Imagine an average Tom who has been working hard for 2 years at Noodle. One day Tom decides to move on and packs up. He receives the money he has earned for the remainder of the month, and he stops dead in his tracks. What about his unused vacation, though? The company is supposed to provide him with a paid vacation which he barely took advantage of in the 2 years at work! Where does that money go now that he is leaving? 

This is where PTO steps in. While the practice is not new, companies need to understand the rules behind PTO and educate their team on the topic. Let’s dive into PTO do’s and don’ts to understand the mechanics. 

What is PTO?

PTO stands for Paid Time Off which is an umbrella term for all forms of vacation that employees can take off work and receive their pay nonetheless. PTO includes vacation days, corporate days off, sick leave and personal time off. 

How is PTO calculated?

PTO needs to be earned. Companies usually turn to one of these popular systems to frame a corporate PTO policy. 

• Accrual-based PTO means that employees gradually accumulate their paid leaves as they work. The amount of available time off, therefore, grows proportionate to the amount of actual time worked in the company. The approach doesn’t define what type of time off PTO is spent on. For example, Amazon new hires earn 1 hour of paid time off for every 30 hours worked, with a maximum of 20 days per year. The amount of available accrued paid vacation grows proportionate to the amount of actual employment time in Amazon.
• Unlimited PTO is a relatively new trend that has already been picked up by some leading elite companies such as Sony Shopify and Netflix. Unlimited PTO is exactly what it sounds like: any amount of paid time off is available to teams. The goal is to provide freedom and ultimately help employees build an effective work-life balance to deliver their 100% at work. With the approval from their manager, workers can take a day off for their personal use. 
• Lump-sum PTO is somewhat of a midground between the two approaches above. The employee receives a set amount of PTO at the beginning of a year, for example, and uses it as needed. While the amount of PTO is not unlimited, it still offers flexibility to people. To illustrate, Google, new employees typically receive 15-20 days of PTO annually, depending on their role and tenure. The employee receives a set amount of PTO at the beginning of the year and uses it as needed throughout the year.

The Big Question: Do Companies Have to Pay Out Unused PTO to Workers When They Leave? 

Now that the concept is broken down into simpler terms and we know the systems in place to help companies track their workers’ time off, let’s answer the key question: does an employee get PTO when an employee quits? 

Yes… and no. 

Like with all aspects of HR and payroll management, there are many factors that come into play. The regulations established by the government, nation-wide and state laws, corporate policies and individual work contracts define whether an employee that is leaving for good is entitled to PTO or not. 

Where and why do employees receive PTO when they are leaving a job? 

Some of the countries where full-time employees are provided accrued PTO when they leave include the European Union, Canada, Japan and South Korea. These countries, along with some others, have employee-oriented labor legislation that protects staff and obligates the employer to provide for workers financially even in the case of quitting. 

The company that follows the practice of providing PTO to their leaving employees is actually receiving some benefit from it, too. 

• Reduced legal risks. When a business pays back the sum of money it has been chipping away from the employee for their supposed time off helps avoid potential lawsuits. By giving back the money, the business supports a fair treatment approach protecting and supporting their rights. 
• Simpler book-keeping. The unused PTO and money allocated to it needs to be redistributed and properly accounted finance-wise. By paying out PTO, companies can avoid the administrative burden of maintaining records for former employees and ensure that financial statements accurately reflect the organization’s obligations. 

Where and why do employees not receive PTO when they are leaving a job? 

Surprisingly, Canada has some areas (namely, Alberta, Manitoba, Saskatchewan) where paying out PTO is not required by law, and it is the work contract that specifies the policy in this regard. The UK with its pro-rata basis in regards to PTO, the USA with the PTO policy varying from state to state, Mexico and India are all examples of countries where companies do not have a responsibility to pay out unused PTO to their employees when a work contract is terminated. 

Not sharing the money of the company with a quitting employee clearly has its advantages. 

• Deterrent against career speedrunners. When employees know they’ll lose their unused vacation time, they are more likely to stay. This helps maintain stability and reduces the constant churn of hiring and training new staff. 
• Serious cost saving. By not having to payout potentially thousands of dollars in unused time off, companies can save money and re-invest it into the business,

What if an employee is fired? 

When an employee is terminated for cause, the essence remains: the employee is leaving and shares the same rights as someone who is quitting on their own. The company’s decision with regards to PTO depends on the internal policy and the local regulations. Normally, businesses tend to provide PTO to lessen potential friction between the management and the employee. 

Fun fact. Netflix famously offers employees unlimited paid time off, trusting them to manage their own work-life balance. Interestingly, this policy means there’s often no formal PTO “bank” to pay out upon termination — but employees rarely abuse it, showing how trust can replace strict accrual systems.

PTO Best Practice 

An efficient PTO policy equally satisfies the employee and the employer. The secret of an efficient PTO regulation is finding the right degree of fairness, legal compliance and flexibility. A well-defined PTO is more than an obligation — it may well be a serious advantage for your company in the industry. 

Align With Culture and Legal 

The local regulation is the foundation of your HR policies if you are hiring domestically. And the point is, the regulation is not always in favor of the PTO. While in Germany the PTO needs to be paid out when an employee is leaving, in the US in Delaware and Maine, for instance, employers are not obligated to do so. In fact, it is a work contract or a corporate policy that sets the rule. 

For global teams, culture and legal matters just as much. Extrapolating a domestic (or a favorite) PTO policy in a ‘one-fits-all’ manner won’t be an option. Varying national holidays and legal frameworks must be taken into consideration. 

Stay Consistent 

Staying consistent with a chosen PTO policy is essential for building trust and maintaining smooth operations, especially in today’s diverse work environments.

For domestic teams, consistent PTO policies enable HR managers to plan staffing and maintain and predict the amount of people working on the team. For global teams, consistency is still more important as it maintains equity across nations and time zones. For either type of teams, consistently following a policy helps build a comprehensive corporate culture that employees can rely on and share to feel like a part of the business and the team. 

Review Regularly 

An HR manager may have put their heart and soul into a PTO policy. Yet reality and ever-changing market conditions tend to have their impact on the PTO practices. Checking against the current status of the company, the staff and the market and reviewing a PTO practice is a healthy and stress-free way to keep the program relevant and attractive to the team, while also avoiding unfair use and abuse from the team.

PTO & Independent Contractor 

It must have become obvious by now that the concept of PTO comes up in the world of a corporate employer-employee relationship. Does a business have to support their independent contractor financially, on top of the traditional project fee? 

Technically, an independent contractor or a freelancer is a person that acts as a separate unit in regards to their client. Their client’s only responsibility is the project fee, and any form of supplemental pay, normally a feature of employment, is not required. 

However, offering a small on-top payment may be an unnoticeable, yet invaluable investment into a business relationship with a business’s pool of outsource talent. A reliable method to pay a remote team anywhere in the world is EasyStaff Payroll. The platform helps reach any contractor worldwide and pay in USD, EUR and even crypto — regardless of which payment method is chosen, closing documents are provided for any operation for both the contractor and the company. 

Conclusion 

• Paid time off is one of the fundamental aspects of payroll and HR management in a company. A corporate policy a company decides to proceed with must be based on local laws, so the business stays compliant with the law both at home and overseas. 
• While the question whether PTO is paid out to a leaving employee is not obligated worldwide, the practice of sharing holiday pay and other types of financial support after quitting is becoming popular, now that businesses tend to move towards a more transparent and worker-oriented workplace environment. 
• The major steps of effective PTO management are aligning with the local culture and legislation, staying consistent in following a proposed PTO policy and reviewing the policies regularly. 
• Whether a company pays out unused accrued PTO to its employee that decided to move on or an additional benefit to its freelancer to strengthen a business relationship, EasyStaff Payroll caters to any goals in a business’s team management. The platform bridges companies and global talent to help them work on exciting projects without the unnecessary red tape and wasted resources. Join now!