How Do You Know When to Prorate Employee Vacation?

Most employees—if not all—look forward to their vacation days. And while the federal government doesn't require you to offer employees paid time off (PTO), you'll probably need to provide some amount of vacation to compete with other employers for qualified workers. 

Typically, employers assign vacation time at the beginning of the year. But what happens when you hire an employee after January 1st? Will they have to wait for the following year to enjoy their leave days? Or do you grant them their annual vacation time immediately?

The good news is that you can prorate their paid time off during their first year.

But what, exactly, is prorated vacation, and how do you calculate it? We'll cover all that and more, so let's dive in!

What Is Prorated Vacation?

Prorated vacation is the number of leave days a new employee gets for the rest of the year, based on when they join the company.  

In other words, instead of giving mid-year hires the total number of leave days for the year—or not giving them any PTO—you give them an appropriate number of days off based on when they were hired.

What Is Pro Rata PTO?

Pro rata PTO simply means that when an employee starts working mid-year, their prorated leave days are calculated based on the number of hours or time worked.

What Is Prorated Holiday Pay?

Similar to pro rata PTO, prorated holiday pay is the amount of holiday an employee gets based on how much they work. For instance, if the employee works half as much, they're entitled to half as much holiday.

Why Prorate Vacation for Employees?

As we've said before, prorating vacation is a good way to maintain fairness in the workplace, which helps enhance employee wellness and morale.

If someone joins your company in August or November, they should only get a salary for the pay periods they've worked, right?

It's the same for paid leave days. If someone joins you in November, they shouldn't get 10 days of vacation in two months.

You also need to prorate an employee's vacation days because some states, like California, consider earned vacation time—employees accruing their vacation time as they work—as wages.

That's important because when an employee leaves your company during the year, you'll be required to pay out their unused vacation time immediately. And if you don't do so, the employee can file a lawsuit.

However, that doesn't mean the payout law holds water everywhere. In some states, employers get to decide how to handle paid time off and what happens when an employee leaves. If you've set PTO terms in your employee handbook or employment contract, you must follow them. Otherwise, you risk facing a lawsuit for breach of contract. 

Now, let's look at the common accrual rates companies use to prorate employees' paid time off.

What Are the Common Accrual Rates Used to Prorate Vacation Days?

A PTO accrual rate is how quickly employees earn paid vacation at a company and when they can use it. 

Common accrual methods for paid vacation include:

Yearly

Most companies use an annual accrual policy to give employees a set number of leave days at the start of a full calendar year.

Using this vacation policy is easy since you just deduct the days employees take as leave from their total for the year. 

For example, if you offer 10 days of vacation annually, and an employee takes seven days off in the first four months, you'll deduct those days from the total, leaving only three paid leave days for the rest of the year.

Hourly

Hourly accruals are ideal for part-time workers with irregular schedules. With this method, their accrued vacation depends on the number of hours they work.

Instead of giving them fixed days of vacation every year, you determine the number of days they accumulate per hour. 

For example, say you have a part-time worker, and you want to make sure to give them a fair number of vacation days—proportional to what your full-time workers get. How do you determine the number of days they accumulate per hour?

Here's how:

A typical workweek consists of 40 hours (or five days). Multiply those hours by 52 weeks (number of weeks in a year) to get the total work hours in a year:

Total number of work hours in a year = 40 hours x 52 weeks = 2,080 hours

Suppose you give your full-time workers 10 days (80 hours) of vacation every year. Subtract those 80 hours from the total to get the number of hours a regular employee works at your business yearly:

Number of hours a full-time employee works in a year = 2,080 hours – 80 hours = 2,000 hours

To get the hourly accrual rate, divide the number of allocated PTO in hours by the hours a full-time employee works per year:

Hourly accrual rate = Number of vacation hours / Number of hours a full-time employee works

Hourly accrual rate = 80 hours / 2,000 hours = 0.04

That means for every hour the employee works, they earn 0.04 hours of paid leave. Sound complicated? Check out Hourly's easy-to-use payroll app, which automatically calculates paid time off for your team—so you don't have to.

Monthly, Semimonthly, or Biweekly

Companies that pay workers using a monthly, semimonthly, or biweekly pay schedule might opt to give employees a set amount of time off every pay period. This helps keep things consistent and lined up with your team's wages.

When using monthly, semimonthly, or biweekly accrual methods, you divide the number of PTO hours by the number of pay periods to get the accrual rate.

In other words:

Accrual rate = Number of vacation hours / Number of pay periods

Where:

• Pay periods in monthly schedule = 12
• Pay periods in semimonthly schedule = 24 
• Pay periods in biweekly schedule = 26

So, if you give 10 days (or 80 hours) of yearly vacation to employees, then:

Monthly Accrual

• 80 / 12
• Employees will accumulate 6.67 hours of vacation leave for every month worked
  

Semimonthly Accrual

• 80 / 24
• Employees will accumulate 3.33 hours for every semimonthly period worked
  

Biweekly Accrual

• 80 / 26
• Employees will accumulate 3.08 hours for every biweekly period worked
  

Daily accrual rates are also ideal for a part-timer. However, partial or varying shifts may complicate things.

That said, here's how to calculate how many paid leave days an employee accumulates per day. 

First, multiply the number of workdays in a week by 52 to get the total number of workdays per year.

Or:

Total number of workdays in a year = 5 days x 52 weeks = 260 days per year.

Next, subtract the allocated leave days from the result to get the number of days a regular employee works per year:

Number of days a full-timer works in a year = 260 days – 10 days = 250 days.

Finally, divide the number of allocated leave days (10) by the number of days a full-timer works per year (250).

Daily accrual rate = Number of vacation days / Number of days a full-timer works

Daily accrual rate = 10 days / 250 days = 0.04.

In other words, the employee earns 0.04 PTO days for every day they work.

A Note on Unlimited PTO

Some companies do away with all the tricky PTO calculations and give their workers unlimited PTO. Employees decide when they can take their vacation days—as long as they don't disrupt business.

This option is ideal since you won't have to pay out huge sums of unused leave days to employees who quit. It also offers significant flexibility and freedom to employees.

However, one downside of unlimited PTO is that employees might overuse it (or not use it enough!). For example, what happens if team members take so many vacation days that the rest of your team has way too much work on their hands? Or what if your team doesn't take enough time off, and you find that they could really use it?

Think about the pros and cons of each before making a decision. If flexibility is a top priority, you might want to go with an unlimited PTO plan. If making sure all your employees take a consistent amount of time off is important to you, then setting a firm number of vacation days might work best.

How Do You Calculate Prorated Vacation?

Calculating prorated vacation is fairly simple once you've calculated the accrual rate. Simply divide the number of days worked by the total number of days in the period. And multiply the result by the accrual rate. 

For full-timers, that often means using the yearly or monthly accrual rates. And for part-time employees, that means relying on hourly accruals. 

That might still come across as confusing. So let's try to understand it via four examples. 

Example #1: Calculating Prorated Vacation for Full-Time Employees

To calculate prorated vacation for a full-timer, you divide the number of vacation days the worker has been employed by the total days in that pay period and then multiply the result by the accrual rate.

In other words:

(Number of days a worker has been employed / Total days in pay period) x Accrual rate

Say an employee was hired on June 1 by a company that offers 10 days of vacation annually. 

Let's see how to calculate the employee's prorated leave days. 

First, work out the number of days the company will employ the worker from June 1 up to the end of the year.

Days from June 1 to Dec. 31 = June + July + August + September + October + November + December

Days from June 1 to Dec. 31 = 30 days + 31 days + 31 days + 30 days + 31 days + 30 days + 31 days = 214 days

In other words, the employee will be with the company for the remaining 214 days of the current year. 

Next, divide those days by the total days in a year (365): 

214 days / 365 days = 0.586

Multiply that by the accrual rate—or the number of days (or hours) the company offers as vacation per accrual period. In this case, it's 10 days for a year. So:

0.584 x 10 = 5.84 days.

In other words, the employee who started working on June 1 will be entitled to 5.84 leave days that year.

Example #2: Calculating Prorated Vacation for Part-Time Employees

Let's say a part-time employee works 15 hours per week for a business that offers 10 days of yearly leave. How do we find the prorated leave they'll get? 

To calculate their prorated vacation, first, convert the 10 leave days into vacation hours. 

A typical 9-5 working day consists of 8 hours, so:

Total vacation hours = Total leave days x length of the working day = 10 x 8 = 80 hours

In other words, the company gives 80 hours of vacation every year.

Next, divide the hours they work (15) by the number of full-time hours per week (40).

15 hours / 40 hours = 0.375

Then, multiply that result by the number of vacation hours the company offers its employees: 

0.375 x 80 hours = 30 hours

In other words, the part-timer will be entitled to 30 vacation hours per year if they start working for the company at the beginning of the year.

But what if they joined later in the year?

Example #3: Calculating Prorated Vacation for Employees Joining During the Year

If the same part-timer—who works 15 hours per week—begins working for the company on June 1, how do you calculate their prorated vacation?

First, calculate their weekly PTO accrual rate by dividing the 30 vacation hours—they get per year—by the number of weeks in a year (52): 

Weekly accrual rate = 30 hours / 52 weeks = 0.577 hours per week

In other words, the employee gets 0.577 hours of vacation per week. 

There are 31 weeks between June 1 and Dec. 31. So, multiply the 31 weeks by the weekly accrual factor: 

31 x 0.577 = 17.89

In other words, the part-timer will receive 17.89 hours of vacation that year.

Example #4: Calculating Prorated Vacation for Employees Leaving During the Year

If an employee leaves when the year has already begun, you'll calculate their prorated vacation from the calendar year's start date (or their joining date) up to their leaving date. 

For example, suppose an employee starts working on Jan. 1 and leaves the company on June 1. How will you calculate their PTO?

First, calculate the number of days they were employed from January to June:

Days from Jan. 1 to May 31 = January + February + March + April + May

Days from Jan. 1 to May 31 = 31 days + 28 days (or 29 days for leap years) + 31 days + 30 days + 31 days = 151 days 

Next, divide the days they worked (151) by the total days in the year (365):

151 days / 365 days = 0.414.

Multiply the result by the leave days (10 days): 

0.414 x 10 = 4.14.

In other words, the employee accrued a PTO of 4.14 days for their work in the first five months. 

If they took appropriate paid time off, all is well. But if they didn't, you will have to compensate them for the unused vacation time if you're an employer in California, Illinois, or Massachusetts.   

How To Calculate Pay for Unused PTO?

To calculate pay for unused vacation, you calculate the employee's daily rate and multiply that by the unused PTO days. 

For example, let's say the employee in the previous examples earns $52,000 annually. Here's how to calculate their pay for unused PTO. 

First, divide $52,000 by 52 weeks to get the weekly rate. 

$52,000 / 52 weeks = $1,000 per week

Next, divide the weekly pay by 5 to get the daily rate. 

Daily rate = $1,000 / 5 = $200

Then, multiply the daily rate by the number of unused leave days:

$200 x 4.14 days = $828.

In other words, you'll add $828 to their final paycheck for unused leave days.

Doing these calculations manually can be a headache, especially if you have many employees. So the easiest and most painless way to track employee time off is by using a payroll service like Hourly, which automatically tracks and calculates PTO for your team.

Prorated PTO Helps Keep Things Fair

A great way to manage paid leave is to give employees a certain number of leave days per year and work out prorated vacation days for new hires. 

That way, you can create a sense of trust and satisfaction among your workers by ensuring there's fairness at the workplace and everyone gets the leave days they deserve, which is what we all want, right?