With a PTO accrual system, employees accumulate PTO hours over time as they put in work for your company. Unlike a lump-sum PTO model, employees earn days or hours of PTO at a rate specified by your PTO policy.
An employee could, for example, earn four hours of PTO for every two-week pay period. This would mean that after two pay periods, an employee would earn one full, eight-hour day of PTO to either use or save. If the employee uses four hours of PTO to volunteer at his son’s school, his PTO bank will drop to four hours. From there, it’ll keep accruing as time goes on.
So how much PTO accrual should you offer? What’s the going rate of PTO accrual these days? We’ll cover these details in our guide. We’ll also let you in on the one mistake you must avoid if you choose a PTO accrual system.
How to Calculate PTO Accrual
There are several ways to calculate PTO accrual. After you decide to implement an accrual system, your next step is to decide which calculation method you’ll use.
First, let’s take a look at the most common frameworks for PTO accrual:
- Hourly: employees accrue X hours of PTO for every X hours worked
- Percentage-based: for every work day, employees accrue X percent of the workday in PTO
- Pay period: employees accrue X hours of PTO for each pay period worked, whether that’s every week, every other week, or every month
The framework you choose will depend on whether you mostly employ salaried or hourly employees. For example, a pay period-based system would work well for a salaried employee. An hourly system lines up well for hourly employees.
The next thing you’ll need to do is decide how many hours or days you want your employees to accumulate in one year.
You might decide on something like this:
- First-year employees: 80 hours of PTO per year, equivalent to 10 eight-hour workdays
- Second-year employees: 104 hours of PTO per year, equivalent to 13 eight-hour workdays
- Third-year employees: 128 hours of PTO per year, equivalent to 16 eight-hour workdays
And so on.
Since you’re not giving those days to your employees in one big lump at the beginning of the year, you’ll now need to figure out your PTO accrual rate.
Let’s assume that you pay your employees every two weeks. Since there are 52 weeks in a year, you’d divide that number by 2 to get 26 pay periods.
A formula for calculating a two-week pay period PTO accrual rate is:
X hours / 26 two-week pay periods = two-week PTO accrual rate
So for a first-year employee at our hypothetical company, the formula would look like this:
80 hours / 26 two-week pay periods = 3.08
This means your employees would accrue 3.08 hours of PTO during each two-week pay period.
Before we start doing enough math to make your head spin, here’s the deal: we don’t recommend you calculate PTO accrual for each employee on your own.
Don’t Make the Mistake of Calculating PTO Accrual Yourself
Calculating PTO accrual for a single, hypothetical employee who earns 80 hours of PTO per year at an accrual rate of 3.08 hours for each two-week pay period is simple enough.
But your company probably has more than one employee. And each employee probably has a different work anniversary. And one of your employees has been with you since the start–let’s say three years. You hired three more employees after the first year of business. And since you were doing so well, you hired another four employees last year.
Every single one of these employees would begin accruing PTO on different days of the year and at different rates. And requests to use that PTO will probably come in throughout the year.
And then there are accrual caps. Say you set an accrual cap of 300 hours, or 37.5 eight-hour workdays, to encourage employees to take time off. Employees will have to use some PTO before they can keep accruing. Or, you can cash out PTO at 300 hours and have employees re-set their PTO bank.
You could spend the lion’s share of your time trying to stay on top of calculating PTO accrual using a calculator and a spreadsheet.
But then you wouldn’t have much time left for anything else. And unfortunately, you’d probably mess up at some point. This could land you in hot water depending on where you and your employees live and work. In states like California and Colorado, PTO is considered earned wages.
That’s why we recommend getting payroll software that manages PTO for you. A good payroll software drastically reduces the risk of making mistakes, and it can:
- Let you create a custom PTO accrual policy
- Calculate and track PTO accrual for each employee
- Help you manage PTO requests and approvals
- Sync PTO with your work calendar so you always know who’ll be gone and when
We’ve rounded up our favorite payroll software to make the choice easier for you.
How PTO Accrual Differs from Lump Sum PTO
With a lump sum PTO system, you have to give your employees a year’s worth of PTO at the beginning of the year. Instead of earning it slowly over time, it’s given all at once. This can drive some employees to take long breaks too early in the year, leaving them with a PTO shortage later on.
A lump-sum system can force you into tricky situations, too. If an employee takes unpaid time off under the federal Family and Medical Leave Act (FMLA), do they get less PTO? How does that work? Do you have to subtract days from the lump sum you already gave? What if they already used it? Do you give them less PTO the next year?
It can get very complicated, very quickly.
A PTO accrual system, on the other hand, means your employees earn paid time off commensurate with the time they’ve worked. Even if they take short breaks early in the year, they’ll keep earning PTO and can save or spend it as needed—or both.
How Much PTO Accrual Should You Offer?
The amount of PTO you offer will depend on your company size and finances, but the most important thing is to check your state’s requirements. Some states have requirements for paid sick time or PTO.
That’s your floor.
Next, you can look at the national average. According to a U.S. Bureau of Labor Statistics survey in March of 2021, the national average is 11 days of paid vacation for the first five years of service, plus seven days of sick leave.
But why be on the low end of the average? In our opinion, your goal should be to create a fair, healthy, and sustainable workplace. And that means generous PTO policies.
If you want to give two weeks (10 days) of PTO per year—the bare minimum in our book—offer an accrual rate of 3.08 hours each two-week pay period. Three weeks (15 days) is much better in our opinion.
For that, you’d offer a rate of 4.62 hours of PTO every two-week pay period.
