Your employee benefits policy helps you attract and retain top talent. And of all of the benefits you can offer your employees, paid time off (PTO) is one of the most important. And if you want to build an effective PTO policy, that policy needs to include time off for vacation.
No matter how much paid vacation you offer, you need to track how employees earn (or accrue) pay for that time off—also known as vacation pay accrual. But what is vacation pay accrual? How does vacation pay accrue with different types of PTO? And how do you calculate accrued time for vacation?
What Is Vacation Pay Accrual?
Vacation pay accrual is the amount of vacation time earned by an employee that hasn’t been paid out yet. It’s also called accrued vacation, accrued vacation leave, or leave accrual.
With accrued vacation time, employees earn (or accrue) time off based on how much time they work. Depending on the situation, businesses may calculate vacation pay accrual based on pay periods or based on the number of hours worked.
For example, a small business that employs all salaried workers might calculate vacation pay accrual based on a set 40 hours per week—while an employer with mostly shift and/or part-time workers would calculate vacation PTO based on the number of hours employees work each week.
When employees decide to use their vacation time, they’re paid their regular wages for the full length of time they’re out of the office—up to the total amount of leave they’ve accrued. So, for example, if an employee has accrued seven days of vacation pay, they can take seven paid days off at their regular rate of pay. If their vacation lasts longer than seven days, any excess time off will be unpaid (unless the employee takes another type of PTO day, like a personal day).
Depending on your vacation policy and local and state laws, any unused vacation leave can be:
- Paid out at the end of the year
- Forfeited at the end of the year
- Rolled over and added onto next year’s vacation accrual
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Different Ways to Structure Paid Vacation
Vacation pay accrual isn’t the only option for structuring your PTO policy. Other ways to structure paid time off (including vacation!) include:
- Fixed or lump-sum PTO: Employees receive a set amount of time off at the start of each year. PTO renews each year, and unused vacation time might expire or carry over into next year’s bank.
- Unlimited PTO: Employees aren’t limited to a maximum amount of PTO. Instead, they can request days off as needed, with management or human resources approving or rejecting the request at their discretion based on business needs, the total amount of time the employee has already taken off, or other factors.
- Flexible PTO: Employees are limited to a certain amount of PTO, but can choose to use these days whenever and however they wish (as defined by the PTO policy). With flexible time off (also known as FTO), employees—and their employers—don’t need to track individual personal, sick, and vacation days. All time off is pooled together, and employees don’t need to wait to accrue vacation PTO to go on a vacation. For example, an employee who is accruing paid time off might have five personal days, five sick days, and two weeks of vacation. With FTO, that same employee would just have 24 days off total, and could use that time however they’d like—including for vacation.
Which PTO Policy is Best?
But which PTO policy makes sense for your business? That depends. Consider the type of workers you employ (like hourly or salaried and part-time or full-time employees), how many vacation days you want to offer, and the type of business you run—then use that information to determine which vacation structure is the best fit for your business and team.
For example, small business owners might prefer offering vacation pay accrual to part-time or hourly workers and fixed PTO for full-time or salaried employees to account for the variation in hours worked as a part-time employee.
In other situations, unlimited or flexible PTO can help businesses attract top talent for highly specialized roles—making that the ideal vacation structure to grow your team.
Pros and Cons of Vacation Pay Accrual
One of the best ways to figure out how to structure your vacation pay is to weigh the pros and cons of each structure—and, from there, decide what works best for your business.
So, what are the pros and cons of leave accrual? Some of the potential benefits and disadvantages include:
Pros
- Motivates employees: Because PTO accrual is based on the number of hours an employee works, they’ll want to put in the hours they need to get their desired time off—which can motivate them to limit call-outs and missed work.
- Protects you from opportunistic employees: With other vacation pay structures (like unlimited or flex PTO), employees can take vacation time whenever they want—for example, after a brief probationary period after being hired or after the start of a new year. This means you could be on the hook for paying a large chunk of cash to a new employee or paying an existing employee for weeks’ worth of vacation time after the new year—only for them to quit shortly after. Accrued vacation pay lowers this risk by requiring employees to earn their time off through time worked.
- PTO isn’t always paid out: With PTO accrual, employees are only paid out for the vacation time they’ve earned, which can save you money over other types of PTO (like offering two weeks of vacation at the start of every year). Additionally, some policies stipulate a “use-it-or-lose-it” rule in which unused PTO isn’t paid out at the end of the year (though that depends on local and state laws; for example, some states, like California, classify PTO as wages, requiring it to be paid out upon termination of employment).
Cons
- Difficult to manage and track: Accrued time for vacation needs to be tracked for each employee, including total accrued time, remaining leave, and how much more time off can be accrued for the year—which can increase labor costs. And if you operate in an area where local or state employment laws require you to separate paid time off for vacation from other times of PTO (like sick or personal days), that requires additional tracking—and additional labor.
- Calculating payouts can be difficult: Employees might accrue leave time differently based on their job role, type of employment, years of employment, and pay periods. This can make it difficult and complex to calculate vacation pay accrual across your organization.
- Payouts might be sudden and unexpected: Budgeting for vacation pay disbursement can be difficult if you don’t know when employees are going to use their time off. This is especially challenging if an employee with a full bank of vacation time suddenly retires, quits, or gets terminated, requiring you to make a sudden—and potentially significant—payout.
How to Calculate Vacation Pay Accrual
Now that you know what accrued vacation is—and how it’s different from other types of PTO and vacation pay—how do you calculate it?
Though payroll and time-tracking software like Hourly can do this for you, you can also calculate accrued vacation time the old-fashioned way using the following steps:
1. Decide How Much Time Off to Offer
The first step in the process is determining how much time off for vacation you’re going to offer employees. Though federal law doesn’t mandate how much PTO you need to provide, some states (like California) place restrictions on how to manage PTO—so make sure to consult your local and state employment laws before drafting your employee benefits and vacation policies.
Remember, vacation accrual isn’t a one-size-fits-all approach. You can structure leave accrual differently for each type of employee. You might allow team members to accrue additional time based on seniority or years of service—for example, getting an extra 8 hours of vacation time for every five years an employee is with the company.
Not sure how much vacation time to offer? Consider looking at the averages. In 2021, more than one-third of employees received 10 to 14 days of paid vacation after one year of employment and 33% of employees received 15 to 19 days of paid time off after 10 years of service.
While you don’t have to structure your vacation PTO in exactly the same way, knowing the average can be a good jumping-off point to figuring out how much leave to offer your employees to ensure you’re being both fair and competitive.
Whatever structure you do decide on should be laid out in your employee handbook and signed off on by your employees.
2. Determine How Many Hours an Employee Can Work in a Year
Next up, you’ll want to determine the total number of work hours an employee works in a given year using this formula:
- Number of weeks in a year x number of work days per week x number of hours per work day
For example, the formula for determining the vacation accrual rate for an employee that works 8 hours per day, 5 days per week, and 52 weeks per year looks like this:
- 8 x 5 x 52 = 2,080
Then subtract the amount of paid holidays you provide to your employees (like federal holidays). For example, if employees are entitled to 10 holidays (of eight-hour days), subtract 10 x 8 from the number above:
- 2,080 - (10 x 8) = 2,000
This number is the total amount of work hours per year.
3. Calculate the Accrual Rate
Calculate your hourly accrual rate by dividing the total number of potential vacation hours by the total number of work hours in a year. The formula for this looks like this:
- Total amount of potential vacation time / total number of work hours annually = Hourly accrual rate
For example, let’s say your employees are entitled to a maximum of 80 hours (or 10 work days) of vacation time per year. The formula would look like this:
- 80 / 2,000 = 0.04
This means that for every hour an employee works, they would accrue 0.04 hours of vacation pay.
By Pay Period
You can also calculate the accrual rate based on your employees’ pay periods—which could make more sense for full-time/salaried employees. To calculate the accrual rate based on pay period, use this formula:
- Total amount of potential vacation time (in hours) / Number of pay periods = Vacation time accrued per pay period
What’s this look like in practice?
