Paid Time Off: Definition and Comparison to Vacation Time

Updated July 7, 2023

The image shows parents and a child sitting on loungers on the deck of a cruise ship. A server is pouring coffee for the family.

Many people use the terms paid time off (PTO) and vacation time interchangeably, but they're distinct concepts. Both policies allow employees to take days off throughout the year, but they each do so in unique ways. When seeking your next position, it's important to understand what kind of time-off policies organizations might offer so that you choose the one that works best for you.

In this article, we compare PTO and vacation time, explain how to accrue time off and discuss the advantages of PTO plans with a list of tips.

What is PTO?

Paid time off, also called PTO or personal time off, is an employer-provided benefit in which the employer compensates employees during their absence from work. Employees use PTO for a variety of reasons, such as sick time, vacations and personal appointments. Companies often use PTO as an alternative to offering specific vacation time, sick time or personal days. There are many different policies companies might have regarding how their PTO works, and one of the more common methods businesses use is accruing hours within a bank.

The longer an employee works, the more hours they build up within the bank. Once they accrue enough hours, they can withdraw them as needed for PTO. Employers often provide a rollover policy that allows accrued PTO hours to carry over into the following year if they remain unused.

Paid time off often increases the longer you remain with a company. For example, in your first year working for a company, you may only have a maximum of 14 days of PTO, but by your fifth year with the same company, this might increase to a maximum of 21 days.

Types of PTO

Here are the types of PTO companies might use to pay employees when they're not at work:

Paid family leave: When you need time away from work to tend to a family member, such as the birth of a baby, your employer may continue to pay you during your absence.
Paid sick leave: This PTO policy enables you to take time off when you're addressing a health concern.
Paid bereavement leave: After the loss of a loved one, you can take a bereavement period to make arrangements.
Paid holidays: The company observes holidays that the country recognizes, so all employees receive compensation during the days the company closes for the observance.
Floating holidays: Floating holidays grant you the opportunity to either take that day off or save the PTO for another occasion.
Jury duty: Federal mandates require you to report for jury duty, and your employer may pay you for the day you're away from work.

What is vacation time?

Vacation time works similarly to PTO, but it is more specific and often useful as a break from work. Some companies allow their employees to use PTO for vacation, while others consider vacation time to be a separate concept. Examples of non-vacation time include sick time, mental health days and jury duty. Vacation time often accrues based on an employee's years of service and their level within an organization.

How do you accrue PTO and vacation time?

Depending on your company's policy, there are multiple ways you can accrue PTO and vacation time. Employers typically determine the maximum number of hours their employees can earn each year ahead of time, and then they decide which method to use to accrue those hours. Here are the different methods companies typically use:

Hourly

This type of accrual doesn't guarantee any specific number of hours per year. Part-time employees who work inconsistent schedules primarily use the hourly method, which allows you earn a small percentage toward your time bank for every hour you work.

Daily

Accruals that accumulate each day are another popular option for part-time employment. For it to work properly, part-time employees work eight-hour shifts. They earn a small percentage of hours for each day they work.

Biweekly

Time that accrues on a bi-weekly basis adds additional hours to your time bank every two weeks or 26 times a year. These accrual rates often align with biweekly paydays, adding to the full number of hours on the date of each paycheck.

Semimonthly

This type of accrual adds additional hours to the bank at either the beginning and middle or middle and end of the month for a total of 24 times a year. These accrual rates often align with paydays as well.

Monthly

This common method of accrual for both PTO and vacation time adds additional hours to the time bank each month. With this method, you earn a percentage of your total hours 12 times per year.

Yearly

Time that accrues by year is popular for long-term employees with tenure. Rather than earning a little at a time and only using what they've earned, this method allows employees to use any of their yearly PTO at any time, and it simply subtracts from their yearly total.

Unlimited PTO

Under the concept of unlimited PTO, employees can take as many days off as they want. This may not work for every company, but the plan has many benefits. Unlimited PTO allows employees to determine for themselves when they take time off and how much time they take without manager approval. There are typically two requirements:

The employee's work is up to date prior to PTO.
The employee's absence neutrally impacts the business.

Unlimited PTO may work better with employees who manage their time well on their own because it's in the best interest of their career to do so. It can also help create a sense of trust in employees because their employers give them responsibility for their own work performance and judge them by the results they deliver rather than their time at work.

Advantages of PTO plans

The following list outlines some of the benefits of working for a company with a PTO plan:

Flexibility

Compared to a traditional time-off policy with multiple categories of hours, such as vacation and sick time, it is easier to use a PTO bank that contains all accrued hours in one place. These policies combine vacation time, sick time and personal time, which reduces your need for offering a reason for your time off. It also decreases the complexity and organization involved in separating the different types of time off, so you have more flexibility to take time off regardless of your reason.

Equality

All employees have access to the same amount of time off based on their years of service to the company. Though some employers may offer additional vacation time as a reward to particular employees, PTO policies reduce the chances of showing favoritism. Employees all earn PTO at the same rate with the same amount of effort, depending on how long they have been with the company.

Privacy

With PTO policies, specifying the reason for taking time off isn't necessary, so employees often feel more at ease. You can take time off for everything from chaperoning your child's field trip to taking an extended weekend or visiting the doctor. This is especially important when your PTO pertains to private matters within your personal life that you don't want to explain to your employer.

Diversity

Employees celebrate a variety of holidays based on their background or religious upbringing. Set vacation time and other time-off policies may only account for specific periods the employer sets, whereas PTO banks allow you to take time off throughout the year to accommodate any holidays you celebrate. Some companies add more widely recognized holidays as a separate paid time off option, which increases the potential for the inclusion of all holidays.

Rollover hours

Some companies offer the option to roll accrued PTO hours into the following year if they go unused. This is beneficial if you seek greater amounts of time off for various reasons. In comparison, many vacation time policies have no rollover. You can plan to use all of your vacation time hours within the year, or they reset.

Tips for using your PTO

Here are guidelines to help you maximize the benefits of PTO:

Plan your vacations in advance

At the beginning of the year, think about how many days you may need away from work. Advance planning can also help you organize your workflow so you're maintaining the quality of your work before and after your time off.

Let your manager know as soon as possible

Submit your requests for time off in advance so you can gain approval and feel at ease about your upcoming vacation. Check your employee handbook to determine if the company you work for requires advance notice, such as two weeks.

Take advantage of paid holidays

If you're planning a vacation, consider leaving town when the company is observing a holiday. This offers at least an extra day of PTO without you using the PTO that you accrued.