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What is paid time off and how does it work?

What does PTO stand for and what do you need to know? Our guide explains the difference between paid time off and vacation.

5 min read

Paid time off—also sometimes referred to as PTO—is a company policy that offers you time away from work for which you still receive your regular wages or salary. Here, we’ll explore what this benefit is all about, and how it works when it comes to vacation, or when you’re ill and unable to work. We’ll also answer some of the more common questions around company-specific policies.

What does PTO stand for?

 PTO is used as an abbreviation for a few different phrases which have very similar meanings—paid time off, personal time off, or planned time off. There are various reasons why an employee would take this kind of leave—vacation, sick days, parental leave, or bereavement leave. Typically, if you take time off for any of these reasons, it will mean you’re not working but are still being paid your wages as if you were.

How does paid time off work?

There are a few different ways that PTO can be earned. One example is through accrual—this is when, rather than having a set allowance of days available at the beginning of the year, employees earn days off as they work. For example, if you have 20 vacation days per year, you’ll earn 0.4 days for each week you work—20 days divided by 52 weeks. These accrued days are held as a type of credit against your employment record. You can then choose when to take them, subject to approval by your manager.

Another method of paid time off is through allotted days. This is where you are given a certain number of days each year by your employer. These will often expire at the end of the year, but your employer may also allow a certain number of days to roll over to the next year if you have some days leftover. The allocated days often run from the calendar year—January to December—or from the financial year—April to March. These days can be calculated as a flat rate for all employees, related to a salary band for your job type, or can be determined by your years of service with a company. 

Finally, there are unlimited holiday polices, which are becoming increasingly popular in the modern workplace. This allows employees to take as much or as little time off from work as they want, fully paid, provided they’re able to meet expectations in all of their tasks.

How does paid time off work for hourly employees?

For hourly employees who receive PTO, the principles are the same—by working a certain number of hours over a given period, you can bank a certain number of hours. For example, for every 10 hours worked, you may earn one hour of paid leave. This would mean that after 300 hours, you’d be given 30 hours of paid time off. Unlimited paid leave benefits aren’t usually an option for hourly employees. This is because you’re generally already eligible to be paid overtime for any extra hours you do. 

You’ll generally need to request your time off through your manager, or your company may have an online system. Typically, the human resources (HR) team will inform you of the process when starting a new job. Make sure to check your contract for exactly how many hours you can accrue in paid time off.

PTO vs. vacationis there a difference?

There is a difference between PTO and vacation, but employers tend to use the terms in the same context. The meaning of paid time off is when you are being paid for time away from work. Taking a vacation is just one reason why you might take paid leave—other instances may include parental leave, jury service, or sick leave.

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Understanding your company’s paid time off policy

The allocation of paid time off should form part of your total compensation package and will usually have been covered when accepting the job. The specific details are typically decided by HR, so it’s a good idea to chat with them if you have any questions about your company’s paid time off policy. Your employment contract should also detail how the policy works, and what you are entitled to. Your manager will oversee your allocation and authorize the days you wish to take.

Unlimited PTO: What you should know

As the name suggests, unlimited paid time off allows employees to take as many (or as few) days off as they choose. More companies are adopting this policy because it shows a company’s trust in their employees to manage their own PTO time, as the days taken aren’t tracked or limited. It requires a degree of mutual respect between employer and employee. Interestingly, studies show that employees with unlimited fully-paid holiday tend to take fewer days off than if they had an allocated number of days.

Make the most of your PTO with N26

Whether you’re using your PTO for a long-weekend getaway or working hard to save up for a big vacation, N26 is there to support you. With an N26 Smart account, you’ll get all our most-loved features like instant push notifications for every transaction—plus, you’ll have access to up to 10 Spaces sub-accounts, virtual piggy banks that sit alongside your main account. Save up for your goals faster with Rules, which automatically transfers a portion of your paycheck into your chosen space. Opening an account from your smartphone only takes 8 minutes—so what are you waiting for? Join the bank you’ll love today. 

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No paperwork, no hidden fees, no hassle. Just 100% mobile banking that works beautifully.
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Is PTO the same as vacation?

There is a difference between PTO and vacation, but they are linked. Vacation is just one of the reasons that an employee might take paid time off—though it’s often the most popular. Essentially, paid leave is any days away from work that you’re being paid for, including holiday but also other types of paid time off, such as sick leave, parental leave, bereavement leave, and jury duty.

How to calculate PTO for part-time employees

It’s best to use hours rather than days when calculating this benefit for part-time employees. For example, a part-time employee may work 15 hours a week and have 10 vacation days a year. Assuming an eight-hour work day, 10 days paid holiday equates to 80 hours. Divide the part-time hours by the equivalent full-time hours— 15 ÷ 40 = 0.375. Multiply this by the amount of PTO given to full-time employees: 0.375 x 80 = 30. The part-time employee should therefore be given 30 PTO hours per year.

How to use paid time off

There are several ways you can make use of this benefit—one of the most popular being to take a vacation. This often involves taking full weeks off at the same time, so you’ll need to request this ahead of time with your manager, who will need to agree on the dates. Sick leave is in place in case of unexpected illness, so can’t be planned for in the same way, unless you need a pre-planned operation, in which case you can inform your manager in advance. Other types of paid time off include parental leave for new parents or to attend a funeral.

How much paid time off is normal?

How much paid time off you are eligible for will depend on several factors, such as how long you’ve been employed at the company, if you’re working in the public or private sector, the type of work you do, whether you’re a full-time or part-time employee, and your location. It will also be dictated by the company’s overall paid time off policy, what’s included, and how the total compensation packages are put together.

How does paid time off work for hourly employees?

Paid time off policies for hourly employees can work in the same way as for salaried employees, but this will vary depending on the company. Employers with hourly employees can determine how much holiday a worker is eligible for based on how many hours they work. They may require hourly employees to work a minimum number of hours or pass their probationary period before they become entitled to any paid time off.

By N26

The Mobile Bank

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