A PTO accrual policy is better than a lump sum policy, hands down. Okay, okay, if you really want to do a lump sum policy, you can make it work. But there are so many benefits to a PTO accrual policy that it blows lump sum out of the water.
It’s true that accrual takes more work to set up. There are more details to figure out ahead of time. But once it’s set up and squared away in your payroll software system, you and your team won’t need to worry about it.
Lump sum, on the other hand, is easy to set up. All you have to do is pick how many PTO days your employees receive each year.
Seems simple, right?
But a lump-sum system can put you in all sorts of stressful situations that you’ll need to keep dealing with over time.
Why PTO Accrual is Better than Lump Sum PTO
Now that you know which system we like better, it’s time for us to explain why. Let’s take a closer look at the clear-cut reasons why accrual always beats lump-sum PTO.
PTO Accrual Feels Fair and Simple
Accrual is built on the simple principle that the more you work, the more PTO you get. Since taking time off becomes more important the longer we work, this principle makes sense. People intuitively understand this concept and generally find it easy to accept.
With an accrual system, your employees are more likely to take smaller breaks throughout the year. But they still have the opportunity to save up for a longer vacation. They can even do both!
Say you have an employee—we’ll call her Maria—who’s new to your company. She started in January 2023, and she has two goals when it comes to PTO:
- She plans to take one Friday off every other month for some R&R alone at home while her kids are at school or summer camp
- She plans to take her kids to Disneyland for a week in June of 2024
Let’s say that according to your PTO policy, Maria starts accruing PTO after one month of working at your company. She’s a first-year employee, so she gets 80 hours of PTO during her first year (equivalent to 10 workdays) and 104 hours during her second year (equivalent to 13 days).
With your PTO accrual system, Maria receives 3.08 hours of PTO every two-week pay period. Maria decides to let her PTO accrue for six months before spending any of it.
For the sake of this hypothetical situation, we’ll say it’s currently July 1 of 2023. Maria has been working for six months and has accrued 40.04 hours of PTO.
She requests—and you approve!—her first paid Friday off work, which will take place on July 7. She will use 8 hours of her PTO for this day, leaving her with 32.04 hours of PTO.
But she’ll gain 3.08 more hours at the mid-month pay period, bumping her back up to 35.12 hours of PTO. And at the end of July, she gets another 3.08 hours. Now she’s up to 38.2. She doesn’t take any PTO during August, which means she accrues another 6.16 hours of PTO.
Now she’s up to 44.36 hours. In September she takes another Friday off, deducting 8 hours from her PTO bank. She’s at 36.36 hours. But she gets her 6.16 hours of PTO for September, pushing her up to 42.52 hours.
According to this schedule—and taking her PTO increase in January of 2024 into account—Maria will be able to take a day off every other month. She’ll also have saved up 69 hours of PTO for her Disneyland vacation. She decides to take 40 hours in June of 2024 for her weeklong trip with her kids.
She’ll have 29 hours of PTO left over after the trip. From there, she can repeat her PTO earning strategy to get the rest and family time she needs to thrive.
The longer she stays with your company, the more PTO she’ll accrue. Eventually, Maria will be able to afford to take one day off every month instead of every other month while also earning enough PTO for longer vacations.
New Employees Slowly Earn PTO
With lump sum PTO, employers usually award a pile of PTO days after the employee has worked for a month or two.
Not only will you have to figure out when each employee gets that lump sum, but your employee might also feel tempted to take a 10-day vacation just three months after they start working. This leaves them with zero PTO for the rest of the year.
An accrual system gets rid of this problem by rewarding employees with PTO as they spend time working for your company. Since they can’t blow it all right at the beginning of their time with you, they’ll be motivated to keep working and racking up those sweet PTO hours.
Start Dates Don’t Matter
With a lump-sum PTO system, you’ll be forced to choose when your employees receive their paid time off. The two most common reset schedules are:
- Company-wide: All of your employees receive their lump sum of PTO on the same day—January 1, for example
- Work anniversary: Each employee receives their lump sum of PTO on their work anniversary
If you go with a company-wide schedule, you’ll have to figure out what happens if you hire someone a month before the PTO resets. A work anniversary schedule means keeping track of everyone’s start date. You’ll constantly be doling out big chunks of PTO and worrying about start dates.
With accrual, you don’t have to think about this. New employees begin with zero PTO and earn more as they work. Everyone will have earned a year’s worth of PTO by the time they celebrate their first work anniversary.
No Need to Worry About Rollovers
With a lump-sum system, you have to decide how PTO transfers from year to year. Some companies reset PTO to zero on December 31—a use-it-or-lose-it scenario. This happens to be illegal in states like California, Montana, and Nebraska, where you’re required to let unused PTO roll over into the next year.
To stay on the safe side of the law, other companies let employees carry over their full unused PTO balance from year to year.
With an accrual system, you get to skip worrying about all of that. PTO is always accruing so it rolls over by default.
No Vacation Crush During the Holidays
Okay, so you’ll still have PTO requests coming in for the holidays. Who doesn’t want to take time off in November and December?
But with an accrual system, it’s unlikely that everyone on your team will have 10 days at their disposal to request all at once. Some might have more, others might have less. It all depends on how long they’ve been accruing that PTO.
And you won’t face the problem of people taking time off to create more PTO space for next year. Assuming there’s an accrual cap, that is.
Speaking of accrual caps, we 100% recommend them. An accrual system can get hairy if you have an employee who never takes PTO and just lets it accrue and accrue and accrue.
Since PTO is considered payable wages in several states, you’ll end up having to pay out a giant chunk of change if, say, an employee works for you for 10 years without taking any PTO.
Accrual caps help you avoid this.
Say you allow PTO to accrue up to 300 hours. Once an employee hits 300 hours, it stops accruing. You give your employees two choices:
- They can cash out the 300 hours and restart their PTO at zero
- They can take a week or two off, creating space for PTO to start accruing again
While some employees might want to cash out their PTO, others won’t want to wipe out their PTO bank. They’ll take time off and return to work feeling rested and refreshed—which is the whole point of PTO.
And you get to avoid the strain of having to pay out tens of thousands of dollars in PTO when an employee leaves the company.
No Conflicts With Unpaid Leave
With the federal Family and Medical Leave Act (FMLA), employees are entitled to 12 weeks of unpaid leave in certain situations. If an employee uses this, how will your lump-sum PTO system handle it?
Will your employee still get the full sum, or will you deduct days since they spent three months away from the workplace? And how will you make sure that this policy is fairly applied across the board?
That’s a tricky edge case you have to figure out.
With accrual, there’s nothing to figure out. During working hours or paid time off, PTO accrues. During unpaid time off, PTO does not accrue. It’s that simple.
What About Unlimited PTO?
Even though it sounds amazing in theory, unlimited PTO is harder to manage than lump-sum PTO. Or, in other words, we highly suggest you do not choose an unlimited PTO system.
Unlimited PTO is what it sounds like: it’s a PTO system where your employees get as much paid vacation as they want. As long as they’re keeping up with their work, that is.
No lump sums, no accruals, no carryovers. They just request days off when needed and take them.
Seems easy, right?
Not so fast. An unlimited PTO policy isn’t really unlimited. Employees still have to request days off. You can still choose to deny those requests if they’re too frequent or come at a busy time.
Without a guaranteed number of days off each year, employees don’t accrue…anything. Sure, you don’t have to pay employees out for unused PTO when they leave your company. But let’s say you have an especially hardworking employee who takes just two days off in the five years she works for you.
Does your company benefit from not having to pay out any accrued PTO days? Yes. But at what cost? Your former employee might feel burned out and unappreciated for the five years she served with your company.
Especially if she’s watched her coworkers take weeks off at a time, no problem, while she keeps her nose to the grindstone.
Read more about why we don’t recommend unlimited PTO. Instead, we suggest choosing an accrual system.
Unlike unlimited and lump-sum PTO systems, PTO accrual gives employees a fair reward for the time they spend with your company.
