Every founder asks me: "Should we do unlimited PTO? It seems simpler."
Let me translate what you're really asking: "Can I avoid tracking PTO and paying it out when people leave?"
The answer is more complicated than you think, and getting it wrong costs money.
What Accrued PTO Actually Means
Accrued PTO means employees earn paid time off based on time worked. Common structures:
Earn X hours per pay period
Earn X days per month
Front-load annually on hire anniversary
Example: "You accrue 15 days per year (1.25 days per month). Once you accrue it, it's yours."
In most accrual systems, unused PTO carries over year to year (though you can cap accruals), and you must pay it out when employment ends.
What Unlimited PTO Actually Means
Unlimited PTO means employees can take as much time off as they want (with manager approval), with no formal accrual or balance.
The pitch: "Take what you need, when you need it. We trust you."
The reality: It's not actually unlimited, there are unstated limits, and "manager approval" is doing a lot of work in that definition.
The Legal Difference That Founders Miss
Here's what most founders don't understand: Accrued PTO is considered earned wages in many states. Unlimited PTO is not.
States requiring payout of accrued PTO: California, Colorado, Montana, Nebraska, plus many others depending on company policy.
States requiring payout of unlimited PTO: None. Because if nothing accrues, there's nothing to pay out.
This is why founders love unlimited PTO - it eliminates the financial liability of accumulated PTO balances.
But here's the problem: Unlimited PTO doesn't exempt you from mandatory paid leave laws.
The Compliance Trap Founders Fall Into
Many states now require employers to provide specific types of paid leave:
Colorado's Healthy Families and Workplaces Act (HFWA): Employees must accrue at least 1 hour of paid sick leave per 30 hours worked, up to 48 hours per year.
New York City's Earned Safe and Sick Time Act: Employees must accrue paid sick leave based on employer size, plus now get 32 hours of unpaid sick time frontloaded.
California's Paid Sick Leave: Employees accrue at least 1 hour per 30 hours worked, minimum 40 hours per year.
The mistake: Founders implement "unlimited PTO" and think it covers these requirements.
It doesn't.
Even with unlimited PTO, you must:
Track accruals for mandatory paid sick leave separately
Ensure employees can use leave for all legally required purposes (not just "vacation")
Maintain records proving compliance
So unlimited PTO doesn't actually eliminate tracking - it just creates two systems: unlimited PTO for "vacation" and accrued sick leave for compliance.
The Financial Reality
With accrued PTO:
Liability shows on your balance sheet. If you have 10 employees who've each accrued 80 hours at $50/hour, you're carrying $40,000 in PTO liability.
When someone leaves, you pay out their balance. In states like California and Colorado, this is legally required even if they were fired for cause.
With unlimited PTO:
No balance sheet liability. When someone leaves, you owe them nothing for "unused PTO" because nothing was accrued.
This looks great to investors and on financial statements.
But there's a hidden cost: Unlimited PTO often leads to employees taking LESS time off (more on this below), which increases burnout and turnover.
What Actually Happens With Each System
Accrued PTO in practice:
Employees know exactly what they have
They plan vacations around their balance
High performers accumulate large balances
You pay out those balances when people leave
Clear, measurable, defensible
Unlimited PTO in practice:
Employees don't know what's "reasonable" to take
They fear taking "too much" compared to peers
Studies show people take LESS time off under unlimited policies
No clear guidance means managers apply it inconsistently
When you fire someone, arguments about "I was planning to take 3 weeks" (that you don't owe)
The real issue with unlimited PTO: Without a defined balance, employees default to taking less because they don't want to look like they're abusing it.
When Accrued PTO Makes Sense
Use accrued PTO when:
You're in states with mandatory payout laws anyway
You want clear, measurable policies
You have a structured, corporate culture
You want employees to actually take time off
You're okay with the balance sheet liability
You have under 20 employees (easier to track)
When Unlimited PTO Makes Sense
Use unlimited PTO when:
You want to eliminate payout liability
You have a high-trust, results-oriented culture
You have strong managers who can approve time fairly
You're willing to set clear guidelines (recommended minimums, maximum blackout periods, etc.)
You're prepared to track mandatory sick leave separately
You understand you'll need to actively encourage people to take time off
The Hybrid Approach That Actually Works
Some companies do: "Accrued PTO with a high cap."
Example: "You accrue 20 days per year. You can accumulate up to 30 days (1.5 years' worth). Once you hit 30, you stop accruing until you use some."
This gives you:
Clear balances employees can track
Protection from unlimited liability
Compliant with state payout laws
Encourages people to actually take time off (use it before you hit the cap)
What Founders Get Wrong
Mistake #1: "Unlimited PTO solves all my compliance problems"
No. You still need to comply with mandatory sick leave laws, which require tracking accruals.
Mistake #2: "Unlimited PTO is cheaper"
Maybe. If your culture pressures people not to take time off, yes. But your turnover costs from burned-out employees might be higher.
Mistake #3: "I can switch from accrued to unlimited without paying out balances"
Absolutely not. In states requiring payout, you must pay employees their accrued balance when you switch policies. You can't just wipe the slate clean.
Mistake #4: "Unlimited PTO means no tracking"
Wrong. You still need to track:
Days actually taken (for patterns, manager fairness, potential abuse)
Mandatory sick leave accruals (separate system)
Compliance with state and federal leave laws (FMLA, FAMLI, etc.)
Mistake #5: "Our handbook says 'unlimited' so we're covered"
Your handbook needs to specify:
Manager approval required
Blackout periods (if any)
What happens to mandatory sick leave
Whether there are any unstated limits
How you handle suspected abuse
Saying "unlimited" without guardrails creates more problems than it solves.
The Bottom Line
Neither system is inherently better. The right choice depends on:
What state(s) you operate in
Your company culture and management strength
Your financial priorities (balance sheet vs. actual cost)
Whether you want clear policies or flexibility
My recommendation for most startups:
Start with accrued PTO. It's clearer, easier to administer when you're small, and you don't have to worry about manager consistency or employees gaming an "unlimited" system.
If you grow to 50+ employees, have strong management culture, and want to eliminate PTO liability, then consider switching to unlimited - but do it thoughtfully, with clear guidelines and active encouragement to use it.
And regardless of which you choose: Make sure you're compliant with your state's mandatory paid sick leave laws. That compliance requirement doesn't go away just because you called something "unlimited."
The goal isn't to minimize what you owe employees. The goal is to have a clear, legal, sustainable system that actually encourages people to take time off.
Because burned-out employees cost you more than accrued PTO ever will.
Need help designing a PTO policy that's actually compliant for your state? That's what I do.