Important: please read
This is general information, not legal advice. It covers federal rules only, unless we say otherwise. State and local law may be different or stricter: check our state employment law hub. Always check the official source before you act. Rules can change. Resources disclaimer
In short
- Federal wage law (the FLSA) does not require pay for time not worked, such as vacations, sick leave or holidays.
- So at the federal level, paid time off is an agreement between you and your employees.
- Some states and cities do require paid sick leave, and some states have rules on paying out unused vacation at termination.
- A good policy covers who is eligible, how PTO is earned, caps, carryover, how to request it, and what happens when someone leaves.
- Put the policy in writing and apply it the same way to everyone.
What federal law says
The Labor Department says the Fair Labor Standards Act 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 the employer and the employee. [US DOL] (opens in a new tab)
Separately, the Family and Medical Leave Act gives eligible employees unpaid, job-protected leave. [US DOL] (opens in a new tab) See our FMLA guide.
Where state and local law comes in
- Paid sick leave: some states and cities require it. For an example, see our California paid sick leave guide.
- Payout when someone leaves: some states treat earned vacation as wages that must be paid out. See our final paycheck guide.
- "Use it or lose it": some states limit or ban forfeiture of earned vacation.
- Federal contractors: some federal contractors have separate paid sick leave rules. Check with the US Department of Labor.
Check your state on our 50-state employment law hub before you finalize your policy.
8 things to put in your policy
| Item | Questions to answer |
|---|---|
| 1. Who is eligible | Full-time only, or part-time too? Is there a waiting period? |
| 2. How PTO is earned | A lump sum each year, or earned per hour worked or per pay period? |
| 3. Units | Track in hours, so part days and part-time staff are fair. |
| 4. Cap and carryover | Is there a maximum balance? Can unused hours roll over? (Check state rules.) |
| 5. Requesting time off | How much notice, who approves, and any blackout dates? |
| 6. Sick time | One combined PTO bank, or separate sick leave? Does it meet any state or city sick leave law? |
| 7. Holidays | Which paid holidays, if any? What if someone must work one? |
| 8. Leaving the company | Is unused PTO paid out? (Many states decide this for you.) |
How PTO fits with FMLA
Employees may choose, or employers may require them, to use accrued paid leave at the same time as FMLA leave, if the reason is covered by your paid leave policy. [US DOL Fact Sheet 28] (opens in a new tab) Say this in your policy.
Exempt employees
Be careful about docking an exempt employee's salary when they have no PTO left. Improper deductions can cost you the exemption. Check [US DOL Fact Sheet 17G] (opens in a new tab) first. Free policy templates are in our templates library.
Common mistakes
- Telling staff "the law requires two weeks' vacation". Federal law doesn't.
- Writing a "use it or lose it" rule without checking your state.
- Ignoring a state or city paid sick leave law.
- Not saying what happens to unused PTO when someone leaves.
- Applying the policy differently to different employees.
Related free tools
Official sources
- US DOL: Vacation leave (opens in a new tab)
- US DOL Fact Sheet #28: The FMLA (rev. March 2025) (opens in a new tab)
- US DOL Fact Sheet #17G: Salary basis (opens in a new tab)
- US DOL: Family and Medical Leave Act (opens in a new tab)
Checked . If a source has changed since then, the official source wins.
Frequently asked questions
Does federal law require paid vacation?
No. The Labor Department says the FLSA does not require payment for time not worked, such as vacations, sick leave or holidays. State or local law may require some paid leave, such as paid sick leave.
Do I have to pay out unused PTO when someone leaves?
It depends on your state and your written policy. Some states treat earned vacation as wages. Check our final paycheck guide for your state.
Can I combine sick days and vacation into one PTO bank?
Often yes, but if your state or city has a paid sick leave law, your PTO bank must meet its rules.
Can PTO run at the same time as FMLA leave?
Yes. Employees may choose, or employers may require them, to use accrued paid leave during FMLA leave if the reason is covered by the paid leave policy.
Should I track PTO in days or hours?
Hours are usually clearer, especially for part-time staff and part-day absences.
More free guides
- HIRINGHiring your first employee in the US
- HIRINGEmployee or independent contractor?
- HIRINGForm I-9 basics
- PAYOvertime basics
- PAYExempt vs. non-exempt employees
- PAYMinimum wage: federal and state
- TIME OFFFamily and medical leave (FMLA)
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