Discretionary Time Off (DTO): A Guide for Employers
What is discretionary time off? How DTO differs from unlimited and accrued PTO, whether it's paid out, who's eligible, and how to write a compliant policy.
Discretionary Time Off (DTO)
What it is, how it differs from PTO, and how to build a compliant policy
When I first heard about discretionary time off, it sounded like a dream for a small business: no tracking, no accrual, no year-end payout headaches. And it can be a great policy. But as I dug in, I learned that the biggest selling point, no payout when someone leaves, is exactly the part that can go wrong if you get the documentation wrong. Discretionary time off is genuinely appealing, but it rewards employers who understand the details and punishes those who treat it casually.
Discretionary time off (DTO) is a paid leave model where employees take time off at their discretion, with manager approval, without accruing a fixed number of days. It has grown in popularity, helped along by large tech companies adopting it, as a flexible, low-administration alternative to traditional vacation. This guide, written for a small-business owner or HR lead considering DTO rather than an employee decoding the benefit, covers what it is, how it differs from other time-off models, whether it is paid out, who is eligible, the honest pros and cons, the one compliance risk to know, and how to write a policy that protects you.
Below you will find the definition, a comparison with unlimited and accrued PTO, the pay and payout rules, eligibility, pros and cons, the compliance trap around payout, and an implementation guide. I build the policy-document and time-off tools this relies on into FirstHR, because a defensible DTO policy depends on clear documentation and consistent administration. This article is general information, not legal advice, and time-off law varies by state, so confirm your state's rules with counsel.
What Is Discretionary Time Off?
Discretionary time off is a paid time-off policy under which employees take leave at their own discretion, subject to manager approval, without accruing a set number of days. Rather than earning a fixed vacation balance, employees are trusted to take the time they need, provided their work is covered and their manager signs off.
The defining features are discretion and non-accrual. Discretion means employees decide when and how much time to take, within reason and with approval, rather than drawing down a fixed bank of days. Non-accrual means they do not earn or accumulate vacation days over time; there is no balance building up. These two features together are what distinguish DTO from traditional vacation and drive both its benefits and its compliance considerations.
DTO grew from a niche concept into a recognized policy in part because prominent technology companies adopted it, most notably when a major employer moved its US salaried workforce to a discretionary time off model. It is worth a quick disambiguation: a small number of organizations use "discretionary time off" to mean employer-awarded recognition or bonus days rather than a flexible leave policy. This guide uses the mainstream meaning, the flexible, non-accrued leave model, which is what most employers and searchers mean by the term.
Adoption is still narrow, which is worth knowing before you assume the market has moved. The SHRM 2026 Employee Benefits Survey puts paid open leave at 6 percent of US organizations, unchanged from the year before, against 99 percent that offer vacation. DTO is a real option, not the default.
DTO vs Unlimited vs Accrued PTO
Discretionary time off is one of several time-off models, and it is frequently confused with its neighbors, especially unlimited PTO. Understanding the distinctions is essential, because they differ in ways that affect tracking, payout, and legal treatment.
| Model | How it works | Accrued? | Paid out at exit? |
|---|---|---|---|
| Discretionary (DTO) | Take time at discretion with manager approval | No | Generally no |
| Unlimited PTO | No set limit; take as needed, results-focused | No | Generally no |
| Accrued PTO | Earn a set number of days over time; tracked | Yes | Often yes (state-dependent) |
| Flexible time off (FTO) | Flexible but often capped or defined | Sometimes | Depends on structure |
DTO and unlimited PTO are the closest pair and often used interchangeably. The subtle difference is emphasis: DTO stresses manager discretion and approval, while unlimited PTO stresses the absence of a cap. In practice they function almost identically, both non-accrued and uncapped, and many companies treat them as the same thing. Accrued PTO is the traditional opposite: employees earn a defined number of days that are tracked as a balance and, in many states, must be paid out at termination. Flexible time off sits nearby but is often capped or more structured.
The distinction that matters most practically is accrual, because it drives payout. DTO and unlimited PTO are non-accrued, so there is generally no balance to pay out when someone leaves. Accrued PTO is earned and banked, so it usually must be paid out. This single difference, accrued versus not, is the heart of why employers find DTO appealing and also where the compliance risk hides, as covered below.
Is DTO Paid? Is It Paid Out?
Two questions cause the most confusion about DTO, and they have different answers: is the time paid when taken, and is it paid out when an employee leaves? Getting these straight is important both for setting expectations and for compliance.
First, is DTO paid? Yes. Discretionary time off is paid leave, meaning employees receive their normal base pay while taking it, just like an ordinary day on the job. It is not unpaid time off. What makes it different from accrued vacation is not the pay during use but the absence of accrual: employees do not build up a bank of days with cash value.
Second, is DTO paid out at termination? Generally no, and this is its central appeal for employers. Because employees do not accrue a balance of days, there is typically no accrued value to pay out when they leave, unlike accrued vacation, which many states treat as earned wages that must be paid out. This eliminates a real liability and administrative burden. But "generally no" is not "never," and the exception is exactly where employers get caught, which the compliance section covers in detail.
Who Is Eligible for DTO?
Discretionary time off is not usually offered to everyone in a company. It is most commonly limited to salaried, exempt employees, and understanding why helps you decide who to include in your own policy.
The reason is both practical and legal. Exempt employees are paid a predetermined salary regardless of the exact hours they work, and under the federal white-collar exemptions that salary is at least $684 a week, per the Department of Labor. A discretion-based, untracked model fits that pay structure naturally.
Non-exempt, hourly employees are the opposite case. Their hours have to be tracked for overtime purposes and their pay is tied directly to hours worked, which makes an untracked, discretion-based model a poor and potentially risky fit.
In practice, most employers who adopt DTO offer it to their salaried staff and keep traditional, tracked, accrued time off for hourly workers. This split is sensible: it gives salaried employees the flexibility that suits their role while keeping hourly workers on a model that handles overtime and hours tracking properly. Whatever you decide, defining eligibility clearly in the written policy is essential, both for fairness and for compliance.
Pros and Cons for Employers
DTO offers real advantages but also genuine risks, and deciding whether to adopt it means weighing both honestly. The benefits are significant, but so are the pitfalls if it is implemented carelessly.
| Pros | Cons |
|---|---|
| No accrued-payout liability at termination (if done right) | Employees may take too little time off, hurting wellbeing |
| Reduced tracking and administrative burden | Inconsistent approvals risk fairness and discrimination claims |
| Recruiting and retention appeal | Coverage and scheduling gaps |
| No year-end use-it-or-lose-it scramble | Legal exposure if documentation is sloppy |
On the upside, DTO removes the accrued-payout liability that traditional vacation creates, cuts the administrative work of tracking balances, appeals to candidates and current staff as a flexible benefit, and eliminates the year-end rush to use up days. For a small business without dedicated HR, the reduced administration alone is attractive.
On the downside, the most-cited worry is that employees with unlimited-style policies take too little time off, not too much, because without a defined allotment they are unsure how much is acceptable, which can feed fatigue and disengagement.
The data is less dramatic than the worry. Research cited by SHRM (2024) found employees under unlimited policies took 16 days off a year, against 14 for employees with a set allotment. Neither runaway use nor a collapse in time taken shows up in the numbers, so what you are really managing is ambiguity.
Inconsistent manager approvals can create perceptions of unfairness or even discrimination exposure. Coverage gaps can arise, and, most importantly, sloppy documentation can create the legal payout exposure covered next. These are manageable but real, and ignoring them is how a good policy goes wrong.
The Compliance Risk Every Employer Should Know
This is the section that most sets a serious DTO guide apart, because the policy's biggest selling point, no payout at termination, is not automatically bulletproof. There is a specific, well-documented way it can fail, and understanding it is what lets you avoid it.
Start with the baseline: federal law does not require any paid time off. The Fair Labor Standards Act does not require payment for time not worked, so whether you offer vacation, and how you treat it, is a question of your own policy and your state's law.
State payout rules are where the money sits. A small group of states treats earned, unused vacation as wages that cannot be forfeited, so it is owed at separation no matter what the policy says: California, Colorado, Illinois, Maine, Massachusetts, Montana, Nebraska, and Rhode Island. California's labor commissioner puts the rule plainly: vacation vests as labor is performed, and unused vacation is paid at the final rate whenever employment ends.
Maine is the one with a size test. Its statute requires payout of vacation accrued on and after January 1, 2023, but exempts employers with 10 or fewer employees, so the mandate binds at 11 or more.
Two others carry conditions worth knowing. Illinois counts the monetary equivalent of earned vacation as part of final compensation and bars any policy or contract that forfeits it. Rhode Island turns accrued vacation pay into wages payable at separation once an employee has completed a year of service.
Elsewhere, a payout is usually owed only where your written policy or contract promises one, which makes the policy the operative rule. The appeal of DTO is that a non-accrued policy leaves no balance for any of this to attach to. Usually that holds. Not always.
McPherson v. EF Intercultural Foundation, decided by the California Court of Appeal in 2020, is the cautionary tale every employer adopting DTO should know. The employer called the policy unlimited but never wrote it down and never told the affected employees it applied to them.
The court held that a policy like that is not truly unlimited, so the state's payout rule still reached it, and the employees were awarded their unused vacation. It declined to say that every unlimited policy owes a payout, which is the part most summaries leave out.
The same opinion sketched what a defensible policy looks like, and the list is short enough to check your own against. It states in writing that the time off is not a form of additional wages, spells out the rights and obligations around scheduling, gives employees a real opportunity to take the time, and is administered fairly so some people do not end up working more while taking less.
The practical lessons are clear and protect you. Put the policy in clear writing. Make it genuinely uncapped rather than secretly limited. Communicate it plainly as discretionary and non-accruing. Administer it fairly so employees actually can and do take time off. And keep documentation. A DTO policy done this way is far more defensible; one handled casually invites exactly the payout liability it was meant to avoid. Because this is fact-specific and varies by state, it is worth reviewing a multi-state policy with counsel.
How to Write a Compliant DTO Policy
Implementing DTO well comes down to writing a clear, defensible policy and administering it consistently. The steps below turn the principles above into a policy that delivers the benefits while avoiding the traps.
The steps that most protect you are putting the policy in clear writing, making it genuinely uncapped, and administering it fairly, exactly the points the California case turned on. Documenting the policy in your employee handbook with employee acknowledgment, keeping required statutory leave separate, and training managers for consistency turn DTO from a liability risk into the low-administration benefit it is meant to be.
Writing the policy is the easy half. The half that actually gets tested is whether the policy still describes what your managers do, which is a question about practice rather than about drafting and has to be answered from records. Work through the record below once a year and whenever the policy changes, and file the completed copy with the policy itself so the evidence sits next to the promise.
Frequently Asked Questions
What is discretionary time off?
Discretionary time off (DTO) is a paid leave policy where employees take time off at their own discretion, subject to manager approval, without accruing a fixed number of days. Instead of earning a set number of vacation days, employees are trusted to take the time they need as long as their work is covered and their manager approves. Because the time is not accrued or banked, DTO is not tracked as a balance. It is most common for salaried, exempt employees and has grown in popularity as a flexible, low-administration alternative to traditional accrued vacation.
Is discretionary time off the same as unlimited PTO?
They are closely related and often used interchangeably, but there is a nuance. Both are non-accrued and uncapped in the sense that employees do not bank a fixed number of days. The difference is emphasis: discretionary time off stresses that time off is granted at the employer's and manager's discretion with approval, while unlimited PTO emphasizes that there is no set limit at all. In practice they function very similarly, and many companies use the terms for the same kind of policy. Both differ sharply from accrued PTO, which is earned and tracked.
Is discretionary time off paid?
Yes. Discretionary time off is paid time off: employees receive their regular base pay while taking it. What makes it different from accrued PTO is not whether it is paid during use, but that it is not accrued or banked. Because employees do not build up a balance of days, there is no accrued value attached to the time. So DTO is paid when taken, like any ordinary day worked, but it does not accumulate into a bank of days that has cash value, which is central to how it is treated at termination.
Does discretionary time off get paid out when you leave?
Generally no, because it is not accrued. The main appeal of DTO for employers is that, since employees do not bank a fixed number of days, there is usually nothing to pay out at termination, unlike accrued vacation which many states require to be paid out. However, this is not bulletproof. A California appellate decision, McPherson v. EF Intercultural Foundation, held that an 'unlimited' policy that existed only as an informal understanding, with nothing in writing for the employees it supposedly covered, still owed a payout under state law. So a genuinely uncapped, clearly written DTO policy is the safer structure, and employers should confirm their state's rules.
Who is eligible for discretionary time off?
DTO is typically offered to salaried, exempt employees rather than hourly, non-exempt ones. The reason is practical and legal: exempt employees are paid a fixed salary regardless of exact hours, which fits a discretion-based, untracked model, while non-exempt employees must have their hours tracked for overtime and are usually better served by defined PTO. Many companies that adopt DTO limit it to their salaried staff and keep traditional, tracked time off for hourly workers. Eligibility should be clearly defined in the policy.
What are examples of companies using discretionary time off?
Several large technology companies use discretionary or unlimited time off models, and the approach is concentrated in technology, media, and finance and among startups and remote-first firms. One prominent example is a major technology company that moved its US salaried employees to a discretionary time off model. Adoption is much lower in industries like healthcare and manufacturing, where coverage needs and hourly workforces make defined, tracked time off more practical. Across all US employers the model stays rare: the SHRM 2026 Employee Benefits Survey puts paid open leave at 6 percent of organizations, unchanged from the previous year, while 99 percent offer vacation.
What are the downsides of discretionary time off?
The main downsides are that employees may actually take too little time off without a defined allotment, which can hurt wellbeing; that inconsistent manager approvals can create fairness and even discrimination concerns; that coverage and scheduling gaps can arise; and that sloppy documentation can create legal exposure around payout in some states. On the size of the effect, research cited by SHRM in 2024 put average time taken at 16 days a year under unlimited policies against 14 days under a set allotment, so the measured difference is small rather than dramatic. These downsides are manageable with a clear, fairly administered, well-documented policy, but they are real.