Managing Paid Time Off (PTO) policy is complicated. It varies from organization to organization and even from department to department. There’s no one size fits all approach. It is entirely up to the employer to determine who’s eligible to avail PTO, how many days are available each year, and how PTO accrues.

Inspite of the complexity, you must understand how to calculate accrued paid time offs and vacations. That's because organizations use PTOs as a valuable perk to attract and retain top talent.

What is PTO Accrual?

Paid time off accrual or accrued time off is a type of PTO that employees earn/accumulate over a period of time. Paid Time Off includes vacation leave, sick leave, personal leave, bereavement leave, etc. Employees can accrue their PTO on an hourly, weekly, bi-weekly, monthly, quarterly, annual, or per pay-period basis.

An employee's PTO accrual also depends on the time they spend at an organization. Companies reward loyalty by increasing the amount of PTO an employee can accrue over a period of time. According to a study by SHRM,

  • Employees with less than two years of service accrue ten days of PTO each year.

  • Employees with more than five years of service accrue 25 days of PTO each year.

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Difference between lumpsum PTO and accrued PTO

 

LUMPSUM PTO

ACCRUED PTO

Employees receive all their paid time offs at once.

Employees receive or rather accumulate their paid time offs over a period of time.

Typically given at the beginning of the calendar year or fiscal year

Typically given on a weekly, monthly, quarterly basis depending on company policy

Lumpsum PTO is easier to manage for the HR and Payroll department

Calculating accrued time offs is an uphill task in itself

Employees might take all their paid time offs at one go or in clusters

Employees will have to their time offs in a staggered manner instead of using them all at once

Steps to calculate PTO Accrual

Calculating PTO accruals or vacation accruals manually is a huge challenge. That’s why most organizations use time-off management software that calculates PTO accruals automatically. Such software also has the provision to create custom time-off policies, automate leave accruals, and apply for leaves. 

However, if you still want to go the round-about way and calculate time offs manually, you can follow the below steps. 

 

1. Determine the amount of paid time off you want to give your employees 

The first step to calculate accrued paid time off is determining the number of PTO hours/days you would like to give your employees. As mentioned above, paid time off is completely up to the employer’s discretion. You may choose to give your employees 15 days, 18 days, or even 24 days of paid time off. But, remember to comply with the labor laws of your state or country. 

 

2. Calculate the total number of work hours in a year

You’ll have to calculate the total number of work hours in a year depending on the number of weeks your business operates. A typical company operates for 8 hours a day, five days a week for 52 weeks. Based on this calculation, the total number of work hours in a year is 2080 hours (52*5*8 = 2080). 

To calculate PTO accrual, you’ll also have to subtract the mandatory holidays of your business. For example, if you provide ten mandatory holidays in a year to your employees for government and federal holidays, then you’ll have to subtract 80 work hours (10*8) from the total number of work hours. That leaves you with 2000 work hours per year. 

 

3. Determine the accrual cycle or pay period

A pay period is nothing but the frequency at which a company compensates its employees. The most common pay periods are weekly, biweekly, semi-monthly, and monthly. There are 52 pay periods in a weekly pay period, 26 in biweekly pay periods, 24 in semi-monthly pay periods, and 12 in monthly pay periods.

With this, you have all the parameters required to calculate PTO accruals. 

 

4. Calculate PTO accrual 

Dividing the total number of PTO hours by the total number of work hours in a year will give you the hourly accrual rate. For example, if your organization gives 15 days (or 120 hours) of PTO to the employees, and the total number of work hours in a year is 2000, then the hourly PTO accrual rate is 0.06 hours for every one hour worked (120 / 2000). 

In order to calculate weekly, biweekly, semimonthly, and monthly PTO accruals, you can use pay periods. Here’s a simple formula:

Hours accrued per period = Number of PTO hours / Number of pay periods

To calculate the accrued time off by days, just divide the hourly accrued time off by 8.

 

Weekly accrual rate

120 / 52

2.30 hours accumulated for every hour worked

Bi-weekly accrual rate

120 / 26

4.61 hours accumulated for every two weeks worked

Monthly accrual rate

120 / 12

10 hours accumulated for every month worked

Quarterly accrual rate

10 * 3

30 hours accumulated for every three months worked

Half-yearly accrual rate

10 * 6

60 hours accumulated for every six months worked

What happens to unused accrued PTO?

In quite a few cases, your employees may not have used all their accrued PTO within a given year. This is where the rollover policy of your organization comes into the picture. You’ll have to decide whether your employees can carry forward a certain amount of their unused PTO next year. You may even choose to have a use-it-or-lose-it policy where your employees will have to use all their PTO time within a specific duration or forfeit it. However, the laws of some states like California and Dakota prohibit the use-it-or-lose-it option. 

When an employee quits an organization, the employer may be entitled to pay for the unused accrued PTO at the employee’s current pay scale. It is usually paid in the ‘Full and Final settlement’ that employees receive as part of the termination. No law mandates paying out for the unused PTO, but you may be bound by your company’s policy and employment contract. 

Calculating payouts for an hourly employee is relatively simple. You just have to multiply the hourly pay rate with the number of unused accrued PTO hours. You will have to calculate the hourly pay rate for a full-time salaried employee and then multiply it with the total unused accrued PTO hours. 

For example, if an employee earns $70,000 annually and has 50 hours of unused accrued PTO, then:

Hourly pay rate = $70000 / 2000 hours => $35 per hour

PTO payout      = $35 * 50 => $1,750 

Best Practices to develop a successful PTO accrual policy

All work and no play will make your employees dull and less productive. It is essential to give them some time off work to take that well-deserved vacation, recover from an illness, or simply recharge. However, the vacation accrual policy should work for both the employer and the employee. 

Here are some of the best practices that you can consider while framing the policy:

Ask employees for feedback

The employees of your organization are the ultimate beneficiaries of the vacation accrual policy. It only makes sense to ask them how they would like to earn and accrue their PTO. Review the suggestions given by the employees and incorporate as many of them as possible into the final policy. This will create a sense of trust and satisfaction among the employees.

Keep an eye on the competition

Paid time off is one of the most important perks an organization gives to its employees. It’ll help you attract and retain top talent. Therefore, always keep an eye on the competitors’ policies and the industry standards to avoid losing talent.

Determine the eligibility to accrue time-off

A comprehensive time off accrual policy should include the entire workforce. Decide how different types of employees (part-time, full-time, contractors, interns) and from when the employees would be eligible to accrue time offs. Typically, organizations allow new employees to start accruing time off after a probationary period of 60-90 days.

Determine accrual caps and rollover policies

Framing a PTO accrual policy is complex, and it is pretty common to miss out on minute details while formulating the policy. Here are a few questions that you need to ask yourself:

  • Is the accrual policy uniform for all the employees? Do experienced employees get more accrued time off?

  • Is there a maximum amount of time off that an employee can accrue at a given point of time?

  • Can employees carry over accrued time off to next year? If yes, then is there a limit on how much they can carry over?

  • What is the accrual frequency? Are the leaves credited monthly, quarterly, semi-annually, or annually?

  • How is unused accrued time off paid out?

Use a good time-off tracking software

Using a good time-off tracking software like Freshteam can save you a lot of headaches. It tracks time offs of all the employees, allows employees to apply for leaves, manages approvals, calculates and allocates PTO accruals to your employees automatically.

Why use Freshteam to manage your time off accrual policy?

 
Create multiple time-off policies

Creating a time-off policy is the first step in setting up your PTO accrual policy. Building a policy becomes less of a hassle with holidays, calendars, and workweeks of around 18 countries built-in.

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Define accrual type and frequency

Don’t bother about manually calculating the time off accruals anymore, as Freshteam allows you to define the type of accrual (fixed, tenure-based, and unlimited) and accrual frequency for each time off.

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Manage rollover policy

Define the rollover policy of unused accrued PTO once, and don’t look back at it ever again (unless you want to change the policy, of course!). Freshteam will take care of the rest for you.

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