Does PTO Count Towards Overtime? A Guide for Small Businesses

It seems like a simple question: Does paid time off (PTO) count towards overtime? 

Unfortunately, it isn’t a straight-up ‘yes’ or ‘no’ answer. If you find yourself sitting in front of a pile of papers on a Friday night when payroll is due, tearing your hair out because of PTO requests and hours worked––we’re here to help.

In this article, we define paid time off and overtime, and raise some important questions to bear in mind when drafting PTO rules and policies. We’ll also help you figure out whether PTO counts towards ‘hours worked’, and how to easily keep track of all of these hours.

The answer may not be as easy as ‘yes’ or ‘no’—but we’ve got some answers for you to help fill in the blanks!

What is paid time off (PTO)?

Paid time off, or PTO for short, is a benefit that your company offers its employees so they can take time off work and still get paid. The bonus of paid time off is that employees can take this time however they see fit. Vacation, mental health, sick time, and personal leave can all fall under PTO.

Even though the advantage of PTO for employees is its flexibility, creating some rules around PTO is necessary to protect your business. It’s important to provide PTO to employees—and that makes it just as important to create a clear paid time off policy.

What is overtime?

Overtime is any hours worked above 40 per week for non-exempt employees. This standard was set by the Fair Labor Standards Act (FLSA). 

What does this mean for you? Well, if you run a business with nonexempt employees, you will need to keep close track of hours worked. Overtime hours must get paid at a rate of least time and a half. And that can add up quickly.

So, what do we mean when we say ‘hours worked’? These definitions can get tricky. Here’s what the FLSA says:

• Hours on duty: These are the hours your employees are on the premises and officially working.
• Engaged to wait: These are time periods in which an employee is on duty and waiting for something work-related, like a delivery.
• Meetings and training: These are times when employees attend mandatory training for their role or team and individual meetings.
• On-call: An on-call employee knows they need to be ready to work on a moment’s notice. But if these on-call hours are restrictive of what an employee can do while on-call, they’re counted as ‘hours worked’.
• Short breaks: These are short periods of rest, typically under 20 minutes. 30-minute or longer meal breaks aren’t included in ‘hours worked’ unless an employee was asked to perform tasks while eating. 

See what we mean? It can get tricky.

And that means the question of ‘Does PTO count towards overtime?’ is a little tricky, too. Knowing what ‘hours worked’ means depends on understanding basic FLSA laws and policies along with these definitions.

So—does PTO count as hours worked?

Now that we know what ‘hours worked’ can mean, we can start to answer the question: Do PTO hours count towards overtime? 

The short answer is ‘no.’ If an employee works four 9-hour days––for a total of 36 hours that week––and then takes an 8-hour PTO day, you do not have to pay overtime for that PTO day. PTO for hourly employees does count towards payroll hours, but they don’t count towards hours worked.

If you’re wondering why, check on those FLSA rules above again. Because employees taking PTO are off-site, not expected to accomplish any tasks, and can use their time freely, their PTO hours don’t fall under the technical definition of ‘hours worked.’ And if those hours aren’t worked—even though they’re paid—they aren’t considered overtime.

Do vacation hours count towards overtime?

Likewise, vacation time doesn’t count towards overtime. No matter the reason your team is taking PTO, including vacation, it’s still not hours worked if your employee is not on site.  

Does sick time count towards overtime?

No, sick time does not count towards overtime, even if it’s paid time off. Time spent on sick leave is not hours worked, as employees aren’t expected to perform work-related tasks while home sick. 

Do holiday hours count towards overtime?

Short answer: No, time off for a holiday doesn’t count towards overtime. However, the holidays can be a busy time for many businesses. If an employee works during a holiday and their total hours for the week exceeds 40 hours, then every hour over 40 hours worked does count towards overtime. 

Can you get overtime and PTO in the same week?

Theoretically, it’s possible—if an employee works more than 40 hours in a week and then take PTO in the same work week, then any hours worked on top of that 40-hour limit does count as overtime. But that wouldn’t make the PTO eligible for overtime rates.Overtime only takes into account hours actually spent working.

No matter what, PTO itself is not eligible for overtime pay.

What to bear in mind when creating a PTO policy.

Now that you know PTO isn’t eligible for overtime, you’re ready to make a PTO policy for your hourly employees! Here are some questions that are important to ask when developing a policy that works for your business.

1. Will PTO hours accrued be measured by hours worked, years of service, or both?

There are a couple of different ways employees can accrue paid time off. As an employer, you get to choose what works best for you and your team. PTO hours can accrue based on how many hours an employee has worked, how many years they’ve worked at the company, or both.

• Hours worked: Let’s say an employee gets 2 hours of PTO for every 40 hours they work. If they work 800 hours in a year (about 20 weeks at full time), they accrue 40 PTO hours (about a week).
• Years of service: You can set a policy based on how many years they’ve worked. For example, anyone under 3 years of service gets 10 PTO days per year, anyone in the 3-7 year range gets 15 PTO days, and anyone above 7 years of service gets 20 PTO days.
• Hours worked and years of service: You can also combine the above and allow employees to accrue days throughout the year while also starting them off with a set amount of days.

Take a look at your general staffing levels and your budget, and make a decision about PTO accrual that feels good—for you and your team. 

Bear in mind that the American Psychological Association 2022 Work and Well-being Survey found that time off is one of the top ways employers can support employees’ mental health. And employees who are happy are  less likely to quit—and more likely to support your business’s growth long-term. 

2. Will PTO roll over or carry over?

When you write your PTO policy, consider: 

• Will employees need to ‘use it or lose it,’ or will their PTO carry over? 
• How long can employees keep accruing PTO days before they’ve got to start cashing it in? 
• Is there a limit to how many days an employee can take off at once? 
• Let’s say an employee has been working for you for 5 years, accumulated 100 PTO days, and wants to go on a 3-month trip—can they? 

Having these PTO rules written out and agreed on with employees ahead of time means you won’t find yourself scrambling to temporarily fill someone’s role—or trying to resolve conflicts within their team.

3. How will your employees request paid time off?

Your employees have saved up those precious paid time off days. How do they let you know they want to use them? 

Do they fill out a form? Make a verbal request? Can they only take so many days at a time? How much time in advance do you need to know?

Are there blackout dates for PTO for employees? If you run a retail store, for example, you don’t want everyone requesting PTO on Boxing Day. Or, let’s say you run a salon; you can’t have all of your stylists asking for paid time off during Prom season. 

Black out some dates on the PTO calendar based on your busy season. (By the way, do you have a PTO calendar?)  Then create a clear way to submit PTO requests and communicate that method to your team.

4. Does your PTO policy follow the FLSA and state laws?

You have some flexibility in how your employees accrue PTO. But—like most things—you still have to stay up to date on your own state’s PTO payout laws and the Fair Labor Standards Act.

This isn’t a comprehensive list, but here are some important regulatory factors to bear in mind as you get started:

• Minimum PTO: Some states or municipalities require you to offer employees a minimum amount of PTO per year.
• Unpaid leave: Under the Family and Medical Leave Act (FMLA), up to 12 weeks of unpaid leave must be made available to your team for certain family and medical reasons.
• Job protection: The Americans with Disabilities Act (ADA) and FMLA require you to protect the role of employees who take leave. When their leave is over, they have to be able to return to their job, or an equivalent one.
• Provide notice: At a base level, you have to keep your employees educated on their rights under state and federal leave laws. But if you offer PTO, you also have to keep your employees updated on in-house policy changes.

​​Overtime and PTO tracking.

Now that employees know how they can submit PTO requests, how will you keep track of it all? And it’s not just PTO you have to worry about. There’s overtime concerns, regular hours worked, and sick leave. That’s a lot of hours to categorize and track.

You’ve got better things to do than spend all your days tallying up timesheets. You need a way to manage PTO and overtime hours, make sure you’re staying compliant with labor laws, and keep all your details in one place. 

Homebase’s payroll tool can keep track of all these factors for you. Make payroll a breeze by instantly calculating hours, breaks, overtime, and PTO. 

When your employees use our time clock for clocking in and out, hours are automatically logged, collated, and displayed to you on one easy-to-use dashboard. You can even set up policies for breaks and overtime fto calculate hours and wages correctly. 

Plus, everything gets synced to payroll to help you avoid mistakes. You can also allow your employees to submit time-off requests, and you can track schedules through the app to avoid staff shortages and make sure everyone’s hours are accurately recorded and tracked.

Eliminate PTO and overtime headaches.

Take the pain out of figuring out PTO accrual. Homebase can automatically calculate paid time off based on your input parameters. Not only that, but our app can send you a notification if an employee is heading into overtime hours. We’ll even transfer your payroll data to Homebase for you, so the switch is effortless and risk-free. 

Make payroll painless. Sign up today.