’ve taken at least a little bit of leave, so they’re encouraged to take time off. 

Some companies limit the number of accrued hours you can carry over to another year, which has a similar effect as the capping strategy. 

Another nuance to this plan is that you can offer the incentive of earning more vacation days the longer the employee works for you. Exempt employees at Homebase, for example, can earn three weeks of vacation the first year they are employed, and after the first year that increases to four weeks per year. 


With any type of accrued PTO hours or days, you might have to pay out the remainder of an employee’s time off upon termination, depending on where you live. If they don’t take any of their time, it can get expensive.

Banking paid time off

Similar to accrued PTO, you as the employer allot a certain number of total days that an employee can take off over the year for each of the time off categories in your plan. However in these types of plans, rather than requiring employees to earn their time off, you as the employer front load these days into the employee’s time off bank.

To be honest, I don’t see this plan very often. 


The one upside to banked PTO is that it’s an easier plan to put in place because you don’t have to worry about keeping up with the accrual patterns for each employee. This could be easier for businesses who don’t have a software solution for PTO management. 


The biggest problem with this plan is that in theory, you could hire someone, they could take their two weeks vacation early in the year, and then leave your business.

“Unlimited” paid time off

You hear about the “unlimited” PTO strategy quite often in the startup world. This type of PTO policy allows employees to take paid days off throughout the year as needed. Time off is not accrued, nor is it limited in duration.


The plan can be great from a recruitment standpoint. Job seekers might see it as a generous perk because they could have a better work/life balance. And without limits, employees might feel better about taking a vacation knowing they can stay home if they get sick. 

While many companies still track time off to better understand usage, they do not have to. It also simplifies your payroll entries.

On the financial side, an unlimited program provides another benefit. Remember when I mentioned that 24 states require you to pay out an employee’s remaining PTO balance upon termination? If you have an open plan, without accruals, employers don’t have to pay out “earned” PTO, thus reducing your financial liability when the employee exits the organization.


Unfortunately, calling it unlimited is a misnomer—because it’s not really unlimited outside of the theoretical perspective. Businesses and managers still need to set expectations with employees about appropriate time-off usage and when left up to a manager’s discretion, it can lead to disparity between teams and individuals. 

Research shows that many employees end up taking less PTO when in an “unlimited” time off plan than they would in a more traditional accrued plan. It may be that some employees feel less entitled to time off that has not been “earned”. On the flip side, other employees may abuse the privilege since there aren’t any official rules.  

It’s also a little trickier to document how you’re in compliance with some of the requirements for states or cities that require paid sick leave. Often in these areas you’ll see people with two plans: one as an open plan and one plan for sick days so they can show that they guaranteed the employees have the days they’re entitled to. 

Set a company holiday policy

Whatever PTO plan you put in place, make sure you’ve also got a separate holiday policy for when the business’s doors will close. It can be as easy as adopting some or all of the federal holidays calendar and adding any other holidays you think fit into your list. 

Note: The Fair Labor Standards Act does not require you to pay for time off during the holidays. 

Additional paid time off factors to consider 

Let’s look further into what questions should be answered in your policy handbook. 

1. Who is eligible for what? 

Some organizations set up different types of plans for different groups of employees. For instance, you may offer different packages to your exempt employees than you do to your non-exempt employees. You may also wish to devise a different plan for remote employees vs. on-site team members. As long as you’re using objective criteria and not breaking any discrimination  laws, this is fine.

2. How many days are employees eligible for? 

Determine how many days you will provide to employees and how they can earn that time off. According to a recent survey, the average private-sector employee with one year of work experience at a company is eligible for 10 days of vacation—but you can always offer more! A popular strategy is to increase the accrual rate based on the employee’s years of service. 

3. When and how can employees take the leave?

Be sure to lay out in your handbook in what increments your staff can take their available day. Some businesses, for example, only allow employees to take full-or half-days off. Others allow smaller increments like taking off by the hour. 

You may also want to set up a rule around how long an employee can take off. For example, maybe you don’t want an employee to take more than 2 weeks off in a row unless for a protected reason under the FMLA or other leave laws. 

Some companies even stipulate a “blackout period.” During these times, employees may not take their paid leave. This is especially popular among businesses such as retail companies who need all hands on deck during the holiday rush. 

How many days in advance do you need the notice? Define it in your handbook and require employees to request time off by then so their manager can prepare. 

Bottom line 

No matter which option you choose, make sure it’s easy to manage for you (both financially and operationally) and beneficial for your team. Once you create the perfect plan for everyone involved, you’ll likely experience higher employee retention, attract better talent, and enjoy a happier and healthier workplace. 


Time off policy for small business FAQs

What is typical PTO for small businesses?

Many small businesses operate with a PTO policy that is conditional on the amount of time an employee has been with that company. This is true for many large corporate businesses as well. Most of the time, new employees are allowed 10 vacation days per year. This number of days will increase the longer the employee works for that business.

What is a PTO policy?

A PTO policy is an employee benefit program provided by an employer that allows an employee a predetermined and specified number of paid days off.

What is the difference between PTO and vacation?

The difference is simply what the employee uses their time off for. Most businesses nowadays consolidate vacation and PTO into one category, leaving it up to the employee to decide what they do with their time off, whether that is for vacation, doctor’s appointments, or a sick day.

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