Accrued Time Off: What Is It & How to Manage It
byIf you own a business or manage a team of employees, it’s important to know the ins and outs of accrued time off. Here are the main things you need to know:
- Accrued time off can be divided into sick leave and vacation leave.
- Many companies combine sick and vacation leave into paid time off (PTO).
- If you offer PTO, you need a clear accrual policy.
- It’s vital to accurately calculate and track accrued time off.
- Offering competitive accrual rates can help with employee morale and retention.
Offering accrued time off is a great way of keeping employees happy and attracting top talent. In fact, 76% of workers consider PTO to be very important when considering job opportunities. However, the entire idea of accrued time off can be complex, especially if your business is implementing a new time-off policy.
So how do you give workers what they want without creating an administrative nightmare? Learn more about accrued time off and how to manage it.
What is accrued time off?
How to calculate accrued time off
Accrued time off vs. lump sum PTO
How to manage your staff’s accrued time off
What is accrued time off?
Accrued time off is the process of employees earning paid time off based on a predetermined rate. The accrual rate can be based on the number of hours worked. Alternatively, if everyone at your company works the same hours per workday, each employee can earn a flat rate per completed shift.
Paid time off is the total time off that employees are allowed to take, while PTO accrual is the way this time is earned or accumulated over a period. Your state may have specific laws about accrued time off. Make sure to familiarize yourself with any regulations that impact your company.
How to calculate accrued time off
There are numerous ways to calculate accrued time off. Your specific policy will impact how complex or simple your calculations are. Keep in mind that PTO isn’t a one-size-fits-all issue. One of the biggest decisions you’ll make involves choosing between a general PTO bank or separate sick and vacation leave pools.
When building your policy, it’s important to consider what other companies in your industry are doing. Find out how much time they give their employees off per year.
Generally, you should match these offerings to make your company appealing to new hires. If employees can earn much more time off at a competitor, they probably won’t stick around at your company for very long.
Here is a general PTO formula you can customize to your needs:
Accrued PTO hours per period = Total PTO hours granted annually / number of periods worked in a year
Before you can crunch the numbers, you’ll need to know a few things. For starters, you need to decide how many hours employees can earn per year. A good baseline is 80 hours. If your staff works 8-hour shifts, 80 hours of PTO would allow them to take off up to 10 days.
Here are a couple of examples using this formula.
Example accrued time off calculation: vacation time
Suppose that you offer a general PTO bank, which employees have to use for vacation and sick time. In these scenarios, you should offer a higher accrual rate, as team members will be pulling from the same bank to call in sick and take vacation.
In this scenario, suppose that you offer a maximum of 120 hours annually and your team gets paid biweekly (26 pay periods per year).
Now you can use the formula: Accrued PTO hours per period = 120/26
Accrued PTO hours per period = 4.6
So employees who worked with you all year would earn 4.6 PTO hours per biweekly cycle. If someone joined your company mid-year, they would earn 4.6 hours for each eligible biweekly cycle.
Example accrued time off calculation: vacation time and sick time
Now, consider how to calculate vacation and sick time separately. In this scenario, your company still functions on the basic biweekly pay cycle (26 pay periods). However, you offer 80 hours of sick leave and 80 hours of vacation leave per year.
Leave hours per period = 80/26
Leave hours per period = 3.07
So each eligible worker would earn 3.07 hours of vacation leave and 3.07 hours of sick leave every two weeks.
Accrued time off vs. lump sum PTO
Want to avoid all of this math? If so, you could offer a lump sum PTO instead of accrued time off. Under both models, you have to set a maximum PTO amount. However, there’s one key difference.
Instead of accruing PTO, team members will get all of their annual hours at once. Most businesses that offer lump sum hours divvy them out at the start of every fiscal year. The benefit of this option is that employees can take a longer vacation. However, those who burn up all of their hours early in the year will have to wait until the reset period to take any more time off.
How to manage your staff’s accrued time off
Managing accrued time off fairly requires a strategic approach. Here are some basic steps to assist with managing PTO. You can also make this a hassle-free process with modern scheduling technology.
Create a PTO accrual policy
First, you need a PTO accrual policy. Your policy should address:
- How many hours employees can earn per year
- The accrual rate
- Whether you will offer PTO or separate sick and vacation leave
- Who is eligible
- The PTO request approval process
There are two schools of thought on PTO vs. vacation and sick leave. Offering separate leave banks gives team members the ability to call in when needed without affecting planned vacations. You don’t want people to feel like they are getting punished for being ill.
However, some people may abuse this system. For instance, if you offer 80 hours of vacation and 80 hours of sick leave, some employees may take two weeks of vacation and miss another ten days of work by calling out.
That’s where the unified leave bank comes into play. It discourages call-outs, as missing too much work can prevent an employee from taking a vacation.
There’s not a right or wrong answer here. Decide what’s best for your business.
Look for common PTO practices in your industry
Your accrued time off policy needs to be on par with industry norms. While you don’t necessarily have to beat out the competition, you should strive to match them.
Offering a couple of extra PTO days per year could even help you attract new talent. For instance, if your top competitors offer 80 hours of vacation annually, consider offering 96.
Implement incentives
Loyal, long-term employees need to be rewarded. You can use your accrual policy as a tool for making seasoned team members feel appreciated. For instance, you could increase the amount of vacation time that employees earn when they hit tenure milestones (5 years, 10 years, 15 years).
Giving employees the opportunity to earn more PTO can encourage experienced individuals to stick around long-term. Building an experienced workforce with incentives is good for your business and its customers.
Calculate accruals on a regular basis
Once you start offering PTO, it’s important to calculate it consistently. Employees should get updated accrued time off figures on each pay stub. This way, they know exactly how many hours they can take off.
You also need a fair way of tracking and approving time off requests. As you receive and approve requests, make sure to factor these changes into your shift planning process. It’s important not to approve too many requests at once, as your employees will be left short-handed.
Manage your staff’s accrued time off with When I Work
When I Work is full-service payroll and scheduling software. Our all-in-one platform includes team messaging tools, a digital time clock, and PTO calculation capabilities.
With When I Work, you can offer competitive and fair accrued time off without taking on a huge administrative burden. Sign up for a free trial today to learn more.
