What is accrued time off?
Accrued time off is a type of PTO policy where employees earn their paid time off based on how many working hours they’ve put in. Employees can accrue PTO on an hourly, weekly, biweekly, monthly or per pay period basis. Accrued time off differs from lump sum PTO in that a company calculates how much time an employee can take off per year by the amount of time they work. Unlike other leave plans, PTO doesn’t differentiate between sick days, vacation time and other reasons for taking time off of work.
According to the U.S. Travel Association, 55% of American workers do not use their allotted paid time off. In 2018, 768 million vacation days were unused across the United States. This is largely due to North American corporate culture where people see taking too much time off as potentially jeopardizing an individual’s chance for professional advancement.
When companies have a policy allowing employees to accumulate paid time off based on how many hours they’ve worked, they will have accrued a certain amount of PTO by the end of a year. They can either choose to use this time off throughout the year or, if they don’t take it, carry it over to the following year or receive a payout, depending on company policy.
When employees leave the company without taking their accrued PTO, you may need to calculate their accrued PTO so far that year and add it to their final paycheck. Your company policy will dictate how many hours employees need to work in a year before they start earning their accrued PTO and whether they may roll their accrued time off into the following calendar year if they haven’t used it yet.
Accruing PTO: how to calculate it
Accrued time off is typically calculated at the employer‘s discrepancy and their company policy. To correctly cash out the amount of PTO an employee has earned or determine how much PTO to roll over to the following calendar year, employers must have a method of accurately calculating accrued time off. To begin this calculation process, employers must first determine how many days of PTO they want to offer employees per year. According to the SHRM, the average amount of PTO days in the USA is 18 per calendar year.
Next, consider how many hours per week the employee works. A full-time employee typically works 40 hours per week, while a part-time employee works up to 25 hours per week. Then, use the number of hours per week to determine how many hours a year the employee works. For example:
- 40 hours x 52 weeks = 2,080 hours per year
Companies that offer their employees two weeks of PTO annually would then use 80 hours as their numerator to calculate the accrual rate:
- 80 hours PTO / 2,080 hours per year = 0.038 hourly PTO accrual rate
Depending on your company policy, consider whether to include sick days in PTO or if employees can accrue time off when being paid for federal holidays. If not, you will need to determine how many holidays or paid sick days employees receive annually and subtract that from the number of hours worked per year to calculate accrued vacation time.
State laws on PTO accrual
In some states, when PTO accrues, it is considered part of an employee’s wages, and you cannot legally deny them this compensation by failing to pay out or roll over the PTO to another year if it’s unused. Check your state laws regarding employer PTO accrual policies and ensure you abide by these regulations when outlining a fair policy for your business.
Managing accrued time off with a formal company policy
The best way to manage accrued time off is to implement a formal company policy that clearly outlines the calculation method and holds all employees to the same standard. Follow these best practices to ensure employees understand the time off they’re entitled to and that they feel comfortable taking it:
Workplace flexibility
The amount of PTO accrual you permit employees to access at your company will largely depend on schedule flexibility. Although unlimited PTO accrual is an attractive perk that is sure to attract talented candidates, it can cause challenges when year-end approaches and multiple employees are taking large chunks of time off because of how much PTO they’ve accrued. For workplaces with relaxed scheduling and the ability for staff to work remotely, this is less likely to be a concern.
Company culture
When defining your PTO accrual policy, consider what type of workplace environment you want to create for staff. Employees who feel encouraged to enjoy a healthy work-life balance and take their accrued time off are statistically happier with their jobs. To boost productivity, you might want to offer unlimited PTO accrual days as long as employees provide a certain period of advance notice for taking time off to allow for effective scheduling.
Implements benefits and incentives
Some companies might see “a use it or lose it” PTO policy as motivating employees to take their time off before the end of the year, but it can be demoralizing in some cases. If employees are too busy working hard to take their time off and then lose out on that accrued leave at the end of the year, they are likely to feel overworked.
Consider converting unused PTO accrual to benefits or incentives at the end of a calendar year so employees can still benefit from that paid time off, even if they are too busy to take a vacation. Allowing employees to take their accrued PTO on a year-end paycheck or put it toward debt such as student loans ensures nobody misses out on the perks of a PTO accrual program.
