Small Business PTO Policy: Complete Guide with Templates and Examples

Your team needs time off. It could be because of a sick kid, a dental appointment, or just a day to recharge. Without a clear small business PTO policy, you're stuck fielding last-minute texts, scrambling for coverage, and playing the bad guy when someone needs a long weekend.

A solid time off policy keeps your people happy while protecting your business during busy seasons. It shows you value your team as humans, not just hourly workers punching a clock. 

This guide breaks down exactly how to build a time off policy that actually works—with sample templates, accrual calculations, and state law guidance you can use today.

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TL;DR: What is a small business PTO policy and why does it matter?

A PTO policy defines how employees earn and use paid time off. Without one, you're stuck managing time off requests with sticky notes and hope.

Key benefits:

• Attracts and retains quality employees who value work-life balance
• Prevents favoritism and confusion about who gets time off when
• Protects you legally in states where unused PTO counts as wages
• Reduces burnout by encouraging your team to actually take breaks

Most common setup: 10-15 days PTO per year, accrued over time, with 2 weeks notice required for planned time off.

Why your small business needs a clear PTO policy

A PTO policy spells out how your team earns time off, when they can take it, and what happens to unused days. Think of it as your insurance against those 6 AM "I'm not coming in" texts. Most small business PTO policies either lump everything together—15 days use-as-you-want—or split it up into 10 vacation days and 5 sick days.

Without a written policy, you're making it up as you go. That's how one person thinks she has unlimited sick days while another hoards his time like gold.

Small business PTO policy benefits

A clear paid time off policy gives you three major advantages:

1. Competitive hiring advantage - PTO attracts employees who want to work there
2. Better retention - Keeps quality employees satisfied and engaged
3. Burnout prevention - Gives your team time to rest without worrying about losing income

Without a policy, you're playing referee in disputes about who gets what time off and when. A written policy ends the confusion before it starts and protects you legally.

Some states treat accrued PTO as earned wages, meaning you'll owe employees a payout when they leave.

How to build a PTO policy for your small business (step-by-step)

Building a PTO policy isn't rocket science, but getting the details wrong can turn your life into a scheduling nightmare. Here's what you need to nail down before someone asks for three weeks off during your busiest season.

Step 1: Choose your PTO structure

You've got three main options:

Accrual-based PTO is perfect if you're worried about new hires taking two weeks off then ghosting you.

• Employees earn PTO gradually, like 1.25 days per month worked
• The downside is tracking fractions of days
• Works best for small businesses, retail, and restaurants where you need predictable costs

Lump sum PTO gives everyone their full allowance on January 1st or their hire date.

• Simple to track, feels generous, nobody's doing decimal math
• The risk is someone uses all 10 days by February then quits in March
• Works well for established small businesses with stable teams

Unlimited PTO sounds progressive until you realize nobody knows how much time is actually okay to take.

• Your anxious overachievers take less time off than before
• Others treat it like an extended European gap year
• Fits tech companies and remote teams, but requires strong communication
• If you go unlimited, publish minimum-use guidelines—like 15 days encouraged per year

Step 2: Set your accrual rate or time bank

For accrual-based systems, divide your annual PTO hours by the number of pay periods. If you offer 10 days (80 hours) per year and pay bi-weekly with 26 pay periods, employees earn 3.08 hours per pay period.

For lump sum policies, specify when time becomes available. Full-time employees might receive 15 days on January 1st, while part-time employees get a pro-rated amount based on hours worked.

Many businesses use tenure tiers to reward loyalty: 

• 2 weeks for the first 5 years
• 3 weeks for 6-10 years
• 4 weeks for 11+ years

Most small businesses start with 10 days PTO plus 6-7 holidays for full-time employees. That's roughly what employees expect as a baseline.

Step 3: Define eligibility and waiting periods

Making new hires wait 30-90 days before they can take PTO is standard. It protects you from the hire who books Coachella before learning where the bathroom is. Just spell out the waiting period clearly.

Decide who qualifies for PTO:

• Full-time only: Many small businesses limit PTO to employees working 30+ hours per week
• Prorated for part-timers: Others offer prorated PTO to anyone working 20+ hours to stay competitive
• Document clearly: Whatever you choose, apply the rules consistently to avoid discrimination claims

Step 4: Set request and approval rules

Create one system for requests and stick to it. Whether it's Homebase, a shared calendar, or carrier pigeon, pick one method.

Key rules to establish:

• Advance notice: Require two weeks' notice for planned time off (doctor appointments get more flexibility)
• Who approves: Spell out who has approval authority—owner, managers, or shift leads
• Competing requests: Decide how you handle conflicts (first-come-first-served vs. seniority)
• Last-minute sick days: Require notification before the start of someone's shift

Put it in writing, because "I told you at the bar last week" isn't a time-off request.

Step 5: Determine rollover, forfeiture, or cash-out rules

You'll need to decide what happens to unused PTO at year-end:

Rollover policies allow employees to carry over unused days—usually with a cap like 40 hours or 5 days. This gives employees flexibility without creating unlimited liability on your balance sheet.

Use-it-or-lose-it policies require employees to forfeit unused PTO at year-end. This encourages people to take breaks and prevents massive payouts. However, this approach is illegal in some states that treat accrued PTO as earned wages.

Cash-out rules determine whether you pay employees for unused PTO when they leave. Some states like California require it. Others let you decide. Whatever you choose, put it in writing.

State PTO requirements: What you need to know

Before you finalize any time off policy, check what your state actually requires. Some states treat PTO like earned wages, meaning you'll pay out unused days when someone quits, while others let you set your own rules.

Federal vs. state PTO rules

At the federal level, there's no law requiring paid time off. The Family and Medical Leave Act (FMLA) guarantees unpaid leave for certain life events—like caring for a seriously ill family member—but doesn't require you to pay employees during that time. 

FMLA only applies if you have 50+ employees and the employee has worked 1,250 hours in the past year.

Most PTO rules come from state-level laws, which may regulate accrual requirements for sick leave, carryover rules for unused time, and whether you must pay out PTO at termination.

States requiring PTO payout at termination

Several states treat accrued vacation as earned wages that must be paid when an employee leaves:

• California: Must pay out all unused vacation time; can't have use-it-or-lose-it policy for vacation (California Labor Code)
• Colorado: Vacation pay counts as earned wages and must be paid out upon separation (Colorado Wage Claim Act)
• Illinois: Earned vacation must be paid out under the Wage Payment and Collection Act (820 ILCS 115)
• Montana: Once vacation is earned, it's considered wages and must be paid at separation (Montana Wage Payment Act)
• Nebraska: Earned, unused vacation must be paid to departing employees (Nebraska Wage Payment and Collection Act)

In states like Texas, Florida, Georgia, South Carolina, and Alabama, there's no payout requirement—but your written policy still rules. If you promise to pay out unused PTO, you must honor that promise.

Paid sick leave requirements

Several states and cities require employers to offer paid sick leave. As of 2026, these states mandate paid sick leave:

• Arizona: 1 hour for every 30 hours worked (24-40 hours per year depending on employer size) (Arizona Fair Wages and Healthy Families Act)
• California: At least 40 hours (5 days) per year, accrued at 1 hour per 30 hours worked (California Healthy Workplaces, Healthy Families Act)
• Colorado: 1 hour for every 30 hours worked, up to 48 hours per year (Colorado Healthy Families and Workplaces Act)
• Oregon: 1 hour for every 30 hours worked, up to 40 hours per year (Oregon Sick Time Law)
• Washington: 1 hour for every 40 hours worked (Washington Paid Sick Leave)

Additional states with paid sick leave mandates include Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New Mexico, New York, Rhode Island, and Vermont. 

Many cities have their own requirements that may be more generous than state law. Even if your state doesn't mandate sick leave, offering it means your team won't drag themselves in and infect everyone else.

How to calculate PTO accruals (with examples)

If you've chosen an accrual-based policy, you'll need to calculate how much PTO employees earn per pay period.

The basic PTO accrual formula

Here's the formula: divide total annual PTO hours by total pay periods per year to get hours accrued per pay period.

Example 1 - Bi-weekly payroll: An employee gets 10 days (80 hours) of PTO per year. You pay bi-weekly (26 pay periods). 

80 ÷ 26 = 3.08 hours per pay period.

Example 2 - Monthly payroll: An employee gets 15 days (120 hours) of PTO per year. You pay monthly (12 pay periods). 

120 ÷ 12 = 10 hours per pay period.

PTO accrual rate examples

Here's how much PTO employees earn per pay period based on annual allotment:

If you offer 10 days (80 hours) per year:

• Bi-weekly payroll (26 periods): 3.08 hours per pay period
• Monthly payroll (12 periods): 6.67 hours per pay period

If you offer 15 days (120 hours) per year:

• Bi-weekly payroll (26 periods): 4.62 hours per pay period
• Monthly payroll (12 periods): 10 hours per pay period

If you offer 20 days (160 hours) per year:

• Bi-weekly payroll (26 periods): 6.15 hours per pay period
• Monthly payroll (12 periods): 13.33 hours per pay period

Sample PTO policy templates for small businesses

Here are templates you can steal and adapt for your business.

Template 1: Basic small business PTO policy

All full-time employees earn 15 days of PTO annually, available after 90 days of employment.

• PTO covers any absence: vacation, sick time, personal days, or that random Tuesday when you just can't deal. 
• Employees must request planned time off at least 14 days in advance through Homebase. 
• Emergency sick time requires notification before the start of your shift. 
• Unused PTO carries over up to 40 hours annually. We pay out unused PTO upon separation per state law.

Template 2: Restaurant PTO policy

Full-time employees earn 1 hour of PTO for every 30 hours worked, up to 80 hours annually.

• PTO is available after 60 days of employment.
• Blackout dates: December 15-31, Valentine's weekend, Mother's Day weekend. No exceptions unless you're literally hospitalized. 
• Shift trades allowed with manager approval 48 hours in advance. 
• Unused PTO does not carry over. 
• Sick leave requires 2+ hours notice before shift start.

Template 3: Retail PTO policy

Employees earn PTO based on average weekly hours: 20-29 hours/week equals 40 hours PTO annually, 30+ hours/week equals 80 hours PTO annually. 

• No time off requests accepted for November 20-January 2. 
• One employee maximum off per department per day. 
• Requests submitted less than 21 days in advance may be denied based on coverage. 
• Sick time requires finding your own coverage or calling manager 3+ hours before shift.

Template 4: Use-it-or-lose-it PTO policy

Employees accrue 1.25 days of PTO per month worked, totaling 15 days annually. 

• All PTO must be used by December 31st—unused time is forfeited and does not carry over. 
• Employees receive reminder notifications in October and November. 
• Time off requests require 2 weeks advance notice. 
• We encourage employees to take regular breaks throughout the year rather than saving all PTO for year-end.

Template 5: Part-time employee PTO policy

Part-time employees working 20+ hours per week earn prorated PTO: 1 hour PTO earned for every 40 hours worked, with maximum accrual of 40 hours per year. 

• PTO becomes available after 90 days of employment. 
• Unused PTO carries over up to 20 hours annually. 
• Time off requests require minimum 1 week advance notice except for emergency sick leave.

Template 6: Flexible/hybrid PTO policy

Employees receive 12 days of banked PTO available January 1st plus 5 flexible days per year. 

• Banked PTO requires 2 weeks advance notice and manager approval. 
• Flexible days can be used for appointments or mental health days with 24-48 hours notice. 
• Banked PTO carries over up to 40 hours; flexible days do not carry over.

4 common PTO policy mistakes—and how to avoid them

1. The "unlimited PTO" trap: Unlimited PTO sounds progressive until nobody knows how much time is actually okay to take. Your anxious overachievers take less time off than before, while others abuse it. 

For small teams, set clear expectations: encourage a minimum of 15 days per year with at least one consecutive week off.

2. Playing favorites with approvals: Approving Jessica's last-minute request while denying Mike's planned vacation is how you end up in discrimination territory. Document your approval criteria and apply it consistently. 

"Because I said so" isn't a defensible policy when someone files a complaint.

3. Forgetting to track anything: Relying on memory or sticky notes for PTO tracking is a disaster waiting to happen. When disputes arise, you need documentation. 

Use PTO tracking software like Homebase to automatically calculate accruals, handle requests, and maintain records.

4. Making policies too restrictive: Requiring doctor's notes for one sick day, denying all December time off, or making people find their own coverage before calling in sick—these policies drive good employees away. 

Be reasonable, or watch your team find employers who are.

Make PTO easy to manage—with Homebase

Writing a PTO policy is the easy part. Actually managing time off requests without losing your mind requires systems that work without you. 

Homebase's automated tracking handles PTO balances, processes requests, and flags scheduling conflicts automatically—no spreadsheets, no manual calculations, no headaches.

Set up your PTO policy once, and let employees request time off right from their phones. You'll see who's out at a glance, avoid scheduling conflicts before they happen, and never lose another sticky note request.

Start your free trial of Homebase today and see why 100,000+ small businesses trust us to manage their teams.

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FAQs about PTO policies for small businesses

What is a good PTO policy for a small business?

A good PTO policy specifies how time is earned, how to request it, and what happens to unused days. Start with 10-15 days PTO plus holidays, use accrual-based tracking, and require 2 weeks notice for planned time off.

How many PTO days are normal for a small business?

Most small businesses normally offer 10 days PTO in year one, 15 days after 2-3 years, and 20 days for senior employees. Add 6-7 paid holidays and you're competitive with other small employers. Industries with high turnover often start at 5-7 days to manage costs.

What is an example of a small business PTO policy?

Here’s an example of a small business PTO policy:

All full-time employees earn 15 days of PTO annually, available after 90 days of employment. PTO covers vacation, sick time, and personal days. Employees must request time off at least 14 days in advance. Unused PTO carries over up to 40 hours annually. We pay out unused PTO upon separation per state law.

What is a reasonable PTO policy?

A reasonable PTO policy balances employee needs with business operations. Minimum: 10 days PTO plus 6-7 holidays for full-time staff. Include clear request procedures, advance notice requirements like 2 weeks for vacation and same-day for sick leave, and fair rollover rules.

What's the difference between PTO and vacation time?

PTO is the catch-all bucket—vacation, sick days, personal time, everything. Vacation time is specifically for planned time away. Some businesses keep them separate so people don't come to work sick to save their vacation days.

Can I require employees to use PTO for sick days?

Yes, you can require employees to use PTO for sick days unless you're in a state or city requiring separate sick leave. 

If you lump everything together as PTO, employees can use it however they want. Just remember: forcing sick employees to use vacation days means they'll either come to work contagious or resent you forever.

Do I have to pay out unused PTO when someone quits?

Whether or not you have to pay out unused PTO when someone quits depends on your state. California, Colorado, Montana, Illinois, and Nebraska require payout of unused vacation time. In states without requirements, your written policy rules. Whatever you choose, apply it consistently.

What is a standard PTO policy for small businesses?

A standard PTO policy for a small business typically has: 10-15 days PTO accrued throughout the year, available after 90 days of employment, with 2 weeks advance notice required for planned time off. Add 6-7 paid holidays and you've got what most employees expect.

Can you use sick time for anything?

If your policy lumps everything into one PTO bucket, yes employees can use sick time for anything. If you separate sick leave from vacation, sick time is typically restricted to illness, injury, or medical appointments.