PTO accrual: How it works and how to calculate it

Everyone needs a break from the daily grind. A well-managed PTO policy helps your team achieve a healthy work-life balance. Whether your employees need vacation time with family, sick leave, or a mental health day to recharge, generous paid time off policies help them stay motivated and productive.

However, policies designed to improve employee satisfaction shouldn’t be a burden to human resources and management. Traditional, manual tracking methods for PTO accrual can be cumbersome and error-prone, especially if you offer different types of leave for a distributed team of salaried employees, part-time workers, and independent contractors.

Your workforce deserves to rest without the added stress of overcomplicated systems. Learn how to calculate PTO accrual, handle requests, and track time off with an automated PTO management system. 

PTO accrual: Rates and how it works

PTO accrual is the way employees earn paid time off. Clear PTO accrual policies help both employees and administrators set expectations, manage leave, and ensure accurate and fair tracking. 

Employers can mix and match different accrual methods to fit their workforce’s needs. Here are five common approaches:

1. Per regular hours worked: Workers earn PTO based on hours worked. For example, for every 40 hours worked, one hour of PTO is accrued. This method promotes fairness among hourly workers, ensuring employees get back what they put in. 
2. Per pay period: PTO hours accrue at the end of each pay period (e.g., eight hours every two weeks). This approach is consistent and predictable, making it beneficial for a mixed workforce of salaried and hourly workers. 
3. Annual allotment: Employees accrue a set amount of PTO each year, typically at the beginning of the year. When they take time off, you subtract PTO from their accumulated balance. This accrued PTO method simplifies tracking with predictable formulas. 
4. Accrual based on length of service: Some companies increase PTO accrual rates as employees gain seniority within the company, encouraging their workforce to stay long-term. This is a strategic way to reward loyalty and retain experienced employees.
5. Unlimited PTO: This PTO policy allows employees to request paid time off as they need without any set limit. Employees are expected to use their discretion to balance work and personal needs. This system can foster a culture of trust and flexibility (and attract top talent) if implemented with clear guidelines to ensure work responsibilities are effectively managed.

How does PTO accrue at your business? That’s up to you. Every method has advantages and disadvantages. The “per hour worked” method is ideal for industries with high turnover or a mix of full-time and part-time hourly staff, whereas accrual based on length of service aligns with companies that aim to build long-term work relationships.

Regardless of your approach, you can maintain transparency and trust with airtight tracking and clear communication about how PTO accrual works.

How to calculate PTO accrual per pay period

How you calculate PTO accrual depends on how you allocate time off. If you grant PTO in a lump sum at the start of the new year, you simply subtract the hours used from the initial balance. If employees earn it over time, you can follow these steps to calculate their available paid time off: 

1. Determine annual PTO allocation 

Start by calculating the total number of PTO hours an employee earns per year. For example, if your PTO policy rewards 10 days of PTO per year, multiply 10 (the number of paid days off) by eight (the number of hours in a workday). This totals 80 hours of PTO accrued throughout the work year. 

2. Divide annual hours into pay periods

Now, calculate the hours your employees accrue every pay period. If you pay employees biweekly, divide the total annual PTO hours by 26. If you pay employees monthly, divide the total allocated hours by 12. 

Let’s use the previous example of 10 days of PTO per year. Your employees will accrue 80 hours of PTO throughout the year. If you pay employees biweekly, there are 26 pay periods in a 52-week year. Dividing 80 by 26 yields roughly 3.1 hours of PTO accrued each pay period.

3. Multiply accumulated PTO

Now, you’re ready to calculate the accrued PTO. Multiply the amount of time your employees accrue each pay period by the time worked. 

Imagine your employee works five months without taking any paid time off. During those five months, there are 10 biweekly pay periods. If your employee accrues 3.1 hours of PTO per biweekly pay period, multiply 3.1 by 10 to reach 31 hours of PTO. To calculate the number of days off, divide that sum by eight, which equals 3.9 vacation days.

Different types of PTO accrual

Hourly accrual for independent contractors and pay period rates for salaried employees have unique formulas to determine PTO. Here’s how payroll calculates PTO in these scenarios:

Hourly accrual

Hourly accrual is a popular method for hourly workers and independent contractors. It ensures that everyone receives PTO proportional to the hours worked. 

Imagine an employer awards 120 hours of PTO annually to full-time workers who work 2,080 hours each year (40 hours per week for 52 weeks). The hourly accrual rate formula is: 

120 hours ÷ 2,080 hours = 0.06 PTO hours per hour worked

Accrual per pay period

Employers decide on pay periods—daily, weekly, biweekly, or monthly—based on their business model and their employees’ needs. Regardless of how often you pay out employees, the formula is the same. Let’s use a weekly pay period as an example. 

If the same 120 hours of PTO are distributed over 52 weeks, the accrual rate formula is: 

120 hours ÷ 52 weeks = 2.3 PTO hours per weekly pay period

Salary accrual

Many organizations award PTO days to salaried workers at the beginning of each year. HR still calculates accrual rates per pay period to follow local or state PTO laws and contractual obligations. Here’s how to calculate the accrual rate for an employee who earns 20 days of PTO annually and is paid monthly:

20 days ÷ 12 months = 1.7 PTO hours per monthly pay period

Considerations for PTO accrual

Your PTO policy needs to consider more than just accrual rates. Here are factors to consider to ensure your system works for your employees and the organization’s larger goals:

PTO rollover

What happens to unused PTO at the end of a work year? PTO rollover is a powerful employee benefit. It provides flexibility and lets employees take more time off.

However, rollover can strain the business, increasing your financial liability if employees accumulate large amounts of PTO over time. Consider setting a maximum limit on rollover (e.g., only 25% of total PTO can rollover) or implement a “use-it-or-lose-it” policy to encourage employees to use their PTO. 

Cash out unused PTO

Rather than a rollover policy, organizations can offer a cash-out program for employees who prefer monetary benefits over time off. Likewise, cash-out policies should be considered for employees who leave the company with a positive PTO balance. 

PTO limits

A maximum cap on vacation accrual prevents employees from accumulating excessive time off that leads to staffing or operational issues. Employees who stockpile PTO could also require large payouts if they leave the company. A reasonable cap encourages employees to take time off regularly, creating predictability for management and promoting a consistent work-life balance. 

Offer different types of leave

Grouping all types of leave into one (e.g., sick leave, parental leave, vacation time, and personal days) can cause more stress than relief. Each type of leave bears a specific purpose and level of necessity. Consider a tiered system (e.g., unlimited sick leave and vacation time based on accrual rates). This helps employees handle personal or unpredictable needs without stressing about lost vacation time. 

Automate PTO accrual with Oyster

Focus on choosing the proper PTO policy for your workforce. Let us handle the math. With Oyster’s Total Rewards, we can help you build a time off policy that supports a thriving workforce while taking those confusing payroll spreadsheets off your hands.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.