How to build a PTO policy for your small business

You don’t need to be a Fortune 500 company to create a time-off policy that’s fair, compliant, and easy to manage. In fact, getting your paid time off (PTO) policy right early on can help you attract top talent, build trust, and avoid compliance headaches down the road.

If you’re a small business owner wondering how to build a simple, scalable time-off policy — this guide is for you.

We'll walk through the different types of PTO, how to set clear rules your team will understand and respect, and how to stay compliant even if your team spans multiple states (or countries). So let’s jump straight in.

What is a PTO policy — and why does your business need one?

A PTO policy is your company’s rulebook for how employees take paid time off. That includes everything from vacation and sick days to personal leave and public holidays.

Even if you only have a handful of employees, a written policy helps protect your business and your team. It keeps things fair and consistent, and makes life easier when it comes to payroll and planning.

Without a clear policy, you’re more likely to deal with misunderstandings, burnout, or even legal trouble — especially if you're operating across different states or countries.

Are you legally required to provide PTO in the US?

There’s currently no federal law in the US that requires private employers to offer paid time off for vacation or personal leave. That decision is up to you.

However, some states and local governments do require paid sick leave, and the rules can vary widely. For example:

• California mandates at least 3 days of paid sick leave per year.

• Massachusetts requires small businesses with 11+ employees to provide paid sick time.

• New York City requires even small employers to offer up to 40 hours of paid sick leave annually.

To learn more about the PTO requirements in each state, check out our free US State Explorer tool:

Even if you are not legally mandated to provide PTO, it’s still advisable to offer it. It shows your team that you trust them, respect their personal time, and value their wellbeing — not just their output.

PTO helps prevent burnout, increases employee loyalty, and boosts productivity. In fact, studies show that employees who take regular time off come back more engaged and focused. It also builds a positive employer brand; if you’re competing with bigger companies for talent, a thoughtful PTO policy helps you stand out.

In short, PTO isn’t just a perk — it’s a recruitment, retention, and performance strategy. By offering it early, you’re setting the foundation for a healthier, happier, and more sustainable team culture.

What types of PTO should you consider offering?

PTO doesn’t just mean vacation leave; it covers almost all categories of time off. You don’t have to offer all of these, but many companies aim to offer the following as a minimum:

• Vacation leave. For rest, travel, and recharging.

• Sick leave. For physical or mental health days. Note that these are generally used for minor illnesses or injuries, with extended time off for serious illnesses or injuries requiring a separate process.

• Personal days. For appointments, emergencies, or life administration. Many companies require employees to take vacation leave for this, but setting aside personal days shows empathy and can set you apart as an employer.

• Public holidays. This is typically based on your company’s or team’s location.

• Parental or family leave. For new parents or caregiving responsibilities.

As mentioned, not all types of leave have to come out of the same “bucket.” For instance, many small businesses offer separate sick and vacation days to avoid discouraging employees from taking time when they’re sick.

So, how do you create a PTO policy for a small business?

To create your own PTO policy, here are six steps to follow:

1. Decide what types of PTO you’ll offer

Begin by choosing which types of leave make sense for your business, using the list above as a starting point.

You can be creative here, too. For example, if you have a very small team, you can consider giving your employees an additional paid day off on their birthday. This is a relatively small gesture but can be a great way to make your people feel valued.

Be realistic about your team size and resources, but don’t be afraid to offer more than the bare minimum. Remember: generous PTO is a powerful retention tool.

2. Choose your distribution method

Next, you’ll need to decide how you’re going to distribute your leave to your people. There are typically three approaches you can adopt:

• Lump sum. Your employees get given a fixed number of days at the start of the year.

• Accrual-based. Your employees build — or accrue — their PTO allowance over time (e.g., 1.25 days per month).

• Unlimited PTO. Employees take what they need, when they need it (we’ll discuss this in more detail below).

3. Define the eligibility rules

PTO is a benefit, so you need to decide who qualifies for PTO — and when. For example:

• Is it available to full-time employees only, or part-time as well?

• Does PTO start immediately for new hires, or after a probation period?

• Do part-time employees accrue time off proportionally to full-time ones?

In some cases, there may be local or state laws in place that decide the answers to these questions for you, but if not, you’ll need to run the numbers and work out what is viable for your business.

4. Set clear guidelines

Once you’ve settled on your policy, you need to clearly lay out:

• How your employees are going to request time off (including who approves and what channel they should use).

• If you will require a notice period (and, if so, what it will be).

• If there will be any “blackout” dates. For instance, you may want to restrict paid vacation leave during busy periods for your business. 

5. Ensure it is inclusive and fair

Don’t let unconscious (or conscious) bias creep in — PTO should be equally accessible to all employees, regardless of role or location.

6. Document everything

Once you have completed all these steps, formally document it and add it to your employee handbook and onboarding materials. Transparency builds trust.

What are some PTO policy examples for small businesses?

To give you an idea, here are some common examples of PTO policies for small companies:

Accrual-based PTO

This is arguably the most popular approach for small businesses, as it gives you more control over how and when PTO is used — especially in a growing team. It also rewards loyalty, as the longer your employee stays, the more PTO they accrue.

Example:

Your full-time employees accrue 1.25 days of PTO for each month worked, up to a maximum of 15 days per year. PTO begins accruing on the employee’s start date, and can be used after the first 30 days of employment.

Lump sum PTO

As mentioned, this approach involves granting your employees a full PTO balance at the start of the year. It’s simpler to administer, but note that it can lead to large payouts if an employee leaves early.

Example:

Each full-time employee receives 15 days of paid time off (PTO) at the beginning of the calendar year (i.e., January 1). New employees receive a prorated amount based on their start date.

Unlimited PTO

With unlimited PTO, there is no cap on vacation or sick days; employees can take as much time off as they like. This approach works well in high-trust cultures, but only if expectations are clearly managed.

It’s also important to note that, without guidelines, employees may actually take less time off, not more.

Example:

Each full-time employee is entitled to unlimited PTO. Time off must be approved by managers in advance to ensure adequate coverage and team coordination.

Benefits & Leave —

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How to manage an unlimited PTO policy

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How to ensure your PTO policy is compliant

As mentioned, the federal government does not mandate private employers to offer any PTO — but some states do. Several require companies to offer paid sick leave, while others require payout of unused vacation days upon termination.

For example, California requires unused vacation to be paid out when an employee leaves, but Florida doesn’t.

The important thing to note is that you must comply with the relevant laws in your employee’s location — not just where you are headquartered.

If you’re hiring people in different locations, always be aware of:

• Carryover rules. Some states require unused PTO to roll over into the next year.

• Payout rules. States like California and Illinois mandate payout of unused vacation time.

• Sick leave mandates. Several states (and cities) legally require paid sick leave.

What if you have employees in other countries?

If you have employees in other countries, things can start to get really tricky. Many countries mandate PTO by law, with the minimum number of days differing across borders.

In Germany, for example, full-time employees are entitled to a minimum of 20 days’ PTO each year (as well as 10 paid public holidays). If you have an employee there, you must adhere to this.

To see a full breakdown of PTO requirements in every jurisdiction, check out our free Country Explorer tool.

As well as creating compliance headaches, this can create friction with your other team members. To ensure fairness and equitable treatment, many international companies offer all employees the same amount of leave (i.e., your US-based employees would also get 20 paid days). If you have employees in multiple countries, it might even be worth offering unlimited PTO for this reason.

How can Remote help?

Remote makes it easy for small businesses to manage PTO, especially if you’re hiring (or plan to hire) in other states and/or countries.

Specifically, we ensure:

• No compliance headaches. We provide full compliance with local laws at all times, whether you’re hiring in Texas or Tokyo.

• Smooth transitions with balance transfers. If you’re switching to Remote, we make it quick and easy to carry over existing PTO balances (where allowed), so nothing gets lost in the shuffle.

• Built-in recordkeeping and offboarding. Remote keeps your PTO data synced with payroll, and automates unused PTO payouts when needed — no manual calculations required.

• Fair and full benefits management. We help you put together a tailored benefits package — including PTO — that is fair and attractive for all your people.

With full in-house support, one centralized platform, and no reliance on third-party vendors, we remove all your compliance headaches and make it easy to manage your team. To learn more, speak to one of our friendly experts today.

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