How to Calculate Vacation Pay for Hourly Employees

The summer holidays are officially in full swing. Just like November through January, the summer season can mean changes in foot traffic and staffing for small business owners across the country. For over a decade, April through July has seen the biggest jump in workforce numbers for 16- to 24-year-olds, increasing by 24 million young adult workers in 2017 alone.

While new employees and customers are coming in, chances are many of your workers are also headed out. Vacations penciled in on the calendar in January have a way of showing up unexpectedly in July, leading to swapped shifts and less seasoned employees on the floor. And if you haven’t already been tracking and calculating vacation pay, it can feel like a tough season to get started.

If it’s your first time tackling paid vacation, 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.

How to calculate vacation pay for hourly employees

1. Decide how much vacation your employees can earn

While the U.S. government doesn’t legally require employers to offer paid vacation, an hourly worker in America with a year of experience averages 11 days of paid vacation a year. Up to 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 it’s clear workers are here to stay, and 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 that they’ll be accruing 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. Figure out the vacation pay formula

Start by dividing 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.

Download the Vacation Pay Calculator
Want to calculate vacation pay for hourly employees? Download the Vacation Pay Calculator now.

How to track vacation pay for hourly employees

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.

1. 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.

Check out our free vacation calculation (say that three times fast) spreadsheet here.

2. Use your timekeeping system to track automatically

Depending on your timekeeping system, your software may provide vacation-tracking features along with attendance tracking. If you use time clock software, 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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How to Calculate Vacation Pay for Hourly Employees