PTO Accrual

According to the Bureau of Labor Statistics (BLS), 79% of full-time American workers have paid time off (PTO) to cover illness, injury-related absences, and vacations. Stats like these show just how much PTO has become an expected offering in the current landscape.

As an employer, offering a generous policy for PTO accrual can help you attract quality talent. However, you must understand how to calculate PTO accrual in a way that is beneficial to employees while also feasible for the organization.

With that in mind, let’s explore the question, “What are accruals?” We’ll also cover key differences between PTO accruals and other leave strategies so that you can decide which structure makes the most sense for your organization.

What Is Paid Time Off Accrual?

Paid time off accrual is the process of accumulating PTO hours and carrying over unused leave from one year to the next. What does accrual mean? It simply means that something accumulates or increases over time. In this case, what accrues is the employee’s PTO hours.

Under the PTO accrual model, your staff accumulates a certain number of hours or days of leave during each pay period. Typically, the use of these leave hours is regulated under your vacation or PTO policy.

The amount of leave your staff accrue each pay period will vary based on several factors:

• How long they’ve been with the company
• The length of each pay period
• The company’s leave policy

For instance, if your business uses the traditional biweekly pay structure, you could allow employees to accrue four PTO hours per pay period. However, if you want to provide the same annual accumulation opportunity but pay employees weekly, you would need to give them two hours per week.

Many businesses use a sliding scale for PTO hours to reward tenured employees. To implement a scale like this, you could increase PTO hour accumulations by two hours per month for each five-year block of service.

In this example, employees with less than five years of service would accrue eight hours per month, those with five to 10 years would accrue 10 hours per month, etc.

Offering PTO hour accruals is a vital part of your compensation strategy. You could also consider offering separate sick and vacation accruals to make your company more appealing to top talent. There are two schools of thought on this.

Those who favor offering a combined PTO bank for both sick days and vacation time believe that doing so discourages absenteeism and call-ins. While this may be true, forcing employees to sacrifice vacation opportunities to take time off for legitimate family obligations—like sick children, critical illnesses, or family deaths—can cause friction among your workforce.

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 1st.

For example, say Kyle works for a company that gives him 4 weeks of vacation at the start of every year. He can use all of that time at once or can space it out through the year. Beth works for a company that also offers 4 weeks of vacation time, but she earns 1 week of vacation every three months. By the end of the year, Beth will have earned the same amount of vacation as Kyle.

However, let’s say that Beth wants to take three weeks of vacation during the summer while her children are out of school. Under the accrual model, she wouldn't be able to do this unless her employer allowed her to roll over paid leave time from the previous year.

How Do You Calculate Annual Leave Accrual?

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

Many employers allow their staff to accrue 80-96 hours per year. An 80-hour accrual limit gives workers enough time to take two weeks of paid vacation per year. The 96-hour model makes calculations easier, as it allows you to divide out exactly eight hours per month.

Once you’ve decided how many hours to provide your team each year, it’s time to choose a calculation method.

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 would 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 would accrue 3.69 hours per check. If you pay them weekly, they would 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.

Should Your Employees Accrue PTO While on Leave?

There are several ways to approach this issue. Many employers allow their staff to accrue PTO hours while on paid vacation or sick leave. Others pause leave accrual when their staff are on vacation or out sick.

In most instances, you should allow your staff to accrue hours while taking the PTO time they’ve earned. Otherwise, they may feel as though you are penalizing them for taking their leave.

There are exceptions. For instance, if an employee is suspended without pay or on extended unpaid leave (i.e., FMLA), you may want to pause their PTO accrual.

Benefits of an Accruals Policy

An accruals policy provides employees with clear guidance regarding how they build their PTO banks and when they can use them.

An accruals policy also incentivizes team members to be more strategic with their time off. If an employee has a vacation coming up and barely has enough accrued hours to cover their time-off request, they will also be less prone to absenteeism, as they don’t want to compromise their plans.

If you offer a variable accrual system, it also provides a reward mechanism for long-term staff. For instance, you can allow senior staff members to roll over a larger bank of hours each year. You could also increase their accrual rate in increments. While these changes may seem small, they go a long way in nurturing employee loyalty.

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.