How to calculate PTO and vacation accrual?

If you are not math savvy, calculating paid time off is not an easy task to deal with. Things are getting a bit more complicated when most of your employees are off for summer or winter vacation and new employees are having short term contracts.

Going for the yearly accrual rate is most commonly the option, however, some companies would like to have different accrual rates for vacation such as hourly pay. We will go through such cases and present the ways on how to calculate vacation accrual. 

  1. Best practices on vacation accruals
  2. Yearly accrual rates
  3. Monthly accrual
  4. Bi-monthly vacation accrual
  5. Every two weeks vacation accrual
  6. Daily vacation accrual
  7. Hourly vacation accrual
  8. Calculating the hourly rate of vacation time

Best practices on vacation accruals

You must track not only the vacation days but also the sick days. Other types of leaves can exist however these should not affect these balances. 

Have a balance cap. Employees should be encouraged to spend their PTO. Such policies encourage reluctant staff to spend their time off and should comply with the legislation.

Time off in lieu and overwork bonus. We have encountered companies that provide extra hours or days to the PTO balance of long-hour workers. 

The allowances should be different according to the contract types and the role (ie: between managers and staff, or between full-time personnel and part-time workers).

Determine the maximum carryover. In case an employee did not use his days off within 12 month period, will they be able to carry forward anything for the next year? Some organizations have forfeited approach - use it or lose it - if they don’t use it by a specific date it will be lost.

Agree on how much PTO your employees can earn

The PTO calculation requires you to agree on the number of hours a full-time employee can accrue yearly. The US government doesn’t require employers to offer paid vacation, however, employees benefit on average of 11 paid vacation days (88 hours).

Agree on the accrual type
The next step would be to decide on what type of accrual rates your employees will choose:

  • by hours worked
  • daily
  • weekly
  • bi-weekly
  • monthly
  • yearly

Note: Take in consideration if there will be a waiting period before the vacation accrual starts for newcomers. Reflect on the fact that new employees. Will they become eligible after the first 90 days of employment or after 12 months of continuous service?

Yearly accrual rates

If you go for the yearly approach, it is the easiest to calculate. Ie: for 12 months each full-time employee has 11 paid vacation days. This is also the best option if in your company you have full-time employees, that have passed the tenure year. The math is easy: when they take time off, you deduce from the total PTO the number of days off.

Additionally, to benefit of the entire 11 days you will have to work for one year. This is why employees would not like to wait so much, so other accrual types come handier.

The situation gets difficult when you are dealing with temporary workers. Shorter accrual rates are a better fit for such situations.

Important: For employees that are not hired on the first day of the year, their vacation must be prorated. This means that the employee will not benefit for the full amount of vacation days, for one year but for the rest of the year. 

Two examples
A. for a new full-time employee hired on 1 July 2019, hired in a company offering 11 paid vacation days yearly, the calculation will be the following. 2019 has 250 working days (and 115 weekends) within the 12 months. From 1 January to 1 July there are 84 working days. 250 working days - 84 working days = 166.
Divide the number of days worked by the total number of days in the period:
166/365 = 0.454
Multiply this quotient by the number of days off granted per year. 
0.454 x 11 days = 4.9 days.
The employee shall be offered 4.9 days of PTO in 2019.

B. for a part-time employee working 10 hours per week the steps to calculate the vacation days would be the following:

  • Divide the number of hours worked by the number of hours  of a full-time employee weekly:
    10/40 = ¼ = 0.25

Multiply the result by the amount of PTO hours provided to full-time employees per year:
0.25 × 88 hours = 22 hours. 

The employee will benefit from 22 hours of time off per year.

If the employee had been hired on 1 July, the prorated value would be calculated as follows:

  • Start by dividing the number of hours eligible per year (22) by the number of weeks (52) 22/52 = 0.423
  • Calculate the number of weeks between two dates: between 1 July 2019 and 1 January 2020 -  there are 26 weeks and 2 days.
  • Multiply the number of hours the employee should receive every week by the number of weeks until the end of the year.
    0.423 × 26.2 = 11.08

The result is 11.08 hours to be offered to a part-time employee. 

Monthly accrual

If you go for the monthly accrual within your company. This is a great option, easy to calculate and appreciated by employees.

The monthly PTO Calculation would be as following: the number of total PTO hours per year / 12 months.
Let’s check one concrete example: Josh has 80 hours of PTO yearly. 
80/12 = 6.66 hours per month.

Bi-Monthly Vacation Accrual

This type is again easy to handle and employees will have the same amount of accrual at each payday. The calculation of the number of hours that employees can accrue for their holidays, in this case, is the following:
80 accrued PTO hours/24=3.33 hours earned twice every month

Every Two Weeks Vacation Accrual

To calculate the two-week accrual is a bit more different from the bi-monthly one because you will have to divide the yearly number of PTO hours by 26, not 24. Where did we get 26 from? This is the simple math result of this equation: 52 weeks in a year / every 2 weeks.
80 accrued PTO Hours/26 = 3.07 hours earned every two weeks

Daily Vacation Accrual

This is another good accrual type. The daily PTO accrual works well with full-time employees. When it comes to people dealing with shifts this is not a good option. Moreover, part-time employees must work full time for a good calculation. In companies with high-turnover, this type of accrual is often the norm.

Let’s see the formula for the daily PTO accrual type for a full-time employee working 40 hours a week: 80 Accrued Hours/ (5 working days x 52 weeks) = .307

The result (quotient) needs to be multiplied by the number of days worked. 0.307 x 22 days worked = 6.75 hours earned for 22 days (the number of working days in July). 

Hourly Vacation Accrual

The calculation of paid time off, in this case, is the following: divide the yearly accrued vacation hours by the total number of hours worked in a year. For 2019, we are speaking about 2000 hours. This type of PTO rate is good for employees that are working variable schedules. 
80 accrued hours /2000 = 0.04 hours earned per hour worked.

Calculating the Hourly Rate of Vacation Time

1. Identify the hourly pay based on your salary
For a full-time employee that works 40 hours a week (5 days per week x 8 hours ) for a full year - 52 weeks and has a salary of $52,000, it will earn per week $1,000 and $25 hourly.  The formula would be the following: 
Formula = [$52, 000 / 52 weeks per year ] / 40 = $1,000 /40 = $25
2. Identify how many hours of vacation you tool
If you took 3.5 days of vacation, the calculation would be: 3.5 x 8 hours per day = 28 hours of vacation

3. Identify how much you need to pay
The hourly work pay is equal to your vacation pay. In this case 28 hours of vacation x $25 per hour = $700 before taxes.