Becoming familiar with how paid time off (PTO) accrual works makes good business sense for any company that offers it. Studies show that it is one of the most coveted employee benefits, and for good reason. According to The International Labour Organization, a UN agency, more than a third of workers worldwide struggle to achieve work-life balance. To plan ahead as employees earn their days off, they’ll want to know what they’ve earned and what’s available. That’s why it’s important for employers to understand the basics of PTO accrual and how the calculations work.
This step-by-step guide will cover how to calculate earned PTO hours, compare different types of policies, and have a system in place for tracking it all.
How PTO accrual works
What is PTO?
PTO is a benefit employers offer employees. It allows employees to take time off for vacation or personal reasons while still receiving their paycheck. Employees can typically use it for whatever they like. Some use the time away to rest and recharge their batteries. Data even suggests that taking time off can significantly boost mental well-being and even lower stress levels. Others use it to spend time with family and friends, or even to run personal errands.
What is a PTO accrual?
Simply put, a PTO accrual is how employees earn paid time off as they work. It is typically accrued gradually over a set time period, such as the number of hours or weeks worked.
- Accrual rate: This is the rate at which an employee earns PTO per accrual period
- Accrual period: This is the time frame during which an employee earns PTO
- Hours worked: This is the number of hours an employee works during an accrual period
For example, an employee with an accrual rate of 0.05 per accrual period of an hour would need 20 hours on the job to earn one hour of PTO. The average PTO accrual rate per hour ranges between 0.03 to 0.06 hours. This means that a full-time worker who works 40 hours every week would earn around 1.25 to 2.5 days of PTO every month.
PTO can fall under different categories. The most common are:
- Vacation: These are planned days off work to relax, travel, or have fun
- Sick time: These are days an employee uses when sick, injured, or needs to go to a doctor’s appointment
- Personal days: These are used for unexpected events, like being stuck in a snowstorm or dealing with a family issue
- Parental leave: These allow new parents to care for a child
- Jury duty: These are for employees summoned for jury duty
- Bereavement: These provide employees with time off to attend funeral services or grieve
The number of PTO days employees can earn is usually based on their length of service with a company. According to the U.S. Bureau of Labor Statistics, the average number of paid vacation days for employees working for one year is 10 to 14 days. The number of days increases from 15 to 19 for those who have worked more than 10 years.
Understanding how PTO accumulates is just the first step — now let’s explore how these numbers are calculated and applied.
The most common accrual period that employers use when calculating PTO is hourly. An hourly rate makes it easier to calculate for full-time, part-time, and hourly employees. Here is how PTO works when calculated by hour:
- PTO Accrual Rate x Hours Worked = Accrued PTO
For example, if the accrual rate is 0.05 hours per hour worked, an employee who has worked 40 hours earns 2 hours of PTO. That would be:
- 0.05 PTO Accrual Rate x 40 Hours Worked = 2 Hours Accrued PTO
If you need to calculate your PTO accrual rate, here is the equation:
- PTO Hours / Total Annual Hours Worked = PTO Accrual Rate
For example, if you receive 80 hours of PTO for every 2,080 hours you work, the accrual rate is 0.038. That would be:
- 80 / 2,080 = 0.038 Hourly Accrual Rate
Some companies also calculate periodic or annual PTO accrual. Periodic accrual refers to employees accumulating PTO during set periods, such as weekly or monthly. For example, an employee might earn 6.67 hours of PTO every month. After six months, the employee has 40 hours of PTO, equivalent to one week.
When a company uses annual accrual calculations, employees can also receive their entire PTO allotment at the start of the year. For example, in this case an employee could receive 80 hours of PTO on January 1. Every hour of PTO an employee takes is subtracted from this lump sum amount.
Types of PTO policies
Employers have different PTO policies, with the most common including:
- Lump-sum PTO policy: Employees receive their entire allotment of PTO at the beginning of the calendar or fiscal year. Employees do not have to wait for PTO to accrue
- Unlimited PTO policy: Employees can take as much time off as they need to as long as they complete their work and get approval from their manager
- Accrual-based PTO policy: This is the most common way employees earn PTO. It is typically based on the hours an employee works or a pay period
PTO caps and PTO rollover
Many companies cap the amount of employee PTO in a year. For example, an employer may set a maximum of 120 PTO hours earned. Some organizations allow employees to roll over unused PTO to the following year, often with limits. So, if you took only some of your PTO this year, the remaining balance will be rolled over to next year.
However, a company may have restrictions on PTO carryover limits. Different states have different policies. For example, employers in California can set PTO caps as long as they are reasonable. Employers should consider consulting an employment law attorney so that they don’t violate state laws and regulations.
What happens when accrued PTO goes unused?
Both workers and employers need to know precisely how PTO accrues. Business owners and managers should know how to do it to avoid labor law violations. Employees should know how to calculate their PTO to ensure they take advantage of every hour they earn.
Many companies have a rule that employees lose their PTO if they don’t use it within a set time. However, there are different PTO payout laws in various US states. Some states, like California, prohibit “use-it-or-lose-it” PTO policies. All unused PTO must be paid out when an employee’s employment ends.
Accrued PTO is a liability for employers that can negatively impact their finances. Employers must pay for employees’ unused PTO when they leave or are let go. This can greatly affect a company’s cash flow and budget, especially if many employees have a lot of unused PTO. To reduce these risks, employers can limit PTO accrual and regularly ask employees to use their PTO.
Understanding PTO accrual is key to creating time-off policies
Tracking PTO accrual can be a helpful reminder to employees that their work directly contributes to earning well-deserved time off. Rather than keeping the calculations mysterious, both employees and employers should understand how these hours add up. To reduce back-and-forth email messages and boost worker confidence, many employers invest in HR software that automatically tracks PTO (and allows workers to request days off day or night). This helps everyone stay on the same page, eliminates the need for manual calculations, and provides employees peace of mind that their time is properly tracked.
