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Table Of Contents

How To Calculate PTO & Vacation Accrual Like A Pro

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Table Of Contents

Vacation benefits are a hot topic among employers these days. Some companies, such as LinkedIn, have rolled out a generous unlimited vacation policy. This leads people to ask about how much PTO they should give and how it can be accrued. While PTO contributes to the overall employee reward package, it is a deceptively complicated subject. Employees need to know how much they can receive, how it is earned, and experts believe that vacation accrual should begin on the first day of employment.

As with 401k plans and insurance programs, PTO benefits encourage hard work by way of allowing individuals to relax and recharge. But how much PTO is too much? How much is too little? And how will you calculate vacation accrual? Let us help you find out.

What is PTO?

To understand vacation accrual, it’s important to realize how paid time off (PTO) works. PTO can include holiday pay, sick days, company holidays, and vacation. 

An employer can offer a pool of different types of paid leave to their employees through PTO. It includes vacation leave, sick leave, holidays, or personal leave. There is a common misconception that PTO is the same as a vacation. But in reality, these are two different concepts. Employees can take unpaid vacations. PTO, however, allows employees to keep their hourly rate, regardless of where they’re working.

How it works

Organizational structures and policies determine how PTO functions. Depending on the structure of your company, you can determine the guidelines and the amount of PTO each employee can take. There are three ways an organization can set its PTO policy:

The traditional PTO system

In this system, employees get a fixed amount of leaves every year. It’s up to them to use it at their convenience. Additionally, employers may divide their PTO into different categories, such as personal leaves, sick days, and vacation.

A PTO Bank system

As the name suggests, a PTO bank system lets employees organize all their time off into one pool. There is no classification of leaves into types such as sick leaves, vacation leaves, or personal leaves. Employees can take their leaves as and when they want without telling management why they plan to take them.

The best part about this system is that it makes calculations super easy for HR departments. In addition, employees can plan their leave utilization to take advantage of the PTO bank system.

Unlimited PTO system

This system is pretty self-explanatory and is adopted by hundreds of successful companies around the world like Netflix, Sony, and more. It consists of a flexible PTO system where no time limit is set by the organization. This system allows employees to enjoy time off as long as it does not disrupt productivity or work schedules. It also offers major flexibility to employees.

What is accrued vacation?

Vacation accrual is referred to the portion of an employee’s unused vacation or paid time off that is earned but not taken. Vacation accrual applies to those paid leaves that are accrued by an employee over time. Employees can carry their unused vacation with them from one year to the next. 

Companies often choose to give accrued vacation time instead of offering separate leave balances for personal days, sick days, and paid vacation time.

How to calculate vacation accrual

Many employees suggest that there should be a certain, uniform vacation accrual mechanism for all employees to follow. At the same time, it can be beneficial to have variable parameters in certain situations. Here are the most popular vacation accrual methods:

  • Accrual periods: Employees of most companies accrue vacation days on a monthly basis, but weekly and yearly intervals are also possible. In companies with high turnover rates, daily leave time accrual might be an option as well.
  • Equal or progressive leave accruals: Leave accrues annually in equal amounts or progressively, depending on the length of employment.
  • Establish a waiting period: A waiting period can be set before vacation time starts accruing and based on the laws in place, can last between three months and one year.
  • Separate balances for vacation days and sick days: They need to be tracked separately; however, other types of leave can exist that don’t affect either of these.
  • Using a balance cap: Companies often introduce a balance cap when employees are reluctant to take time off. The aim is to keep the overall available leave time within a reasonable range. In this instance, it is important to follow the legal guidelines and regulations that specify a reasonable proportion of the balance cap.
  • Overtime bonuses and time off in lieu: Many employers reward their employees for overtime by adding time to their vacation balances.
  • Different leave time amounts: You can have different amounts for full-time or part-time employees, or managers and regular employees.

How we can help

Vacation Tracker is a leave management tool that takes the hassle out of tracking and managing your employee’s time off. From creating up to 25 leave types to weekly custom notifications, we’ll make sure that everyone in your company stays on top of their leave activity. Interested? Try it free for 7 days!

Snigdha Gupta
Snigdha Gupta

An avid writer and aspiring marketer, Snigdha is a student at Concordia University’s John Molson School of Business.

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