Understanding PTO Rollover: What Employers Need to Know

You’ve heard the saying that when you're running a business, “time is money.” And time off is just as important. Paid time off (PTO) policies are a key aspect of taking care of your team and keeping things running smoothly. However, one big question often arises for small business owners: Should unused PTO roll over into the next year?

Let’s review the options, the pros and cons of each, and what to consider when crafting your PTO rollover policy.

Types of PTO Rollover Policies

Every business handles PTO differently, and there’s no one-size-fits-all. Here are the most common types of PTO rollover policies you might consider:

1. Use-It-or-Lose-It PTO

This policy means employees must use their PTO by a specific date (usually the end of the year), or they forfeit it. It's simple to manage, but it can lead to rushed vacation requests in December or frustrated employees who lose earned time off. But beware! Not all states allow it. (More on this below.)

2. Capped PTO Rollover

This policy allows employees to carry over unused time, but only up to a limit (for example, 40 hours or one work week). Once they hit that cap, they stop accruing until they use some PTO. This strikes a balance between flexibility and keeping PTO liabilities for your business under control.

3. Unlimited PTO

This type is rare in blue-collar industries, but still worth mentioning. Employees can take time off as needed, with a manager’s approval. It works best in project-based or flexible environments but requires a high level of trust and good communication.

4. PTO Payouts

Some companies offer to pay employees for unused time at the end of the year or upon their departure from the company. While we won’t go deep here, you can read more about PTO cash-outs in our recent article.

Pros & Cons of Offering PTO Rollover

Before you lock in your PTO policy, you’ll want to weigh the benefits and risks for both your company and your employees. Company culture is important, and you’ll want a policy that employees feel is fair and can see being applied accurately across the company.

Pros of a PTO Rollover Policy

• Employee Satisfaction: PTO rollover demonstrates that you value your team’s time, which in turn builds loyalty.

• Flexibility: Employees can save time for major life events or longer trips.

• Reduced End-of-Year Absenteeism: Knowing they won’t lose paid time off, employees are more likely to delay end-of-year absences for a more convenient time.

• Retention: A thoughtful PTO policy is a competitive edge when hiring skilled tradespeople.

Cons of a PTO Rollover Policy

• Accounting Complexity: Carried-over PTO is a payroll liability for the company, which can impact the company's finances.

• Bottlenecks: Employees may hold onto PTO, and all take time off at once.

• Burnout: Conversely, employees may store up PTO and end up overworking in the process.

• Policy Confusion: Without clear guidelines, rollover can cause misunderstandings or misuse.

PTO Accrual & State Law Considerations

PTO accrual and rollover aren't just business decisions—they're also legal ones. Each state or commonwealth sets its own rules on PTO carryover and payouts. If you're in any of the skilled trades, your business might operate across state lines, so it’s smart to stay informed. Before finalizing your PTO rollover policy, consult with a legal or HR expert to ensure compliance. (JLS Accounting is a great place to start!)

Below are a few examples illustrating the importance of knowing your state’s laws regarding rolling over paid time off.

Examples

• California: Use-it-or-lose-it PTO policies are not allowed. Accrued PTO must roll over, but you can cap the accrual amount.

• Illinois: As of 2024, most employees are entitled to one week of paid leave per year, and they may begin using their paid time off after 90 days of hiring.

• Massachusetts: Doesn’t require PTO, but if you offer it, it’s treated like wages. Accrued PTO must be paid out when an employee leaves.

• Texas: You can enforce a use-it-or-lose-it policy—but only if it's clearly stated in writing.

Best Practices: Building a PTO Rollover Policy That Works

There’s more to setting up a PTO policy than just choosing a rollover type. To create an effective policy, think about how to keep it clear, consistent, and functional for your payroll and accounting staff.

Decide on Your Accrual Method

Most businesses use either an hourly accrual method (e.g., 1 hour of PTO earned for every 40 hours worked) or a lump-sum accrual method (e.g., 80 hours added at the start of the year). Hourly is more precise, but it can complicate payroll management. Whichever you choose, be sure it's clearly explained in your PTO policy.

Set a Clear Rollover Cap

If you're allowing carryover, define a maximum. For example, allow 40 hours to roll over, with no accrual beyond 120 hours. This keeps your PTO liabilities predictable and fair.

Automate Tracking

Use payroll software that automatically tracks PTO accrual, carryover, and caps. This reduces errors and saves your team hours of manual work.

Monitor and Communicate Regularly

Run regular reports on total PTO owed to ensure your books are accurate and your cash flow remains stable. Don’t wait for the end of the year to remind employees of their PTO balance or rollover rules.

What Your PTO Policy Should Include

A solid PTO policy is more than a sentence or two in the employee handbook. It should cover:

• How PTO is earned (accrual method, rates)

• When it can be used (after probation period, with notice, etc.)

• How rollover works (cap, deadline, or loss)

• Whether PTO is paid out when employees leave

• How to request and track time off

Put it in writing, share it with your team, and revisit it annually to stay aligned with business needs and state laws.

Bottom Line

A good PTO rollover policy keeps your crew happy and your business running smoothly. It shows respect for your workers’ time while protecting your bottom line. Whether you’re managing a small service team or a large construction outfit, the right approach to PTO accrual and carryover can save you headaches in the long run.

For guidance on setting up your business’s PTO policy or for a review of your current one, reach out for a no-obligation call today.