Are you required to give your team paid time off? Just like most other things in America, it depends. For small businesses, most paid leave rules are dictated by your state or city, and often, they can change on January 1 or July 1 in any given year.
I have two reasons for you to care about paid leave compliance:
- In states and cities with mandatory policies, failing to comply can carry hefty fines and, in some cases, even legal action.
- Leave policies signal what we value. If you say you care about your people, the policies you set demonstrate whether that’s actually true.
Before you adjust wages, evaluate your mandatory and voluntary paid leave policies. Like a Chipotle bowl in an inflationary economy, you might be paying the same but getting less. If your team has fewer work days for the same pay, it may impact your ability or willingness to increase wages.
Set your 2026 calendar and clearly communicate your company holidays and total paid days off. If needed, update your PTO policies in your time and attendance system and your employee handbook.
Know who’s an employee
The number one mistake I see by business owners is misunderstanding who’s an employee and who’s a contractor. Paid leave mandates and policies only apply to W-2 employees — full-time, part-time, temporary, and seasonal. They do not apply to contractors. If a contractor requests paid time off, be clear that they are not eligible for your company benefits and leave programs.
Federal and state holidays
As a private employer, you are not required to close on federal or state holidays, but you must record them for payroll purposes. There are currently 11 federal holidays. If you choose to remain open, be aware that your hourly employees are entitled to a higher rate of base pay — 150-200% per hour, depending on your location.
Paid sick leave (PSL)
Currently, 22 states and the District of Columbia have local or statewide PSL requirements, often for both full- and part-time employees. Some locations have expanded “sick and safe leave,” meaning the employee may use the time for caregiving or other family needs. Most payroll systems maintain up-to-date summaries of compliance requirements — here’s one from Gusto.
PSL may accrue over the year or be awarded on a milestone date. Some states require rollover of unused time up to a maximum. Some locations require payout for certain accrual methods.
If you’re in a location without PSL requirements, it’s at your discretion to craft a policy.
Paid time off (PTO)
PTO — once known as “vacation time” — is the one type of leave that is entirely at your discretion. There is no federal, state, or local requirement. However, if you do offer PTO, you’ll need to comply with state and local labor laws for awarding and accruing hours, carrying unused hours over between years, and paying out unused PTO when an employee leaves your firm.
You’ll need to create a request and approval procedure; often, you can automate administration through your payroll or time tracking system.
Be careful of using the term “PTO” as a catchall, as you may create an unintended obligation for yourself should your employee leave your company. Here’s a summary of dismissal paycheck requirements from Gusto.
Unlimited leave
As a simplified approach, unlimited leave has grown in popularity. You can offer a single leave policy across employee locations, skip the headache of per-period accruals and local compliance tracking, and avoid the surprise expense of payouts for resignations or layoffs. If you’re considering unlimited leave, consult an employment lawyer. You need clearly written policies that meet or exceed the requirements in all of your operating locations. Even with unlimited leave, you’ll still need to comply with state family and medical leave program requirements, as they are funded through payroll taxes.
Paid family and medical leave (PFL or PFML)
The federal Family and Medical Leave Act (FMLA) applies only to companies with 50 or more employees.
Currently, 11 states and the District of Columbia have active PFL policies; Minnesota, Maine, and Maryland’s programs will start in 2026. (Check out this site for a nice chart by state.) If you are employed on payroll by your S-corp or C-corp, you are also eligible, even though you’re the business owner. These programs are funded through payroll taxes.
Your obligation under PFL is to protect the person’s job during their approved leave. They collect wage replacement benefits from the state fund, similar to how unemployment works.
Note, if you’re self-employed or a sole proprietor, you may be able to opt into your state’s PFL programs for a quarterly payment. This can be a great option if you are planning a pregnancy or know you’ll need recovery time from a surgery.
If you are in state without PFL, you can craft policies based on your company’s needs. It’s common for parental or medical leave policies to be defined once someone needs to use them. If you informally create a policy for one person, that becomes the company’s policy until you write a different one. Handling leave on a case-by-case basis could expose you to legal claims of unfair practices.
Other leave policies
Bereavement, jury duty, organ donation, crime or domestic violence, school activities, voting, and military service may all be statutory leave types that you’ll need to understand, even for just one or two employees. The best practice is to notify employees in writing of their rights via an employee handbook or summary of policies. SHRM offers a service that generates a minimally compliant multistate handbook for under $500. When in doubt, consult an employment attorney, not just LegalGPT.
One new one: Since the 2022 Dobbs decision, some multistate employers have established paid leave and travel cost reimbursement policies for employees to obtain pregnancy-related healthcare out of state. This is an entirely voluntary policy. In a small company, your team may know where you stand, but if it’s important to you, work with a lawyer to write a clear policy.
Unpaid time off: Employees can request unpaid time off. Approval is at your discretion.
Compliance and tracking: To administer all of these policies, you’ll need a clear way to make a request and record an approval. Contemporary payroll systems have features that allow you to assign eligibility and policies for each employee type, request time off from their supervisor, and record that time taken in your payroll and policy tracker. While shared spreadsheets and email can work when you’re small, make sure you have an adequate audit trail of time awarded, taken, and paid to avoid compliance headaches and fines.
