person using a green and black calculator

A Complete Guide to PTO Accruals

In this guide to PTO accruals, we’re going to explain all you need to know about accrued PTO – from what “accruals” are, to how accrued PTO works, and how to calculate accruals.

This guide is perfect for HR professionals, department heads/managers, or small business owners learning how to run the HR side of their business. Read on to learn more.

What is PTO Accrual?

PTO accrual is when employees’ PTO balances gradually increase over time, relative to the time they spend working.

Accruals are a common way for businesses to manage PTO. Alternatives include lump-sum PTO and unlimited PTO, which we’ll explain in-depth a little later. 

How Does PTO Accrual Work?

With accrued PTO, each employee’s balance will (typically) begin at zero.

Over time, they will earn (“accrue”) more PTO as they complete more service time or log more working hours with the company.

For example, staff might earn 1.5 days of PTO for every month worked. 

With this example, if one team member started working on January 1st, starting with a PTO balance of 0, and worked a continuous schedule through to July (completing 6 months of work), at the start of July they would have a PTO balance of 9 days, accruing 1.5 days of leave for each of their 6 months at work.

In another example, let us say that staff earn 0.05 hours of PTO per hour worked.

A team member who worked a 40 hour week would then earn 2 hours of PTO for that week. After 4 full working weeks, they would have accrued 8 hours of PTO.

But if the team member was to work a 48 hour week, they would earn 2.4 hours of PTO. If they worked 2 weeks of 40 hours and 2 weeks of 48 hours, at the end of 4 weeks they will have accrued 8.8 hours of PTO.

How to Calculate PTO Accrual

To calculate PTO accrual, you need to determine two things: the PTO accrual rate, and accrual frequency.

PTO accrual rate means how much PTO the team member earns at a time, and accrual frequency is how often PTO will be accrued.

For example, in our earlier example where staff earn 1.5 days of PTO per month, the accrual rate is 1.5 days, and the accrual frequency is monthly.

To calculate this, decide how much PTO to offer per year (assuming a full year worked), and decide what your accrual frequency will be (typically based on hours, days, weeks or months worked).

For example:

  • Yearly PTO allowance = 15 days.
  • Accrual frequency = monthly.

Now you can divide the total yearly allowance by the frequency to come up with the accrual rate.

  • Yearly allowance (15) / frequency (12 – number of months in a year)
  • Accrual rate = 1.25 days accrued per month

Now you can calculate how many days of PTO an employee should have based on how long they’ve worked.

  • If someone works for 2 months, they’ll have 2.5 days of PTO (1.25 x 2).
  • After working for 6 months, they will have 7.5 days of PTO (1.25 x 6).
  • After working for 10 months, they will have 12.5 days of PTO (1.25 x 10).

How to Calculate PTO Accruals for Hourly Employees

PTO accrual works very similarly if your employees are paid hourly, instead of a regular salary.

Begin by breaking your PTO accrual rate down to an hourly figure

  • With the example above, employees would accrue roughly 0.058 hours of PTO each hour worked – let’s round it to 0.06 PTO hours per hour worked).

Calculate the employee’s hours worked, and multiply the number by their accrual rate.

  • For someone who worked a 40 hour week, they will have 2.4 hours of PTO accrued over that time (0.06 x 40).

If the person works more or less in a week, they will accrue PTO hours relative to their actual time worked.

  • Let’s say they worked overtime, and logged 47 hours in one week. This week, they will earn 2.82 hours of PTO.
  • Another week, business is slow and they log fewer hours, only working 32 hours. As a result, they will have 1.92 PTO hours accrued that week.

How to Calculate PTO Accruals for Part-Time Employees

The PTO accrual calculation works more or less the same for part-time employees and full-time employees.

You just need to alter their accrual rate to match their working schedule.

  • For example, full-time employees who work 40 hours per week get 15 days per year and earn 1.25 days per month.
  • A part-time employee who works 20 hours per week would get half – 7.5 days per year or 0.625 days per month.

For most part-time employees, especially if the employee works an irregular schedule, it may be best to do PTO accrual by hours or days, instead of week/month, to ensure their PTO matches accurately with their working time.

Accrued PTO vs Lump-Sum

The most common “alternative” to accrued PTO is lump-sum PTO.

This is where, instead of earning PTO gradually over the year, employees get their entire yearly PTO allowance in one go.

For example, instead of accruing 1.25 days per month, to equal 15 days for the year, team members will get all 15 days available to use at the start of the leave year.

We put “alternative” in quotation marks because lump-sum is still essentially a form of accrued PTO.

The accrual frequency is really all that changes – instead of accruing PTO by hour, day, week or month, employees earn PTO by year.

Learn more about Accrued PTO vs Lump-Sum PTO here.

PTO Accrual vs Unlimited PTO

Another alternative to accrued PTO is unlimited PTO.

With this type of PTO policy, PTO isn’t stacked up over time, or capped at a certain amount per year. Team members are instead free to take PTO when and as they like.

This should be within reason, of course. Team members aren’t free to take 6 months of the year on PTO. But there is no hard limit, and no running PTO balance as there would be with accrued or lump-sum PTO.

Is Accrued PTO the Best Option for Your Team?

Deciding between accrued paid time off and lump-sum (or unlimited PTO) can be a tough decision.

There are pros and cons to going with an accrual system for PTO.

On the plus side:

  • It acts as an incentive for employees; they’ll see PTO as a payoff for the work they put in.
  • It’s easier to manage for new employees, as there’s no need to prorate yearly PTO balances.
  • You may avoid situations where many people are trying to use PTO at the same time before it expires.

Cons include:

  • Less flexibility for employees; it may be harder to plan ahead for their vacations, as they may not know how much PTO they will have available.
  • Overall it requires more work to manage and keep PTO balances up to date.
  • It gets more complicated if you choose to put an expiry date or cap on PTO accrual.
  • The cash flow liability can be less predictable than with lump-sum PTO policies.

There’s no definitive answer as to which method is best. You’ll want to examine the pros and cons and decide for yourself which method you think is the ideal approach for your team’s PTO policy.

FAQs & Tips for Managing PTO Accruals

If you choose to do PTO accruals in your business, here are some tips to follow and things to think about when setting up your PTO accrual policy.

How Much PTO is Enough?

First, how much PTO should your employees get?

Again there’s no “right” or “wrong” answer to this. The ideal amount is however much maximizes productivity, retention and ability to attract new talent – and it’s nearly impossible to come up with a solid answer to this.

You can use what other companies are doing as a benchmark; the average private industry worker in the US gets from 9 to 23 days of PTO per year, rising based on service time.

US workers in all sizes of business, with less than 5 years’ experience, average 10 days of PTO per year.

You should realistically aim for more than this, as the US standard for PTO is horrifically low compared to the rest of the world.

Accrual Frequency & Date

Again, there’s no right or wrong answer for when to accrue PTO, – in terms of the frequency, and the actual date on which PTO accrues (e.g. does it accrue at the start of each month or the end?)

But the most common practice is to line this up with your pay period.

So if employees are paid each month, you’ll add accrued PTO to their balance each month as well.

Accrual rate could still be per day or week, but the PTO will become available to employees at the same time as their pay packet.

If employees are paid hourly, though, accrual rate should always be calculated based on hours worked.

Accrual Caps

Some companies will put a cap on the total amount of paid time off that can be accrued and held at one time.

For example, accruals may be capped at 30 days. This would mean that, as long as the employee has 30 days in their balance, they will not accrue any more paid time off.

But if they were to use some of their PTO, accruals will begin again.

So let’s say the person took 5 days off. Now their balance is at 25 days – and they’ll be able to earn more, until they hit the cap of 30 days again.

A PTO balance cap or accrual can be a good way to limit the financial impact of PTO, as well as an incentive to make sure employees actually use their time off. However, consider the following:

  • Check if it’s legal to put a cap on PTO accruals in your company’s location.
  • Make sure employees know the rules, and know that accruals will be capped at a certain amount.
  • Make sure employees can see their PTO balance and know when it’s coming up to the limit.
  • You should give ample opportunity for people to use their paid time off and avoid reaching the cap.

Does Earned PTO Expire?

Another decision you’ll need to make when setting up your accrual policy is if (and when) PTO will expire.

For example, you may make it so that accrued PTO expires after a year.

Let’s see what this would mean in practice.

  • We’ll say that employees accrue 1.25 days’ paid time off per month, expiring after a year.
  • An employee starts accruing PTO on January 1st. 
  • They don’t use any PTO for an entire year. After 12 months, they have 15 days of PTO banked up. At this time, their first accrual (1.25 days, from January 1st the previous year) is set to expire.
  • Their PTO balance will thus be reduced by 1.25 days (though they will also accrue another block of PTO, which will keep it at 15 days assuming they don’t take any days off).

Common practice is that earned PTO does not expire. It’s difficult to manage, as you need to ensure that only that block of PTO expires, and maintain the rest of the person’s PTO that was earned more recently.

If you want to limit PTO accruals, it’s more common to use an accrual cap.

This, too, you need to consult with legal professionals to ensure you’re not breaking any laws, as labor laws in some locations don’t allow you to take away an employee’s earned benefits.

PTO Payout

Any unused accrued PTO may be paid out when an employee leaves their job.

You’ll need to check the law in your company’s location as to whether or not this is required. Some states and counties require unused PTO to be paid out upon termination, some leave it up to the company.

In some areas, using accruals means you must pay out unused PTO, as it’s considered an earned benefit, while providing PTO upfront in a lump-sum is not.

Be sure to check what’s required of you, though. For a list of each US state and their rules on paying out PTO, check out this article.

Automation & Software

Dealing with accruals gets pretty complex, especially as your headcount grows, and you need to make sure each employee’s PTO balance gets updated with the correct amount of leave each accrual period.

That’s why it’s important that you use some kind of automation or software to manage your accrual system. You’ll save a ton of time and effort, and avoid the inevitable human error that will happen eventually.

We recommend that you use Flamingo to manage this. Flamingo is an app designed to manage your entire PTO process, and automatically calculates and updates accruals for your team based on the accrual rate/frequency you choose.

It’s free to try, so give it a go and see how it makes managing accruals easier.

Final Thoughts

This article has, hopefully, explained everything you need to know about accruals for paid time off, how they work, and whether an accrual system is right for your team.

Whether you do accruals, lump-sum, unlimited PTO or some other kind of PTO policy, the most important thing is that you provide your team members with an ample paid time off allowance.

Access to PTO makes your team happier, healthier, and ultimately more productive, even if it means you’re paying them to spend less time in the office.

Similar Posts