Guides

PTO carryover policy examples for small teams

Every December the same question comes up: what happens to the vacation time people didn’t use? A carryover rule answers it once, in writing, so nobody has to decide case by case. Here are the four rules small teams use most, with wording you can adapt.

1. Full carryover

“Unused PTO carries over to the next year with no limit.”

Simple and generous. The downside is that balances can grow for years, which becomes a real cost if your state requires paying out unused time when someone leaves, and it can mean long absences when people finally use it.

2. Capped carryover

“Employees may carry up to 40 hours of unused PTO into the next year. Hours above 40 are forfeited on January 1.”

The most common middle ground. People keep a cushion, and the business knows its maximum exposure. Pick a cap you can explain, such as one week or half the yearly allowance.

Example: Sam earns 80 hours a year and ends the year with 56 unused. With a 40-hour cap, Sam starts January with 40 hours carried in, then starts earning the new year’s 80.

3. Use it or lose it

“PTO must be used in the year it is earned. Unused PTO does not carry over.”

It pushes people to rest, and balances reset cleanly each year. But some states do not allow PTO that has been earned to be forfeited, so check before you adopt it. A softer version gives people until March 31 to use last year’s time.

4. Accrual cap instead of a carryover cap

“PTO stops accruing once an employee’s balance reaches 120 hours, and resumes once the balance drops below 120.”

Nothing is ever taken away, so it works in places that ban forfeiture, but the balance can never grow without limit. It needs a tracker that checks the balance every pay period, which is hard to do reliably in a spreadsheet.

Writing the policy

• Say when the year resets (January 1, or each person’s work anniversary).
• Say whether the cap applies to every leave type or only vacation. Sick leave often has its own state rules.
• Tell people their balance in early November, so nobody is surprised in December.
• Put it in the handbook and have everyone acknowledge it.