What is vacation accrual?

Vacation accrual is the amount of paid time off (PTO) that an employee has built up over time in line with their company's PTO policy. For example, an employee may accrue eight hours of paid time off every two weeks.

Some employers use a vacation accrual method to calculate how much paid time off (PTO) an employee can take. Instead of getting a “bank” of time off to draw from at the start of the calendar year (or other period determined by the employer), employees earn and accumulate time off based on time worked. They can then use their accrued vacation time as needed. 

Using the vacation time accrual method still allows employers to determine how much time each employee can take off each year (in accordance with labor guidelines). You can vary the accrual rate for individual employees based on factors like their seniority, position, and classification, ensuring that every person receives the days off they earn. 

How to calculate vacation accrual

To calculate vacation day accrual, decide how many days off you wish to offer per year. Then determine the number of work hours per year, subtracting any mandatory holidays or closures. Divide that number by the number of vacation days (calculated in hours) to determine the accrual rate. 

For example, if your company offers two weeks of paid vacation per year plus 10 paid holidays and closes for a week every summer, your calculation will look like this:

80 hours of PTO / 1,960 working hours (40 hours per week for 49 weeks) = 0.04 hours of vacation time accrued per hour worked.

You must also decide how often you will issue time off: per pay period, monthly, quarterly, semi-annually, or annually.

Some organizations implement a vacation accrual policy in lieu of paid holidays or sick time. For example, a healthcare organization that requires round-the-clock staffing 365 days per year may use vacation accrual to ensure adequate staffing during holiday periods. Employees can cash in vacation time to take a holiday off or work instead to continue growing their “bank” of hours. 

Vacation accrual policies 

As with a lump-sum vacation policy, companies must establish clear vacation accrual guidelines. The policy should include the following:

• Vacation accrual cap policy, i.e., how much time off an employee can earn and bank before they have to cash it in.
• Vacation request procedures.
• Vacation time rollover policy, and whether (and how much) accrued time off rolls over from year to year, or if employees need to use it or lose it. Some employers opt to pay out unused vacation days at the end of the year.
• Whether vacation accrual includes sick time and holidays or if those days will be handled separately.
• How much accrued vacation an employee can use at once. 
• Clear guidelines for when employees can start accruing vacation time and using it. Some organizations allow employees to accrue time from day one but not access the paid time off for 60 or 90 days. 
• How you will pay out unused vacation time if the employee leaves the organization. 

Remember that every state has laws regarding vacation accrual and how the hours must be paid. For example, a “use it or lose it” policy is illegal in some states since vacation time is an earned benefit that cannot be taken away. Other states require employers to pay out unused vacation time at the current pay rate when an employee leaves the organization, but this isn’t the case everywhere. Check your state laws and employment regulations before establishing a vacation accrual policy.

Pros and cons of vacation accrual 

A vacation accrual policy requires additional accounting and management to ensure that every employee receives the correct amount of time off and is paid at the correct rate. This can become a cumbersome task in a large organization without tracking software and a vacation accrual calculator.  

However, employees often appreciate the flexibility of a vacation accrual plan, especially when they can bank their hours to cover a more extended vacation or take smaller breaks throughout the year. Vacation accrual also supports staggered time off to ensure you have enough staff to cover busy periods.

Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.