How to Build a PTO Policy That's Fair and Simple to Run

A paid time off (PTO) policy does two jobs at once: it tells your team what they're entitled to, and it gives you a consistent, defensible way to handle every request. Get it right and time off runs quietly in the background. Get it vague and you'll spend the year answering the same questions and making one-off calls that look unfair the moment someone compares notes.

Here are the decisions that make up a good policy, and how to think about each one.

1. How time off is granted: accrual vs. lump sum

• Accrual — employees earn PTO gradually (e.g. a set number of hours per pay period). It's fairer for part-year hires and limits how much anyone banks at once, but it needs accurate tracking.
• Lump sum — the full annual allowance is available from day one (or the start of each year). It's simpler to explain and popular with staff, but a new hire could take it all and then leave.

Small teams often start with a lump sum for simplicity and move to accrual as they grow. Either works — just be explicit about which you use.

2. How much to offer

Set a number that's competitive for your industry and region, and meets any legal minimum where you operate. Decide whether sick leave is separate or rolled into a single PTO bucket, and whether that changes with tenure (e.g. an extra day or two after a few years). Whatever you choose, write it down as a specific figure, not a vague promise.

3. Carryover and expiry

• Use it or lose it — unused days expire at year end. Simple, but check it's legal in your jurisdiction; some places require payout instead.
• Capped carryover — employees can roll over up to a limit. A fair middle ground that avoids both lost days and unlimited liability on the books.

4. Requesting and approving time off

Spell out the process: how far in advance to request, who approves, and how blackout or peak periods are handled. The goal is predictability — everyone should know how a request is made and roughly how long a decision takes. Keep an auditable record of requests and approvals so balances are never in dispute.

5. Edge cases to name up front

• What happens to unused PTO when someone leaves.
• How PTO interacts with public holidays and other leave types.
• Rules for negative balances or advancing time off.
• How part-time allowances are pro-rated.

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A policy is only as fair as it is consistently applied — and consistency is hard when balances live in a spreadsheet and approvals happen over chat. The fix is to run accruals, requests, approvals, and balances in one place so the rules enforce themselves. It also pairs naturally with a strong start: see our employee onboarding checklist, and our guide to choosing HR software for a small business for what to look for in a system to run it.