How to Calculate Vacation Pay for Your Employees

When you provide a vacation policy for your employees, there are a few things to consider to ensure that you provide fair compensation while staying within reason. Read further to learn more about vacation pay, how to differentiate it from other types of pay and how to calculate vacation pay for your employees.

 

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What is vacation pay?

Vacation pay, or paid time off (PTO), is a type of employee benefit that employers provide to their staff members. Companies that offer vacation pay may experience increased employee morale and loyalty. This is because they feel that their employer cares about their health and well-being outside of the office.

 

What is accrued vacation pay?

Accrued vacation pay is a common method where an employee earns a certain number of hours or days in vacation pay, throughout the course of a year or during the course of their employment with a company. For example, after one year at a company, an employee receives 10 paid vacation days, after five years they receive 15 paid vacation days, and at 10 years they receive 20 paid vacation days. 

 

How to calculate vacation pay for your employees

Here are six steps to help you calculate vacation hours for your employees:

 

1. Review the types of employment you offer

This allows you to determine a calculation method that works best for the type(s) of employment you offer such as salaried employees, part-time hourly employees and seasonal employees.

 

2. Choose a yearly vacation pay schedule

This a simple option that allows you to assign a set number of paid vacation days for your employees. You may base the number of vacation days they receive based on years with the company or pay grade.

 

3. Calculate vacation pay based on hourly work

This is a useful calculation if you have employees who work for an hourly rate, part-time. Here is an overview of the calculation to use for hourly workers:

(hours weekly) x 52 weeks (total weeks in a year) = X (yearly hours worked)

(yearly hours worked) – (standard hours of PTO per year) = X (yearly hours worked after PTO)

(yearly hours worked after PTO) – (standard hours of PTO per year) = (yearly hours worked)

(hours weekly) / (yearly hours worked) = (accrual of PTO per hours worked)

Example:

Here is an example of an employee who works an average of 40 hours a week:

40 (hours weekly) x 52 weeks (total weeks in a year) = 2,080 (yearly hours worked)

2,080 (yearly hours worked) – 50 (standard hours of PTO per year) = 2,030 (yearly hours worked after PTO)

2,030 (yearly hours worked after PTO) – 50 (standard hours of PTO per year) =  1,980 (yearly hours worked)

40 (hours weekly)  / 1,980 (yearly hours worked)  = 0.02 (accrual of PTO per hours worked)

In conclusion, for every hour worked, your employees get 2% of those hours added to their vacation time.

 

4. Calculate vacation pay based on daily hours worked

This method is typically used for part-time employees who work 8-hour shifts. First, you need to make a note of the number of paid holidays you offer. Here is an example of an employee who works two full days a week and gets 6 paid holidays:

2 (days) x 52 (weeks) = 104 (workdays annually)

104 (workdays annually) – 6 (paid holidays) = 98 (workdays annually)

2 (days) / 98 (workdays annually) = .02 = 2%

In conclusion, for every day worked, your employee gets 2% of a day added to their vacation time.

 

5. Calculate vacation pay based on monthly or bi-weekly pay periods

This method is helpful for full-time or salaried employees. To do this, you will need to know how many hours of vacation time you offer, and the number of pay periods your employees receive.  Here is an example for an employee paid bi-weekly:

50 (vacation hours) / 26 (pay periods) = 1.92 (accrued hours each pay period)

In conclusion, for every pay period an employee reaches, it adds 1.92 hours onto their vacation time.

 

6. Create a PTO calculator

You can create your own vacation hours calculator for your employees using a spreadsheet software program. This isn’t a mandatory step, but it can be helpful to organize and track your employees’ vacation pay.

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