PTO Accrual: What It Is and How to Calculate It

What is PTO?

PTO (Paid Time Off) is a benefit for workers that combines vacation time, sick leave, and personal days into a single bank of hours that employees can use as needed. The goal of paid time off is to give employees the flexibility and autonomy they need to manage their work-life balance. This shows that their well-being is valued and respected. Within Europe, it is called annual leave, while in the UK, it is called holiday leave.

What is PTO accrual?

PTO (Paid Time Off) accrual is the process by which employees earn PTO hours or days over time. The amount of PTO accrued is typically based on the employee's length of service, job title, or other factors. The employee can then use the accrued PTO hours or days for various purposes, such as taking time off for vacation, sick leave, or personal days.

Importance of PTO Accruals

PTO accruals play a crucial role in helping employees manage their leave balances and know at any time how many time-off days they are entitled to. This sense of organization and control can significantly contribute to their well-being. They also create clear policies and procedures that ensure payroll consistency, labor legislation compliance, and employee equality. With standardized PTO accruals, everyone knows where they stand regarding time off.

How does PTO Work?

Accrued PTO is the PTO that employees earn over time. The employer sets an accrual rate, determining how much PTO an employee earns per pay period or year.

For example, an employee might earn 1 hour of PTO per 40 hours worked.

Note that elements such as Accrual rates, Accrual periods, Hours worked, and other factors can influence the PTO amount at any given moment. Also, companies cap the number of PTO hours a worker can accrue in a year.

Types of PTO Policies:

A paid time off (PTO) policy is essential for maintaining transparency regarding employees' PTO. Companies establish PTO policies to manage and provide PTO for their employees, considering the flexibility that each employee may need. When developing a PTO policy, it's important to consider what will work best for the specific business, as there is no one-size-fits-all approach. Each company has its method for accruing and distributing PTO.

As for the types of PTO policies, the most common ones are:

1. PTO Accruals:

With this policy, employees accrue PTO periodically over time, typically based on their length of employment and hours worked.  

In this article, we will cover this policy type.

2. Allotment (or Lump Sum):

This policy provides employees with a specified amount of PTO at the beginning of the year rather than having it accrue over time. Employees can use this allotment as they see fit.

3. Unlimited PTO:

Under this policy, employees can take as much time off as needed if their work is completed and their manager approves it. Unlimited PTO policies are designed to give employees more autonomy and trust.

Creating Your Accrual-Based PTO Policy

To create an accrual-based PTO policy that's efficient and well-received by your staff, you must consider factors such as accrual amount (the pace of the PTO incrementation), accrual frequency (how often you grant additional PTO), accrual carry-over, aspects specific to new employees, work schedules, and so on.

When creating your PTO policy, you must comply with labor legislation in your country and grant employees the minimum PTO established by law.

Additionally, there are a set of factors that you need to consider:

• Accrual amount – the number of PTO units (hours, days) you grant every time you increment an employee's PTO entitlement
• Accrual rate or frequency – the period of time between two consecutive incrementations.

The PTO accrual rates, commonly used are:

• Hours worked
• Daily
• Biweekly
• Semimonthly
• Monthly
• Yearly.

We will provide an example on how to calculate the PTO accrual rate for each of these cases.

• Accrual carry-over – the amount of time off an employee can carry over the next year and the conditions that apply (e.g., must use carry-over PTO before the second trimester, etc.)
• Employee's tenure or length of service – the amount of PTO may benefit based on their tenure. For example, an employee gets in the first year 10 days; however, in the next ones, they will get +1 more. The US Bureau of Labor of Statistics numbers provide more details about the paid vacation plans based on tenure:

• 14 days after 1 year (of service),
• 18 days after 5 years,
• 20 days after 10 years, and
• 23 days after 20 years

• Negative balance. Another important aspect to consider is the company's terms and conditions regarding taking more time off than entitled to, which is often referred to as a 'negative balance '. This could apply to situations such as illness or family emergencies.
• There are part-time and full-time employees. If someone working 40 hours per week gets 20 days per year, a part-time (20 hours per week) employee gets half of it.
• Probation periods. Most businesses have 3-6 months probation periods when they can't book any time off.
• Bonus PTO. If an employee consistently hits its sales targets or goals, consider allowing them to take the Friday of the month off.
• Capped PTO. Businesses can limit the number of PTO hours an employee can accrue. Let's say someone has 10 days carried from last year and has accrued 5 days already. If the company has a cap of 15 days, then the employee must use some days to continue accruing.

How to Calculate PTO Accruals?

Calculating PTO accruals may be challenging, especially if you joggle with multiple PTO rates and policies and use something other than dedicated HR software. However, if you only have a few employees and standard accrual rates, you can manage on your own just fine.

First, establish the accrual amount and frequency. Then, establish the leave units an employee is entitled to in a year (based on law legislation in your country and your company's leave policy).

When it comes to the PTO timeframe or when the accrual starts, there are three options:

• Calendar year (Jan 1 to Dec 31)
• The company fiscal year (Jul 1 to Jun 30)
• The employee's hire date (Any day of the year).

Next, you must reflect on the frequency—as the word says, how often the PTO allowance gets updated. The frequency can be hourly, weekly, biweekly, semimonthly, monthly, or sometimes even yearly.

Remember: You can use a PTO tracking system or spreadsheet to record accrued and used PTO. Regularly communicate with employees about their PTO balances and encourage them to use their PTO to maintain a healthy work-life balance.

Accrue PTO Hourly

For example, you grant PTO based on the number of hours an employee has worked. This example applies to project-based or temporal employees. Then, let's consider that an employee is entitled by law to 10 days of PTO per year, which, for a standard 8-hour work day, translates into 80 hours.

Step 1: let's calculate the working hours yearly:

In 2024, there are 262 (working days) * 8 (working hours/day) = 2096 working hours.

If we deduct the 11 public holidays, then we have the following:

2096 – 80  = 2008 hours

Lastly, let's deduct the 80 PTO hours per year:

2008-80 = 1928 working hours

Step 2: let's calculate the number of PTO hours accrued per work hour

If the employee is entitled to 80 hours of PTO for every 1928 worked hours.

To calculate the PTO accrual based on hours worked, divide the number of PTO hours by the total work hours:

80/1928 = 0.038 hours

After 8 hours worked, an employee earns 8 hours x 0.038 = ±0,4 days of PTO.

Accrue PTO Daily

To calculate the daily accrual, we use a similar way of calculating the allowance:

1. Calculate the total working days in a year

262 weekdays – 11 holidays – 10 PTO days = 240 days

2. Calculate the PTO accrual per day

10/241 = 0,41 hours of PTO per workday.

Accrue PTO Weekly

52 total weeks – 10 PTO days (2 weeks) - 11 federal holidays (2 weeks) = 48 weeks

80 hours of PTO per year / 48 workweeks = 1.66 PTO hours accrued per workweek.

Accrue PTO Biweekly

80 Hours of PTO / 26 bi-weekly periods =3.07 PTO hours accrued per bi-weekly period.

Accrue PTO Semimonthly

80 Hours of PTO / 24 semimonthly periods = 3.33 PTO hours accrued per semimonthly period.

Accrue PTO Monthly

80 Hours of PTO / 12 monthly periods = 6.67 PTO hours accrued per monthly period.

Yearly PTO Bank

Employees are given a specific number of hours of PTO to use for the entire year.

For example, 80 hours of PTO is the equivalent of 10 work days of PTO if the employee has an 8-hour work schedule.

HR Best Practices for Setting PTO Accrual Policies

Managing time off is a big responsibility. However, with the best practices and the right tools in place, it becomes an automated HR process like any other. Implement HR software solutions that eliminate human error, synchronize leave with payroll, and give employees access to their HR records. They will take care of the most complicated part of PTO accruals. Then, consider the following practices for PTO accrual policies:

• Create an adequate PTO accrual policy for your company. Each company is different. It has different people, different work schedules, and different employee benefits. Your policy must be adjusted to fit your workforce and customized for various employee groups and work schedules.
• Make the PTO policy and procedure transparent and standardized. Ensure that new employees understand their PTO benefits. If there are updates or modifications to how PTO is allotted or handled, they should be immediately communicated to every employee. Create training programs or manuals explaining the PTO accrual policies and HR tools used for them.
• Provide a way to find who is off. A transparent way lets people see who's on leave, who's sick, and who's at work to ensure good planning and avoid overlaps. It will make them more aware of their team's situation and more responsible when requesting time off.
• Give employees more time off. Providing more PTO time than the minimum required by law encourages them to use it to avoid burnout and low performance.
• Create an easy-to-use responsive leave request procedure. Employee self-service is a great way to do this. Each employee has an account with their PTO bank allowance, days used, and availability. Again, create a procedure that matches your employees' work schedules and workflows. Employees will appreciate holidays, blackouts, and other factors. Another example is using the same leave request procedure for all employment levels, from regular staff to managers.
• Create an efficient communication system for requesting and approving PTO. Facilitate communication between employees, managers, and the HR team to request, track, plan, and manage PTO approval. Ensure any updates or modifications to the current PTO accrual policies are immediately communicated to every employee. Ask them for feedback and consider it. Create training programs or meetings that explain the PTO accrual policies and HR tools used for them.
• Create PTO policies that consider loyalty in the company. Granting extra time off based on service length, regardless of the employee's position, will motivate employees to stay longer and think twice about resigning.

FAQ

Can you roll over accrued PTO?

Yes. Many companies allow employees to roll over accrued PTO and use it in the next year. However, they might condition it. For example, employees may only roll over a certain amount of accrued PTO or may be obliged to take it before a specific date (e.g., in the first quarter of the following year, by the end of June, etc.). As there is no general rule for rolling over accrued PTO, check with your employer.

How much PTO Is normal?

Each country has legislation establishing the minimum amount of time off an employee is entitled to. For example, the norm in the US is 10-11 days off per year. However, US employees often receive loyalty time off, reaching 15 days after 5 years of work and up to 20 days off for more than 20 years of work.

The norm is different in Europe, with most countries having 21 days off per year. There are exceptions, though. France grants all employees 30 days off per year but an additional 14 days for employees with children in care.

Do employers have to pay out accrued time off?

No. Accrued time off encourages employees to take time off, rest, and relax. It's a measure meant to prevent burnout and overworking. The only exception is an employee leaving the company. If the employee no longer works for the company enough time to be able to take the accrued time off, the employer usually must pay financial compensation.

When can workers cash out their unused PTO?

Let's say Josh is leaving at the end of the month. He has accrued 9 days of PTO but has used only 5 days. The remainder of 4 PTO days can be cashed out. If his pay rate per hour is $20, then $20 x 8 hours per daily shift x 4 PTO days  = $640

Conclusion

Managing PTO accruals requires attention to detail, data accuracy, and good communication skills. It may become complicated even when you have just a few employees. That's why dedicated HR software such as LeaveBoard can help you with the entire process, from time-off requests to accurate leave balances. Furthermore, digital tools empower employees and encourage them to be more responsible, provide transparency, improve teamwork, and offer fast procedures that save you time and, in the end, money.