Employers are not required by law to offer paid vacation days, but most companies do: More than 90% of all full-time employees in private industry receive paid vacation.
If it’s your first time tackling paid vacation time, don’t panic. We’ve put together a guide to help you understand how to calculate vacation pay for hourly employees—and make sure you and your employees get the time off everyone deserves.
1. Decide how much vacation your employees can earn
An hourly worker in America with a year of experience averages 11 days of paid vacation a year, and 76% of small business employees receive paid vacation days, with most receiving either 5-9 or 10-14 paid vacation days.
Taking time off has been proven by researchers to increase employee productivity and decrease employee turnover—some of the biggest employment risks to small business owners’ revenue. Providing PTO (paid time off) can also give your business a competitive edge and help attract top talent.
So first questions first: how many paid vacation days are your employees able to earn per year? Are full-time hourly employees eligible to earn more compared to part-time employees?
In order to start tracking and calculating vacation pay, decide what works best for your business (and what you can afford) and work back from there.
2. Determine how employees receive their vacation time
Once you’ve determined how much paid vacation your employees can earn, the next step is to decide how you’ll hand out the time.
Some companies pay out vacation upfront at the beginning of each year, while others set PTO on an “accrual” basis, where employees earn vacation time as they work. Others don’t provide paid vacation benefits until workers continue to stay with the business anywhere from 30 days to 6 months.
If your business is built on hourly employees and you often experience high turnover rates, it may make more sense for your employees to accrue PTO gradually. That way, you aren’t handing over large chunks of vacation time at once, and you aren’t left hanging financially should you pay out an employee only to have them walk away.
3. Start digging into the math
Let’s say that you’ve decided to offer your full-time hourly employees two weeks of paid vacation per year, and they’ll accrue their paid vacation on an ongoing basis. How would you know the amount of paid vacation they’ve earned at any given time?
It’s simpler than you think. Try out this example: you have a full-time hourly employee, Anna, who is eligible for up to two weeks’ vacation pay. Anna’s total vacation time equals 80 paid hours per year, or roughly 4% of the max possible hours she could work over 52 weeks, sans overtime.
Why 4% per year? That’s Anna’s rate of vacation accrual. The key to calculating vacation pay is to let the numbers treat your employees like they’re working, even when they’re on vacation. If they’re getting paid for vacation, they’re using earned time whether they’re actually on the clock or not.
4. Use the vacation pay formula
First: divide Anna’s total hours of vacation pay per year (80) by the total number of hours she can expect to work per year.
Since Anna works a maximum of 40 hours a week and gets paid biweekly, that means she can reasonably work up to 2,080 hours per year.
80 hours divided by 2,080 hours equals 3.85%, rounded up to the 4% mentioned above. This is the formula for Anna’s rate of vacation accrual. That means that for every hour Anna works, she also earns 0.0385 hours of vacation. If Anna makes $15.00 in an hour, then she also makes $0.58 each hour in vacation pay.
Based on her rate of accrual, Anna should earn $1,200 in gross wages and about $46.15 in vacation pay per pay period.
To check your math, multiply your employees’ estimated vacation pay ($46.15) for the pay period by how many paychecks they receive per year (26). If the answer equals or is close to what their total paid vacation time is worth ($1,200 for 80 hours), then you’re on the right track.
Note: this is a popular vacation accrual formula for a typical employee scenario. What your employees will earn in vacation pay can ultimately depend on holidays, sick leave, and other factors throughout the year. To try out a few different scenarios, download our vacation pay spreadsheet.
5. Track Vacation Pay
If you’re not entirely sure what happened right there, you’re not alone. Calculating vacation pay can be time-consuming, even if you just have a single employee. Once you’ve calculated the vacation pay for your hourly employees, you also need a clear way to track the hours.
Below are a few options to make calculating and tracking a little easier.
Use a spreadsheet to track manually
If you’re an Excel enthusiast, try creating your own spreadsheet with functions based on the calculations above. You’ll need to include:
- Employee hourly pay
- Max vacation hours per year
- Max hours work-able per year
- Rate of vacation accrual
- Hours worked per pay period
- Vacation hours earned per pay period
- Vacation pay earned per pay period
There are also plenty of PTO accrual templates available online you can tweak to fit your company’s individual PTO plan.
Use your timekeeping system to track automatically
Depending on your timekeeping system, your software may provide vacation-tracking features along with attendance tracking.
You might be able to connect it to your payroll provider as well to save you the heavy-lifting and make sure hours and vacation pay stay consistent and accurate.
Take a look at what your timekeeping system offers. You might already be tracking vacation time and not be aware of it.
Tracking and calculating vacation pay for hourly employees doesn’t have to leave you needing a vacation of your own. Determine what PTO structure works for your team, run the numbers to see what makes sense for your budget, and find a tracking method that works best for you.
Putting your system in place now will keep vacation tracking a breeze for seasons to come—even if you’re not at the beach.
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