How to Help Employees Understand PTO Accrual and Battle Burnout

A strong paid time off (PTO) policy is the cornerstone of any well-balanced benefits plan—and a perk most workers prioritize. One policy in particular, PTO accrual, stands out as a formula employers can shape into a personalized plan that employees truly appreciate. In fact, 26% would take a pay cut for more PTO.

PTO accrual policies vary by company and industry. While “use it or lose it” plans encourage people to take time away from work, others give employees the option to carry time off into the next year or even convert PTO into cash to cover expenses.

Since almost a quarter (23%) of US workers don’t use their time off, offering a PTO payout can help people maximize the benefit in their own way. They can use the extra cash to pay off a loan, cover unexpected repairs, and enhance their nest egg for retirement. In this guide, we’ll talk through different annual leave accrual policies and discuss ways you can calculate PTO accrual yourself.

What is PTO accrual?

PTO accrual, or earned PTO, is a type of paid leave policy where time off gradually increases relative to how much the employee works or how long they’ve been with the company. Whether it’s separate sickness, vacation, and personal days or a more generalized leave accrual policy, this system relies on diligent recordkeeping to run smoothly. Common PTO rates include:

• Hourly PTO accrual: Employees earn time off based on the number of hours they work.
• Periodic PTO accrual: Time off accumulates during a set period (e.g., on a daily, weekly, bi-weekly, monthly, or quarterly basis).
• Annual PTO accrual: At the start of each calendar year or on their anniversary date, employees receive time off all at once, which increases based on tenure.

Unlimited PTO vs. PTO accrual

Unlimited PTO takes the hassle out of calculating annual leave accruals, allowing employees to take as much or as little time off as they need. Whether PTO requests get approved is still up to managers’ discretion, but there’s no PTO balance to track or risk of the balance going negative. It’s a generous policy that can simplify a lot of processes, but its success in improving the employee experience will depend on company culture and attitude towards time off.

In other words, good internal communication is key to maximizing the benefit of unlimited PTO. There are no guarantees that employees will take enough time off to maintain a healthy work-life balance despite it being unlimited, but it’s worth researching further to figure out if it’s a good fit for your organization.

Flexible PTO vs. traditional PTO

Traditional PTO policies organize time off into categories (e.g., 5 sick days and 10 vacation days). Flexible PTO, or banked PTO, eliminates these labels, allowing employees to use their allotted time off at their discretion.

Why should employers keep leave accrual up to date?

Since employees can request time off at any moment, it’s important to stay up to date on their leave accrual rates. That way, when a time-off request comes in, your team can immediately determine how much time/hours an employee has available and whether you can accommodate their request.

It gets time-consuming to manually keep track of every employee’s accumulated sick days, paid time off (PTO), and time-off requests. It also leaves a lot of room for human error. Building a leave accrual processing system into your human resource information system (HRIS) can help alleviate these challenges for your team.

What is the difference between accrued leave and annual leave?

Annual leave is a popular alternative to the accrual model. Under the annual leave PTO model, employees are given access to all their leave hours in a lump sum on a predetermined date, usually January 1.

How to calculate PTO accrual

The first step to establishing or revamping your PTO accrual policy is deciding how many hours you want your employees to accrue annually.

Yearly

The yearly PTO accrual model is essentially the same as offering a fixed amount of annual leave. You can give employees access to their leave hours on the first of the year or on their anniversary date. The yearly approach is very rigid, which is why it isn’t commonly used.

For instance, let’s say that you give out PTO hours on the first of the year but generally don’t allow employees to take vacation until after their one-year anniversary. If you hire a new team member in June, do you give them their PTO hours six months early or wait until the following June?

If you give them their PTO hours early, it will contradict your policy. If you make them wait until June, it can create complications in HR.

Monthly

The monthly approach makes calculating PTO hours very simple, especially if you offer 96 hours of paid time off per year. To determine how many hours to allocate per month, simply divide the total by 12. For instance, if you offer 96 hours annually and divide them by 12, your employees would accrue eight hours per month. Simple, right?

Weekly/biweekly

Under the weekly or biweekly approach, employees accumulate hours at each pay period. Naturally, you should choose the accrual method that aligns with your pay structure (i.e., weekly or every two weeks).

Again, let’s assume you are awarding 96 hours per year. In this instance, divide 96 by either 26 or 52 pay periods. If you pay your team biweekly, then they will accrue 3.69 hours per check. If you pay them weekly, they will accrue 1.84 hours per check.

Daily

There are approximately 260 weekdays per year (give or take a few for holidays and leap years). If your business is only open Monday through Friday and closed on most major holidays, you can divide the total annual leave hours you offer by 260 to calculate daily accruals.

The daily method can be pretty complex and is often unnecessary for calculating leave among full-time employees. That’s because all full-time staff will work Monday through Friday virtually every week unless it’s a holiday or they are cashing in some of that PTO time they’ve accrued.

However, you can use the daily method for part-time employees, provided they work eight-hour shifts. If they work shorter shifts, you might just want to average their monthly hours and assign PTO based on these figures.

For instance, if a part-time employee works irregular shifts and averages about 80 hours per month, you could assign them half the PTO hours your full-time staff accrues.

Hourly

Let's say that you want to give an employee 96 hours of paid leave in a year and would prefer to calculate their PTO accrual on an hourly basis.

There are approximately 2,080 working hours in a year (260 days x 8 hours per day). Therefore, you would divide 96 by 2,080 to estimate how many PTO hours someone accrues per hour worked. That equals 0.046 hours.

Admittedly, the hourly accrual method is complex. However, it is a great option for part-time employees who work variable hours. With this approach, you don’t have to average their hours over an entire month. Instead, you can assign them an accurate amount of PTO based on their actual hours worked.

PTO leave accrual example

A full-time employee who works 40 hours per week gets 15 vacation days that reset on January 1st each year. Since their company is open 2,000 hours per year, the formula for this employee’s accrual rate is:

120 hours of PTO / 2,000 working hours per year = 0.06

This means they earn 0.06 hours of PTO for each hour spent on the job. Breaking this down a little further, this translates to:

1. Daily PTO accrual: 0.48 hours of PTO each day
2. Weekly PTO accrual: 2.4 hours of PTO each week
3. Biweekly PTO accrual: 4.8 hours of PTO every two weeks
4. Monthly PTO accrual: 9.6 hours of PTO each month

This breakdown is helpful when crafting a PTO policy. Employers use it to illustrate how vacation time correlates to time spent on the job for hourly employees and how much time off salaried employees earn per pay period.

PTO payout example

In this example a company is required to pay their employees for unused PTO as taxable wages. If the employee earns $35 per hour and has 40 hours of unused PTO by the time they retire, here’s how to calculate the payout:

$35 per hour wage x 40 hours of unused vacation time = $1,400 gross wages

Using this number, his accounting department can deduct the appropriate taxes and pay your employee before they ride off into the sunset.

Tips for setting accrued PTO guidelines

As an employer, you have a significant amount of freedom to craft a thoughtful PTO accrual plan that works for your organization and employees. Here are some guidelines to help shape your policy and make managing accrued time off easier:

• Accrual waiting period: At some businesses, new hires must wait a couple of weeks or more to be eligible for PTO. Other businesses allow them to start earning from day 1.
• PTO balance cap: Some companies set a maximum amount of PTO an employee can earn in a given year, while others let them carry over as much as they wish.
• PTO forfeiture: Businesses in certain states can implement a “use it or lose it” PTO policy as an incentive for people to take time away from work.
• PTO rollover: This rule allows earned PTO to carry over into the next accrual period.
• Tenure milestones: PTO can serve as a reward for company loyalty, gradually increasing the longer people stay.
• PTO cashout: Employees can get paid for unused PTO at the end of each year and/or when they leave the company.

Once your policy is finalized, make sure everyone knows where to find it. Most companies add this to their employee handbook with examples to clearly convey the rules and how special regulations apply.

Also, don’t forget to embed PTO positivity into your company culture. Proactively reducing the guilt commonly associated with taking time away from work fosters a happier, healthier workplace where employees feel comfortable taking advantage of your new policy.

PTO accrual FAQs

Still looking for clarity on annual leave accrual? Here are some FAQs covering some of the most popular topics.

Are there any PTO laws and regulations?

To date, the Fair Labor Standards Act (FLSA) doesn’t require private businesses to pay an employee for the amount of time they don’t work. However, state laws vary. Some states regulate “use it or lose it” PTO policies, while others prohibit them because the law views paid leave as earned wages. Additionally, some states require businesses to pay out accrued vacation time at the employee’s current pay rate (not their starting rate).

Be sure to check in with your state’s labor laws to make sure your organization’s PTO policy complies.

What is a "good" PTO accrual rate?

A good PTO accrual rate allows employees to accumulate paid leave in a timely manner, ideally so there’s always time available when they’re in need of a break. If you’re in the beginning stages of this process, investigate what other businesses offer in your industry and figure out what you can reasonably provide without disrupting organizational flow.

A good PTO policy helps boost employee satisfaction, enhance work-life balance, and combat burnout. It can also be used as a recruiting tool that helps your company appeal to potential job candidates.

What happens to accruals when an employee leaves the company or is terminated?

As an employer, you are legally obligated to compensate any employee who has accumulated leave during employment. Accrued PTO is considered part of an employee’s wage. Upon termination or voluntary separation, you must pay out unused hours at the same rate as the employee would have received had they used the leave time.

How does an HRIS process leave accrual?

An HRIS automates the leave accrual calculation process. This saves your HR team time and provides peace of mind, ensuring your employees’ time-off calculations are accurate.

Better yet, with an HRIS, your employees can receive access to their time-off accruals. This can help minimize conflicts between HR and staff. Moreover, by understanding exactly how much leave accrual they have at any given time, your employees can be more mindful of their time-off use.