Ever wondered how PTO accrual works? In this article, we’ll take a deep dive into the world of PTO accruals and show you exactly what you need to know about it.
The term PTO stands for paid time off (or personal time off). However, Australia, the UK, and some European countries also call it annual leave. In simpler words, it is a type of leave during which you spend away from work while still getting paid. PTO is mostly used for vacation days, sick leave, and personal time purposes. However, it is also applicable for other kinds of absences like bereavement, parental leave, or even community service.
PTO accrual is the accumulation or gradual increase of your paid time off hours during the year. Accrued PTO is the type of leave employees earn over time, based on the number of days or hours they’ve worked. In other words, you build it up, little by little, so you can use it when you build enough for desired time off. Employees can use that time for vacation days, sick leaves, or personal time.
Think of it as a benefit that’s like money in the bank. As a result, PTO is earned, saved, and spent as if it were cash in a bank account. After all, time is money, isn’t it?
Establishing a PTO policy is a necessity in order to be transparent about paid time off. Companies devise it as a way to facilitate paid time off for their employees. You should choose a PTO policy based on what works best for your business. There is no universal truth in regard to what businesses may offer in their policies. Every company has a different approach to how PTO is accrued and distributed.
What are the different types of Paid Time Off Policies?
These are the most common types of policies of PTO:
- Allotment (or Lump Sum)
- PTO Accruals
- Unlimited PTO
Annual Allotment (or Lump Sum)
This is the most simple PTO system where employees receive a set amount of hours or days per year. The days are given all at once, usually at the beginning of the year. Employees can then draw on those hours and use them throughout the year or all in one go.
Here’s an example:
- At the beginning of the year (on January 1st) Dwight Schrute receives 12 days of PTO (96 hours). Dwight has the whole year to use these 96 hours as he wishes.
- In April, Dwight asks for (and is granted) 5 days (or 40 hours) off.
- You simply subtract the hours he used from the total sum (12 days PTO – 5 days off = 7 days PTO). After that day, Dwight would have 7 days of PTO (56 hours) left to use.
This method makes calculating PTO quite easy. In the past, most companies used an allotment-based leave program. Due to its complexity, many organizations abandoned this program in favor of accrual-based time off policies (which are more precise and accurate).
Accruals
In this method, rather than receiving PTO all at once, employees earn or accumulate a certain amount of PTO hours over a period of time. This could be each week or month but is usually related to the pay period. Because it becomes available periodically, workers are encouraged to use their PTO in smaller parts rather than using it all at once.
Here’s an example:
- Jim Halpert receives 8 hours (1 day) of PTO each month.
- By September, Jim would have 8 months of accrued periods which equals 8 days. Jim asks for (and is granted) 6 days off.
- You would then subtract the hours he used from the total sum accrued (8 days of PTO – 6 days off = 2 days of PTO). After that day, Jim would have 2 days of PTO and would continue to accrue some more each month.
We will continue to dive deeper into an accrual-based PTO policy right after we quickly go through unlimited PTO.
Unlimited PTO
With an unlimited PTO policy, employees have no limit in deciding when to take PTO and how to use it if the time was granted by a manager. This allows them the freedom to come and go as they need, as long as the tasks are accomplished. This PTO system is relatively new and has become more popular in recent years. Netflix, Oracle, General Electric, Sony, and LinkedIn are some of the elite companies opting for this approach to PTO. The primary goal here is to offer employees flexibility, leading them to have a better work/life balance so that employees are able to give their best.
Even if you have unlimited PTO, having a reliable leave tracking system in place is crucial because of payroll. It’s important to make sure that the employees either used a minimum of days for the year and/or to keep track of days used in case someone leaves the company before the end of the year.
An accrual-based PTO policy is one where an employee receives a designated amount of time off after the passage of a certain amount of time. This could mean calculating it hourly, daily, weekly, or monthly, etc.
This is also the most common policy type.
The most common way to accrue PTO hours is per pay period.
Accruals are important because they link your HR and Payroll department (Accounting). Payroll is in charge of tracking and calculating employees’ PTO, so integrating accruals with payroll works well. A pay stub usually shows how much PTO an employee has accrued. Hence, accruals and payroll have a strong connection, and their link is very important.
Calculating PTO accruals can be a confusing and tedious task, that’s why we recommend using reliable software like Vacation Tracker, which calculates PTO accruals automatically.
However, in case you still want to calculate time offs manually (or are simply wondering what’s under the hood), here are some guidelines you can refer to.
Also, check our free PTO Accruals calculator which can assist you in calculating the amount of time off earned during a specific time frame or by a particular date, eliminating the need for manual calculations.
How you calculate accrued PTO depends on a few factors but the most important are accrual amount, PTO time frames, and accrual frequency. We’ll go through each of these in detail.
The three most common time frame options for tracking PTO are:
– The Calendar Year (from the 1st of January)
– The Company’s Fiscal Year
– An employee’s Hire Date or Work Anniversary
Accrual Amount
When calculating PTO accruals, first you need to determine the number of total hours your employees can accumulate during the year. Then, divide it by your accrual frequency to get the number of hours accrued.
Accrual frequencies or accrual rates are how frequently employees can earn their PTO. When employees know an accrual rate, they can plan ahead of how much PTO they will earn in a year.
The most common way to accrue PTO hours is each pay period. But, besides that, there are some other options. As you will see, different options of accrual frequencies are similar to pay frequency periods. Payroll and PTO are closely connected, so it would not make sense to calculate accruals at a radically different frequency than your company’s payroll.
These are the most common frequencies to calculate PTO accruals:
– Hourly
– Daily
– Weekly
– Biweekly
– Semimonthly
– Monthly
Hourly
This method is the most complicated but is also the most precise. Here, employees accrue PTO by the number of hours worked. It’s mostly used for part-time employees.
Here’s an example:
- First, let’s say that Pam Beesly accrues 80 hours of PTO (10 days) for the whole year.
- Pam works a full-time schedule of 40 hours per week, and she works 52 weeks per year. To find the total full-time hours worked per year:
40 hours worked per week x 52 weeks = 2,080 total yearly hours
- Then, we subtract 80 PTO hours for the year and 6 paid holidays (48 hours):
2,080 yearly hours – 80 PTO hours – 48 holiday hours = 1,952 work hours
- Next, take 80 (the number of hours Pam can earn in PTO) and divide by 1,952 (working hours in the year).
80 Hours of PTO / 1,952 work hours = 0.04 PTO hours accrued per work hour.
So, for every hour Pam works, she will receive 0.04 hours of PTO.
Daily
Daily PTO accrual is a method for employees who are on the clock for regular 8-hour shifts. They accrue time off by the number of days worked. Daily and all other types of Accrual are mostly used for full-time employees.
Here’s an example:
- First, let’s say that Michael Scott accrues 80 hours of PTO (10 days) for the whole year.
- Depending on how weekends fall and leap year, there are a total of 260 to 262 workdays in the calendar year (260 workdays in 2022).
- Then, we subtract 10 days of PTO for the year and 6 days of paid holidays:
260 total workdays – 10 PTO days – 6 days of paid holidays = 244 workdays
- Next, take 80 (the number of hours Michael can earn in PTO) and divide it by 244 (working days in the year).
80 Hours of PTO / 244 work days = 0.33 PTO hours accrued per workday.
So, for every day Michael works, he will receive 0.33 hours of PTO.
Weekly
This option means that employees will accrue PTO once a week. Weekly PTO accrual is for employees who work a standard five-day, 40-hour workweek. Of course, the same method can be applied even if you have a customized workweek.
Here’s an example:
- First, let’s say that Kevin Malone accrues 80 hours of PTO (10 days) for the whole year.
- There are a total of 52 workweeks in the calendar year.
- Then, we subtract 10 days of PTO for the year and 6 days of paid holidays:
52 total weeks – 10 PTO days (2 weeks) – 6 days of paid holidays (approx. 1 week) = 49 workweeks
- Next, take 80 (the number of hours Kevin can earn in PTO) and divide by 49 (workweeks in the year).
80 Hours of PTO / 49 workweeks = 1.63 PTO hours accrued per workweek.
So, for every week Kevin works, he will receive 1.63 hours of PTO.
Biweekly
A biweekly PTO accrual occurs every two weeks. Many businesses pay their employees every two weeks, so basing your PTO accrual on that period makes great sense.
The hourly accrual rate is the best to use for accuracy, but many businesses prefer to use a simpler calculation based on the fact that biweekly pay results in 26 payroll cycles per year.
Here’s an example:
- First, let’s say that Angela Martin accrues 80 hours of PTO (10 days) for the whole year.
- There are a total of 26 bi-weekly periods per year (26 payroll cycles).
- Then, take 80 (the number of hours Angela can earn in PTO) and divide by 26 (bi-weekly periods).
80 Hours of PTO / 26 bi-weekly periods = 3.07 PTO hours accrued per bi-weekly period.
So, for every two weeks Angela works, she will receive 3.07 hours of PTO.
Semimonthly
A semimonthly PTO accrual occurs twice a month, typically on the 15th and last day of the month. Naturally, this kind of accrual is connected with semimonthly pay. Semimonthly payroll cycles happen two times a month meaning that employees will have 24 pay periods a year (24 paychecks).
Here’s an example:
- First, let’s say that Stanley Hudson accrues 80 hours of PTO (10 days) for the whole year.
- There are a total of 24 semimonthly periods per year (24 pay periods).
- Then, take 80 (the number of hours Stanley can earn in PTO) and divide by 24 (semimonthly periods).
80 Hours of PTO / 24 semimonthly periods = 3.33 PTO hours accrued per semimonthly period.
So, Stanley will receive 3.33 hours of PTO, twice a month.
Monthly
A monthly PTO accrual occurs once a month, which is typically on the last day of the month. Naturally, this kind of accrual is connected with monthly payments. Monthly payroll cycles happen once a month meaning that employees will have 12 pay periods a year (12 paychecks).
In the US, a monthly payroll cycle isn’t allowed in all states.
Here’s an example:
- First, let’s say that Creed Bratton accrues 80 hours of PTO (10 days) for the whole year.
- There are a total of 12 monthly periods per year (12 pay periods).
- Then, take 80 (the number of hours Creed can earn in PTO) and divide by 12 (monthly periods).
80 Hours of PTO / 12 monthly periods = 6.67 PTO hours accrued per monthly period.
So, once a month Creed will receive 6.67 hours of PTO.
Probationary Period
Most companies allow new employees to start accruing PTO after a probationary period, typically three months in length.
Accrual Rollover (or Carry-Over)
Usually, your employees will not use all their accrued PTO within a given year. So, you’ll have to decide whether your employees can carry forward a certain amount of their unused PTO to the next year. Most companies will allow employees to roll over some amount of their unused earned leave time. Other employers may let only a portion of the remaining PTO rollover.
For example, with accrual rollover allowed this would be the case:
Toby accrues 15 days of PTO a year but he has only used 10 this year, his leftover of 5 days would roll over into the next year. Then, on top of his 5 days of PTO from the last year, he would start accruing new PTO on January 1.
Part-Time Employees vs. Full-Time Employees
Most employers will offer different amounts of PTO for full-time vs. part-time workers. Usually, companies provide more paid time off to full-timers than to part-timers. For this purpose, it makes sense to create different accrual amounts and frequencies for part-time employees (for example, making their accrual rate per hour worked).
Different Amounts Of PTO For Different Groups Of Employees
Your PTO policy should not treat all employees with a one-size-fits-all principle, but rather on the basis of merit. This means that some employees will accrue more PTO each year than other employees, based on the employee’s tenure (length of service) and accomplishments.
It makes sense to set up a system that allows employees with longer time at the company to earn more PTO each year in order to encourage your senior employees to stay longer in your company. Paid time off is a great way to reward service and loyalty by increasing the number of PTO hours an employee can accrue in a year.
For example:
– an employee who has worked less than three years can accrue 10 days of PTO each year
– an employee who has worked more than five years can accrue 15 days of PTO each year
An employee’s PTO accrual might also depend on the job title. More PTO is commonly reserved for upper-level management, while junior positions receive less.
Negative Balance
A negative PTO balance occurs when an employee has taken time off before they have accrued it. In the US, there are no federal or state laws concerning this matter, so it’s up to the employer to decide whether to allow negative PTO or not.
For example, say that your company allows ten days of PTO a year, and Stanley Hudson wants to use it all in March. This would result in a negative PTO balance. So basically, the employer is advancing or loaning Stanley PTO with the expectation those days will be paid back. This topic should be well documented in your PTO policy, as well as in your employee handbook.
But sometimes, you can let the small amount of paid time off go to a negative balance as a gesture of goodwill. Let’s say that Meredith Palmer has earned 38 hours of PTO, and wants to take a full week off (40 hours). You can be helpful and credit her these extra 2 hours even without a policy if Meredith is a good worker.
When Employees Don’t Accrue PTO
There are certain situations where employees may wonder why they didn’t accrue PTO time. Such cases include when an employee takes off unpaid leave, reduces to a part-time schedule, or is out for an extended period (such as for parental leave). This also includes working overtime or being on-call. Usually, in none of these situations, employees don’t accrue PTO time, as accruals are only for regular time worked.
Can Employees Cash Out Their Unused PTO Days?
Another consideration in your policy is what happens if someone finishes their employment and has unused accrued PTO. It’s always worth checking labor laws in your country before you make decisions about your PTO and decide on a policy for your team. In the US, some states require that any unused PTO must be paid out upon termination. In most cases, it’s not a requirement to pay out accrued time off when an employee leaves. So, review your state’s labor laws for updates on PTO requirements. But, if a company contract or policy promises to pay out PTO, the employer must accept it.
Here’s an example:
Oscar Martinez earns $50000 and has 40 hours of unused accrued PTO, and wants to cash it out. The calculation would be simple.
- For every hour of work performed Oscar makes:
$50000 / 2080 hours = $24.04 per hour
- Then, multiply Oscar’s hourly rate of $24.04 by his accrued PTO time:
$24.04 * 40 = $961.6
Oscar’s accrued PTO payout would be $961.6.
How to Simplify Tracking PTO Accruals
The best way to simplify the PTO tracking process is to use PTO tracking software. There are many different types of software available, so find one that fits your needs. With PTO tracking software, you can easily keep track of all your employees’ PTO accruals and usage. This will help ensure that everyone is taking their PTO in a timely manner and that you are not left short-staffed. Sign up for a demo with Vacation Tracker today to see how our software can help you manage your PTO tracking process.
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Uros Vucendic
After many years of working as a programmer, Uros has finally returned to his true passion, which would be writing, as a content writer in Vacation Tracker. Human words surely bring more beauty and poetry than codes do, so one could say that today, at last, he is content as a writer. A content writer.
