Paid time off (PTO): how it works, accrual and state laws

Paid time off (PTO) is a bank of paid hours an employee can use for vacation, illness, appointments or personal days, usually without saying why. Federal law does not require employers to offer it, but once you do, state wage laws decide whether unused hours can expire and whether you must pay them out when someone leaves. And in 20 states plus Washington, D.C., a paid sick leave law sets a floor your PTO policy has to meet. This guide covers the definitions, the accrual math, the state rules as of November 2026 and how to write a policy that holds up.

What is paid time off?

PTO is any time off for which the employee keeps their normal pay. In everyday use, though, “PTO” usually means one specific setup: a single balance of hours that covers vacation, sick days and personal days together. An employee who books Friday off for a wedding and an employee who calls in with the flu both take the hours from the same bank.

Paid time off is different from three other kinds of leave:

• Paid holidays. Days like Thanksgiving that the business closes or pays a premium for. Most employers track them separately. See our guide to holiday pay rules for how holiday pay and overtime interact.
• Protected unpaid leave. Federal FMLA leave gives eligible employees up to 12 weeks of job-protected leave, but it is unpaid unless the employer lets or requires employees to use paid leave at the same time. Our FMLA leave guide covers eligibility.
• Mandatory leave under state or local law. Paid sick leave, jury duty, voting time and state paid family leave insurance each have their own rules. A PTO bank can cover some of them, not all.

PTO bank vs separate vacation and sick leave

Employers choose between one combined bank and two or more separate buckets. Both are legal everywhere, but they behave differently under state law.

The payout row matters most. California’s Labor Commissioner says a PTO plan that mixes vacation and sick leave is subject to the same rules as vacation, including no forfeiture and payout at the final rate of pay. Nebraska’s Supreme Court reached a similar result in Fisher v. PayFlex Systems (2013). So in those states, a combined bank can cost more at separation than a split plan, because hours that would have been unpaid sick leave become wages owed.

Is paid time off required by law?

Not federally. The U.S. Department of Labor states that the Fair Labor Standards Act (FLSA) “does not require payment for time not worked, such as vacations, sick leave or federal or other holidays.” These benefits are “matters of agreement between an employer and an employee.” Federal contractors are the main exception: some contracts under the Service Contract Act and Davis-Bacon Act set holiday and vacation fringe benefits in their wage determinations.

Two federal rules still touch PTO. First, PTO hours are not hours worked, so they do not count toward the 40 hours that trigger overtime. An employee who works 40 hours and takes 8 hours of PTO the same week gets 48 hours of pay and no overtime premium. Our overtime calculator uses hours worked only. Second, the salary basis rules for exempt employees decide how you can deduct for absences, covered in the exempt section below.

The real requirements come from the states: wage payment laws that decide whether earned vacation is “wages,” and paid sick leave laws that require a minimum amount of paid leave.

PTO accrual methods, with the math

PTO accrual is the rate at which employees earn hours. There are three common methods. All the examples use a target of 80 hours a year (two weeks) and a full-time year of 2,080 hours (40 hours × 52 weeks).

1. Per hour worked. The employee earns a fraction of an hour for every hour on the clock. Rate = 80 ÷ 2,080 = 0.0385 hours per hour worked, which is roughly 1 hour for every 26 hours. A part-time employee working 25 hours a week earns 25 × 52 × 0.0385 = 50 hours a year (exactly 1,300 × 80 ÷ 2,080 = 50). This method is the fairest for hourly and part-time staff, and it is how most state sick leave laws work: 1 hour for every 30 hours worked. It needs accurate punches, which is why it pairs with a time clock app.

2. Per pay period. The employee earns a fixed amount each paycheck, regardless of hours. Weekly: 80 ÷ 52 = 1.54 hours. Biweekly: 80 ÷ 26 = 3.08 hours. Semimonthly: 80 ÷ 24 = 3.33 hours. Monthly: 80 ÷ 12 = 6.67 hours. After 10 biweekly paychecks, an employee has 30.77 hours. This is simple for salaried teams, but it gives a part-timer the same PTO as a full-timer unless you set a lower rate for part-time roles.

3. Front-loaded (lump sum). The full 80 hours lands on day one of the year. New hires get a prorated amount: someone who starts July 1 gets 6 ÷ 12 × 80 = 40 hours. Front-loading is easy to explain, but an employee can use the whole bank in February and quit in March. Whether you can recover those hours from a final paycheck depends on state law, and in California the Labor Commissioner says you cannot deduct unearned advanced vacation from final wages. In payout states, a front-loaded balance may also count as earned the day it is granted, so leaving employees could be owed the full unused amount.

Many employers add a tenure step, such as 80 hours a year for the first two years and 120 hours from year three. With per-hour accrual, 120 ÷ 2,080 = 0.0577 hours per hour worked.

Caps, carryover and use-it-or-lose-it

Three tools keep balances from growing forever, and states treat them very differently.

• Accrual cap. Once the balance hits a ceiling, the employee stops earning until they use some time. Example: with an 80-hour annual rate and a 120-hour cap, an employee at 120 hours earns nothing on their next 100 hours worked; after taking 16 hours off, they drop to 104 and start earning again. California’s Labor Commissioner and Montana’s Department of Labor and Industry both allow reasonable caps.
• Carryover limit. At year end, only part of the balance rolls into the new year. Example: an employee ends December with 64 hours and the policy allows 40 hours of carryover, so 24 hours are lost.
• Use-it-or-lose-it. The whole unused balance expires on a set date. It is the strictest form of the carryover limit.

Carryover limits and use-it-or-lose-it rules are a forfeiture of earned time. Where state law treats earned vacation as wages, forfeiture is not allowed:

• California: the Labor Commissioner says policies that forfeit vacation at a set date are not recognized, and a PTO plan follows the same rule. Caps are allowed. Employers can also pay out unused hours each year instead of carrying them over.
• Colorado: the Division of Labor Standards and Statistics, applying the Colorado Supreme Court’s Nieto v. Clark’s Market decision, says any policy term that forfeits earned vacation is void. You may cap accrual, but you cannot cap how much earned vacation carries over.
• Montana: the Department of Labor and Industry says use-it-or-lose-it policies are not permitted, but caps that stop further accrual are.
• Nebraska: courts have held that earned vacation, and PTO usable for any purpose, is wages, and that a policy conflicting with that is void.

Most other states allow use-it-or-lose-it if the policy is written and employees know about it. Illinois is a good example: its Department of Labor allows the policy if employees get a reasonable opportunity to take the time and had notice of the rule, but earned time can never be forfeited at separation. Massachusetts’ Attorney General has warned that caps and use-it-or-lose-it rules can become an illegal forfeiture of wages, so get advice before using one there. Separately, many state sick leave laws require carryover of unused sick hours, which limits use-it-or-lose-it for any PTO bank that doubles as sick leave.

PTO payout at termination by state

There is no federal rule. In most states, the employer’s written policy decides whether unused PTO is paid out at separation, which is why the policy wording matters so much. A clear statement such as “unused PTO is not paid out at separation” is enforceable in many states. These states take a stricter line on earned vacation, and in several of them a combined PTO bank is treated the same way:

The cost adds up. An employee paid $19.00 an hour who leaves with 52 hours of PTO is owed 52 × $19.00 = $988.00 in a payout state, on the final-pay deadline that state sets. California adds waiting time penalties under Labor Code 203 if final wages are late. If you are in California, read our California overtime law guide as well, since the same final paycheck includes any daily overtime owed.

State paid sick leave laws that shape your PTO policy

As of November 2026, these 20 states and Washington, D.C. require most private employers to provide paid sick leave: Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont and Washington. Cities and counties add their own laws, including New York City, Chicago, Philadelphia, San Francisco and Seattle. Illinois, Maine and Nevada require paid leave that can be used for any reason, which a PTO bank fits naturally.

The most common accrual rate is 1 hour of paid leave for every 30 hours worked. An employee working 1,560 hours a year (30 hours a week) earns 1,560 ÷ 30 = 52 hours, though most laws let employers cap annual use or accrual at 40, 48 or 56 hours depending on the state and employer size. A few rules worth knowing:

• California: 1 hour per 30 hours worked; employees can use at least 40 hours or 5 days a year, and employers can cap the balance at 80 hours or 10 days. A PTO plan qualifies if it meets those amounts and can be used for the same purposes, according to the Labor Commissioner.
• New York: up to 40 hours a year at employers with 5 to 99 employees and up to 56 hours at 100 or more, accrued at 1 hour per 30 hours worked or granted up front.
• Connecticut: coverage expanded on January 1, 2026 to employers with 11 or more employees in the state, and is scheduled to reach employers with 1 or more on January 1, 2027.
• Alaska (new in 2025): approved by voters in November 2024. Since July 1, 2025, employees earn 1 hour per 30 hours worked, up to 40 hours a year at employers with fewer than 15 employees and 56 hours at 15 or more, according to the Alaska Department of Labor and Workforce Development. Unused leave carries over unless the employer front-loads.
• Nebraska (new in 2025): approved by voters in 2024, then narrowed by LB 415. Since October 1, 2025, employers with 11 or more employees must provide 1 hour per 30 hours worked after 80 hours of employment, up to 40 hours a year at 11 to 19 employees and 56 hours at 20 or more. The Nebraska Department of Labor says an existing PTO policy that meets the law is enough.
• Missouri (repealed): voters approved paid sick leave in November 2024 and it took effect May 1, 2025, but HB 567 repealed it effective August 28, 2025. Missouri employers may offer sick leave but are no longer required to. Check the Missouri Department of Labor and Industrial Relations for guidance on hours earned before the repeal.

If your PTO bank is meant to satisfy a sick leave law, check it line by line: accrual rate, when new hires can start using it, the smallest increment of use, notice and documentation rules, carryover, and reinstatement for rehires. A PTO policy that asks for a week’s notice for any absence would fail a sick leave law that allows same-day use for illness.

Paid family leave states

State paid family and medical leave programs are different from PTO. They are insurance programs, usually funded by payroll contributions, that pay partial wages while an employee bonds with a new child, cares for a seriously ill relative or recovers from their own serious health condition. As of November 2026, programs are paying benefits in California, Colorado, Connecticut, Delaware, Maine, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Washington and Washington, D.C. Delaware and Minnesota began paying benefits in January 2026 and Maine in May 2026. Maryland’s program has been delayed, with benefits currently scheduled for 2028.

Your PTO policy should say whether employees may, or must, use PTO alongside state benefits. States differ on whether employers can require it, so check the state program’s employer guidance before you write that rule.

PTO and exempt employees

Salaried exempt employees get the same PTO policy as everyone else in most companies, but the federal salary basis rule changes how absences are handled.

• Deducting from the PTO bank is fine, even for partial days. The Department of Labor’s opinion letter FLSA2005-7 and Fact Sheet #70 say an employer can reduce an exempt employee’s leave balance for a half-day absence, as long as the employee still receives their full salary for the week.
• Deducting from salary for a partial day is not. If the PTO bank is empty and the employee leaves at noon, you still pay the full day.
• Full-day deductions from salary are allowed in limited cases. Under 29 CFR 541.602(b), you may deduct for absences of one or more full days for personal reasons, and for full-day sickness absences under a bona fide sick leave or disability plan.
• Unlimited PTO is common for salaried teams. Colorado’s labor division says unlimited PTO ordinarily is not payable at separation because there is no set balance, but the policy must be genuinely unlimited in practice.

Not sure who is exempt? Our exempt vs non-exempt guide explains the salary level and duties tests.

How to write a PTO policy

A good PTO policy answers every question an employee or manager will ask, in writing, before anyone asks it. Cover these points:

1. Who is eligible. Full-time, part-time, seasonal and temporary staff, and any waiting period before new hires can use PTO (checked against your state sick leave law).
2. How much and how it accrues. The annual amount, the accrual method and rate, and any tenure steps.
3. Cap and carryover. The maximum balance and what happens at year end, written to fit your state.
4. How to request time off. Notice for planned time off, how to report an unplanned absence, and who approves.
5. Blackout periods. Busy weeks when planned PTO is limited, such as the holiday season in retail. Unplanned sick use must still be allowed where a sick leave law applies.
6. Increments. Whether PTO is used in full days, half days or hours.
7. Pay rate. PTO is usually paid at the employee’s base rate. Say how you handle shift differentials and tipped employees.
8. Holidays and leave interaction. How PTO works alongside paid holidays, FMLA and state family leave.
9. Separation. Whether unused PTO is paid out, written to match your state’s law.
10. State and city addenda. Separate pages for each state where you have employees.

Put the PTO policy in your employee handbook and have each employee acknowledge it. Workzenly stores the policy and handbook in the employee app, so people can read the rules without asking where they are.

What employers should do

• Map your locations. List every state and city where employees work, including remote staff, and check the sick leave, payout and family leave rules for each.
• Choose bank vs split on purpose. In payout states, a combined bank can turn sick hours into wages owed at separation. A split plan can cost less there.
• Accrue from real hours. Per-hour accrual is only as accurate as your timesheets. Build it on clock-in records, not estimates.
• Check approvals against the schedule. Before approving a Friday off, see who else is out and who can cover the shift. Shift scheduling that shows approved time off avoids short-staffed days.
• Show employees their balance. Most PTO disputes start with a number nobody trusts. Print the balance on each pay stub or show it in the app.
• Pay PTO correctly. Approved PTO should land in the right pay run at the right rate, and stay out of the overtime calculation. Our guide to how to calculate overtime shows why paid but unworked hours are left out.
• Review every January. State laws changed in 2025 and 2026 and will keep changing. Check your state labor department each year.

Frequently asked questions