Paid Time Off: Definition and Comparison to Vacation Time

By Indeed Editorial Team

Updated October 19, 2022 | Published April 3, 2020

Updated October 19, 2022

Published April 3, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Many people use the terms paid time off (PTO) and vacation time interchangeably, but they're distinct concepts. Both policies allow employees to take a period of PTO 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.


What is PTO?

Paid time off, or 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. 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.

Read more: What Is PTO? Definition, Types and Tips


What is vacation time?

Vacation time works similarly to PTO, but it is more specific and often used 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. It's generally accounted for in a separate capacity from other forms of time off, such as sick time.

Related: How To Compose a Vacation Request Email (With 3 Examples)


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 does not guarantee any specific number of hours per year. It's primarily used for part-time employees who work inconsistent schedules. For every hour you work, you earn a small percentage toward your time bank.

  • Daily: Accruals that accumulate each day are another popular option for part-time employment. For it to work properly, part-time employees must 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, 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. It simply subtracts from their yearly total.

Related: Sick Time vs. PTO: Definitions and FAQs


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 if used thoughtfully, 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.

Related: What You Need To Know About an Unlimited Vacation Policy


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 to offer 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.

Related: What Is Flexible Time Off? Definition and How It Works


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.

Related: FAQs: Taking Time Off Between Jobs


Privacy

With PTO policies, specifying the reason for taking time off is not 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.

Related: 13 Careers With the Most Time Off


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.

Related: Time-Off Request Forms: What They Are and How To Create One


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 must use all of your vacation time hours within the year, or they reset.

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