What is paid time off (PTO)? How it differs from vacation

Paid time off (PTO) looks a little different around the world. Some countries guarantee weeks of paid days each year, while others leave it up to the employer to decide. For globally distributed teams, this can make PTO feel tricky to navigate. But no matter where your team is based, structured time away from work is essential—it supports employees' work-life balance and builds a sustainable organization. 

In this guide, we’ll walk through how time-off policies work and what it takes to create one that supports your team, anywhere they are.

What’s PTO?

PTO is a policy that gives employees a bank of paid days they can use as needed—whether for a vacation, a doctor’s visit, or a personal day. Instead of separating time off into categories like sick leave or personal days, PTO pools everything together, keeping things simple and flexible. 

Employees generally accrue PTO over time, with the amount depending on factors like tenure and employment status. The biggest advantage of PTO is choice: people don’t have to justify why they’re out, which encourages a culture of trust and independence.

Vacation days, on the other hand, refer specifically to paid leave for recreation and leisure. Some companies track them separately, while others fold them into a broader PTO system. Whether employers pay out vacation time depends on local labor laws and company policy, but they’re required to follow regulations.

In addition, holiday time may or may not be included in PTO. Some employers count these days toward accrued balances, while others offer additional paid holidays and floating days. Either way, this time away gives employees space to celebrate cultural or religious events, while PTO stays available for other personal needs.

How does PTO work? 

Companies set up PTO in different ways, and the structure they choose decides how much time employees can take and how they use it. Most policies follow one of three models. In a traditional system, employers split vacation, sick days, and personal leave into separate buckets. In a bank system, they roll everything into one pool of paid time that employees can use as they see fit. And in an unlimited PTO system, employers give people the freedom to step away whenever they need it, as long as the work stays on track. 

Each approach works differently, but the goal is the same: helping people recharge while keeping teams productive.

3 common types of PTO

When building a PTO policy, it’s helpful to know your options. Below are three of the most standard types. 

1. Accrued PTO

Accrued PTO is earned over time based on how much an employee works. For example, a worker may accrue eight hours of paid time off every four weeks or one hour for every 20 hours worked. This common strategy for hourly workers facilitates easy calculation of PTO accrual and ensures that time off is distributed fairly among employees with varying schedules.

2. Allotted PTO

Allotted PTO is usually given as a lump sum at the start of each year. For example, a company might provide each employee 25 days of paid time off each year and refresh this amount on January 1. This is a common strategy for salaried workers who don’t track work hours.

3. Unlimited PTO

A flexible time-off approach captures the attention of top talent, allowing employees to take as many days off as needed for any reason. For employers, it signals autonomy, which can boost morale and retention. But it also requires clear expectations. Without guidance, employees may hesitate to take time, and managers may apply the policy inconsistently.

Benefits of a PTO policy

A well-structured PTO policy benefits both your people and your business. Here are a few advantages to keep in mind:

• Follow regulations: Time-off laws differ widely across countries and regions. Some require a minimum number of vacation days, while others mandate separate sick or family leave. Without a compliant policy, companies risk fines and damage to their reputation. Staying aligned with local regulations means shaping policies to meet legal standards and applying them fairly across the team.
• Reduce confusion: Unclear or inconsistent rules leave employees guessing and managers improvising. A written PTO policy sets expectations upfront, so everyone knows what’s available and how to request it. That clarity builds trust and limits back-and-forth with HR.
• Improve planning: Time off is part of every business cycle. When managers know how much leave employees are likely to take, they can plan projects and schedules more effectively. That predictability keeps work running smoothly while employees recharge.

Drawbacks of a PTO policy

While time-off frameworks come with clear benefits, they’re not without drawbacks. Here are a few challenges employers may run into:

• Discourages sick leave: When sick days aren’t separate from vacation or personal time, employees may second-guess staying home when they’re unwell. That can lead to people working while they’re sick, which hurts productivity and can spread illness to the rest of the team.
• Encourages stockpiling: If unused PTO rolls over, some employees may hold on to their days and then take a long stretch of time off all at once. While rest is important, unexpected extended absences can make it harder to manage workloads and meet deadlines.
• Limits total leave: In some cases, switching to a general PTO bank ends up giving employees fewer hours than they’d receive if vacation, sick, and personal leave were counted separately. That can create frustration and make your policy seem less competitive.

How to create a time-off policy: 4 steps

Creating a time-off policy is about balancing compliance, consistency, and culture. Here are four key steps to guide the process.

1. Personalize your plan

Your workforce has diverse needs. Although a flexible policy is more complex to design, execute, and track, the extra investment will ensure that every team member feels like a valuable member of the organization. Consider how PTO policies will impact different employment types (e.g., full-time, part-time, or contract), seniority levels, regional regulations, and motivations for taking time off. 

2. Define the fine print

Address every detail, including how much PTO an employee can take each year, how hours are accrued or allotted, and how overtime impacts PTO. 

3. Distribute the plan

Employers should take a proactive approach when educating their workforce about their PTO policy. Include the policy in employee handbooks and add it to the onboarding and training processes. Ensure that employees genuinely understand the policy. Some workers might be apprehensive to request PTO for mourning, mental health, or family responsibilities unless you clarify that these are valid reasons. 

4. Regularly review PTO policies

The only way to gauge whether your PTO policy is impactful is by asking the people it impacts most: your employees. Ask for feedback and conduct surveys to identify changes that will make your employees happier and more engaged while at work. 

Build stronger global teams with tailored PTO policies

Effective time-off policies support well-being, encourage balance, and strengthen your company’s reputation. When you align PTO with local laws and cultural expectations, you attract talent and build trust across borders.

With Oyster, you can offer country-specific salary and benefits alongside competitive PTO. That way, you hire with confidence, reward fairly, and keep your global team thriving.

Book a demo to see how simple it is to create compliant, competitive policies for every employee—wherever they work.

FAQs

Why might an employee take PTO?

Employees use PTO for all kinds of reasons, including recovering from an illness, attending a family event, and even serving on jury duty. The flexibility is what makes PTO valuable: people can step away when life calls without worrying about their pay. 

Do I have to pay out PTO when an employee leaves?

That depends on where your company operates. Some countries and U.S. states require employers to pay out unused PTO when someone leaves, while others don’t. To stay compliant, check local laws and make sure your policy explains what happens to any remaining balance.