Business Math Series: Ways to Calculate Vacation Accrual
Calculating paid time off can seem daunting to a busy small business owner. There are many rates to choose from and the calculations aren’t always intuitive. For this reason, most small business owners just end up using a yearly accrual rate. This method is easy – you just have to decide how many days employees should get per year and give it to them in a lump sum.
There are other accrual rates which might be more useful for your company. If your are interested in using them, I am going to help you tackle the math. (Of course, if you had a Timesheets.com account, you could let the software do the hard work for you!)
Typical Accrual Rates
There are a lot of rates to choose from. In the end, most of them dole out the same amount of hours per year, but at different rates. A yearly accrual rate is great for long-term employees or employees who have already put in a year of tenure. But many companies don’t want their employees to have to wait a full year to be able to take some vacation time. In this case, the employee should accrue paid time-off gradually, based on one of the following schedules. Accruing time by hours worked is a special accrual rate which does not guarantee a certain number of hours to accrue per year. This is a great rate for part time employees who work varying schedules, as I explain below.
- By hours worked
- Twice a month
- Every 2 weeks
- First of the month
- Once a month
For any of these, you will first decide how many hours you want your employee to accrue per year (based on a full time schedule) – maybe it’s 40, 80, or some other number. In the sections below, we’ll figure out the fraction of an hour that employees should earn for each pay period.
By Hours Worked
This accrual rate is great for employees who don’t work a set schedule – working variable schedules from year to year. If you want their vacation time to reflect the actual time they put in at the company, then this is the rate schedule for you. Part-time employees will get fewer hours than they would get if you gave them PTO yearly in a lump sum, and employees who work overtime would earn more.
Decide how many hours you would want your employee to get each year if he worked a regular full time schedule. For this example, we’ll say 80 hours, or two weeks. Next, decide which divisor you want to use. The divisor is the number of hours a full time employee supposedly works in one year. 2087 is the divisor used for civilian Federal employees. 2080 is another commonly used number, multiplying 40 regular work hours in a week by 52 weeks in a year. You could also use 2000 for hours worked in a year minus the 2 weeks vacation.
To get our accrual multiplier, we’ll divide 80 (hours in two weeks of work) by 2087 (hours worked in the year) to obtain .0383. So for every hour our employee works he should earn .0383 hours of vacation.
If you are using our service to track accruals, you can set this number in the system. Then your employee will earn appropriate vacation hours automatically regardless of whether he works 50 hours a week or 30. For this accrual rate, it’s really nice to have a system do the work for you because this is a little more math-heavy than the other accrual rates.
Doing the calculation by hand isn’t too bad, though. You can simple multiply the number of hours in the pay period by .0383 and keep a running tally in the employee’s records.
Calculating for Daily or Monthly
To figure an employee’s accrued time based on a daily or monthly rate, you will divide the number of hours to accrue per year by the number of working days in a year, so 5 days x 52 weeks, for daily or simply by 12 for monthly.
A daily accrual rate might be good for a company with a high turn over rate. For an employee working 40 hours a week, getting 80 hours of paid time off per year, you will divide 80 by the number of working days in the year. 80/260 gives you .307. Multiply .307 by the number of total days in your pay period to the see PTO in each cycle.
If the employee worked 5 days in the pay period, you would multiply 5 x .307 = 1.535. So this employee would get 1.535 hours of paid time off in this pay period. If he worked the full year, it would add up to 80 hours. If the employee just works 4 days a week then he would get 1.228 hours each pay period.
The daily accrual rate works really well for part time employees who work full 8 hour shifts.This is not a great rate for employees who work part time shifts.
Calculating for Twice a Month or Every Two Weeks
The calculations here are not much different from the above. Divide the number of PTO hours granted per year by 24 for twice monthly or by 26 for every two weeks.
So for an employee given two weeks of vacation per year, he will get 3.333 hours each bi-monthly paycheck.
This accrual rate will be a little easier to handle than the daily or hourly rate since you will be looking at basically the same amount on each pay check. It’s a little less confusing and easier to figure out an employee’s current PTO amount if records go missing.