Policy required document Workplace
Paid Time Off and Vacation Policy
A paid time off policy says how much vacation or PTO employees earn, how it accrues, whether it carries over, whether it is paid out at separation, and how it is requested.
No federal law requires paid vacation; 80 percent of private industry workers had access to it in March 2025, the same share as had paid sick leave, and 81 percent had paid holidays (Bureau of Labor Statistics, National Compensation Survey). The claims come from state law about what happens to leave once it is earned.
California treats vested vacation as wages: whenever a policy provides paid vacation and an employee is terminated without having taken it, all vested vacation must be paid at the final rate, and a policy may not provide for forfeiture (Labor Code 227.3).
The consequence, established by the courts, is that use-it-or-lose-it is unlawful in California; a reasonable cap on accrual is allowed instead. Colorado, Massachusetts, Nebraska, Illinois, Montana and others reach similar results by statute or decision; many states let the written policy decide, which means an employer without a written policy has no defense to a payout claim.
The policy also has to sit alongside the leave laws that are mandatory. Paid sick leave is required in around twenty states and many cities, with accrual rates, carryover and permitted uses set by statute, and a combined PTO bank must meet the sick leave law's minimums for the sick portion.
California Labor Code 233 lets an employee use up to half a year's sick accrual for family care. The FMLA, state family leave and the jury and voting leave rules are covered on their own pages; the PTO policy is where the company says how paid time interacts with each, and it is the document payroll relies on at the final paycheck.
Obligation ledger
Who requires it, and what each one says.
| Source | Applies when | What it requires | Status |
|---|---|---|---|
| California Labor Code, vested vacation Cal. Lab. Code 227.3 | Every California employer with a paid vacation policy | Whenever a contract or employer policy provides paid vacation and an employee is terminated without having taken it, all vested vacation is paid as wages at the final rate; an employer policy may not provide for forfeiture of vested vacation on termination. Legally required. The courts read this to bar use-it-or-lose-it; a reasonable accrual cap is permitted. | Mandatory |
| California Labor Code, use of sick leave for family Cal. Lab. Code 233 | Every California employer that provides sick leave | Employees may use, in any calendar year, at least the sick leave that would accrue in six months for the family care reasons in section 246.5, at the employee's sole discretion. A combined PTO policy must honor this. | Mandatory |
| Fair Labor Standards Act 29 U.S.C. 201 and following | Every covered employer | No federal requirement to provide paid vacation, holidays or sick leave. Paid leave is a matter of agreement and state law. Stated here so the policy does not claim a federal basis that does not exist. | Market |
Required sections
- Eligibility and the accrual method: per pay period or front-loaded, rates by tenure, and whether part-time staff accrue
- Carryover and any cap on accrual, written to comply with the state rules (a cap, not a forfeiture, in California)
- Payout at separation, by state, and the rate used
- Whether sick leave is separate or part of a combined bank, and the statement that the sick portion meets the state and city sick leave law
- Request and approval: notice periods, blackout dates, and how conflicts are decided
- Holidays observed and how holiday pay works for hourly staff
- Negative balances and advances, and whether they are recovered from final pay where the state allows
- Interaction with FMLA, state family leave, disability, jury and voting leave: which run concurrently and whether PTO must or may be used
- Recordkeeping: balances shown on pay stubs where the state requires it (California requires the sick balance on the wage statement)
- No retaliation for using protected leave
What the examiner asks for
What changed
Change log.
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Questions
What people ask.
Can we have a use-it-or-lose-it rule?
Not in California, where vested vacation is wages and cannot be forfeited; a reasonable cap on how much can accrue is the lawful alternative. Several other states also restrict forfeiture. Elsewhere it is generally allowed if the written policy says so clearly and in advance.
Do we have to pay out unused PTO when someone leaves?
In California, always. In many states, only if the policy or practice provides for it, which is why silence is dangerous: without a policy, a court may find the practice was to pay. State the rule in writing for each state where you have staff.
Can a single PTO bank cover the state sick leave requirement?
Usually, if the bank meets the sick leave law's minimum accrual, carryover, permitted uses and anti-retaliation rules for at least the sick portion. The catch is that in California, PTO that can be used for sick purposes is also vacation, so it is paid out at separation, which pure sick leave is not.
Can we require employees to use PTO during FMLA leave?
Under the FMLA, yes, the employer may require substitution of accrued paid leave for unpaid FMLA leave if the policy says so, with exceptions where the employee is receiving disability or workers' compensation benefits. Several state leave laws limit this. The PTO policy and the FMLA policy have to say the same thing.
Sources
Cal. Lab. Code 227.3, vested vacation (California Legislative Information)Cal. Lab. Code 233, use of sick leave for family (California Legislative Information)Bureau of Labor Statistics, Employee Benefits in the United States, March 2025, Table 6, access to selected paid leave benefits (released September 25, 2025)U.S. Department of Labor, Wage and Hour Division, vacation leave (FLSA does not require it)