Business Math Series: Calculating Vacation Time Based on Hours Worked

There are a lot of ways to offer accruals to your employees. Probably the most common is to give them their whole lump sum at the beginning of the year or anniversary date. But there are other ways to calculate accruals too. I’ve written a whole post about it here but today I am going to dedicate a whole post on the most complicated method: by hours worked.

For employees who may not be long-termers you can add time to their bank on a monthly or biweekly basis. Or, if you just like being super accurate, you can add time based on the actual number of hours they work each pay period.

Accruals By Hours Worked

This accrual rate is particularly great for employees who work a variable number of hours per year. If the employee is entitled to 2 weeks vacation each year, but ends up taking several weeks off for medical leave or something else, you may want the accrued vacation hours to reflect that time spent away from work. Likewise, if your employee puts in extra hours, you might want him to be compensated for that extra time with a little extra vacation time.

Calculating accruals by hours worked offers this flexibility. But calculating it isn’t as easy as just throwing it all into the bank at the beginning of the year…

The Calculation

First, decide on approximately how many hours you want your employee to accrue per year – maybe it’s 40, 80, or some other number. Then we’ll figure out the fraction of an hour that they should earn for each hour they work.

As an example, we’ll say our employee gets about 2 weeks, or 80 hours per year. There are 52 weeks in a year (or you may use 50 weeks if you don’t want to include the 2 weeks of vacation in your standard work year) so a standard work year contains 2080 hours (based on 40 hours per week and 52 weeks per year). Now we’ll divide 80 by 2080 (vacation hours per year/hours worked per year) to obtain .0384. So for every hour our employee works he should earn .0384 hours of vacation.

Once we’ve set this number in the system, our employee will earn appropriate vacation hours regardless of whether he works 50 hours a week or 30.

Example

To see this in action, let’s say our employee averages 50 hours a week for the whole year. 50 hours times 52 gives us 2600. 2600 multiplied by .0384 gives the employee 99.84 hours of vacation. That’s an extra couple of days he’s earned.

Conversely, if the employee only averaged 30 hours per week for the year, he would only get 59.9 – not quite a full two weeks.

To set this up in the Timesheets system, you’ll visit the Settings page for the employee and then click the Options tab. At the bottom of this page you will find the accruals settings where you can enter your prefigured values.

If you don’t already have an account with Timesheets.com, give us a call so that we can help you set one up. Tracking accruals with Timesheets.com is painless and you won’t have to remember a single calculation because they are all done for you!

16 Comments

  1. The US government says there is 2087 work hours per year. I am a contractor paid by the hour with no PTO at all. This means I have to figure in the 5 major holidays as well as anything else where I might not be able to make up the time on other days in the pay period. I went with a 2 weeks of vacation, 5 days of “sick” time and the major holidays a total of 20 days or 160 hours of PTO.

    2087 – 160 = 1927 This gives me my target maximum hours worked
    160 / 1927 = 0.083 or 8.3% The rate of accrual I need to set aside to go into my PTO savings.
    For me the actual value is calculated after taxes and other payroll deductions such as healthcare insurance.

    Anyone see something wrong in this calculation?

  2. How do you figure out vacation time for employees that have a 6-month no-vacation time, 10 days (accrual of 0.83 vacation day/month) for 1-5 years. Transitional of 5 to 6 years (.83 x … before the anniversary month) +(1.25 x…months left in the year after anniversary), 6-10 years (1.25 a month) and transitional again of 10-11 years ((1.25 x … + 1.67 x …) and 11-on (1.67 a month)

    My boss refuses to buy any new software and has me doing it on Excel, and it’s worked but the more language I put in to incorporate what exactly he’s looking for, the more it becomes inconsistent. Help!

    1. Carolyn,

      Let me see if I understand you correctly. If you are in the transitional period and your anniversary month was March, then you would get (.83×3=2.49) + 1.25×9=11.25) vacation days. So about 14 days. In the transitional period, then, you would have more days off than you did in the first 1-5 years. However, if your anniversary month was December, then you would only get (.83×11=9.13) + .83. Better hope you get hired by this company early in the year because your vacation time would be significantly lower if hired later in the year!

      Does it look like I am understanding you correctly?

  3. What are your thoughts on establishing maximum accrual caps when you calculate vacation earned this way? The “standard” seems to be 1.5 times the annual rate, but we have a variety of part-time employees who work different numbers of hours from each other and from week to week, and I’m not sure what number I should use for that “annual rate.” I’m also unable to tell if there’s any issue with providing different caps for different employees and/or how you would go about deciding how to categorize them into groups for capping purposes. I hope that all makes sense – I haven’t been able to find much info about this; we decided to have our employees accrue by the hour because it seemed like the simplest way to keep everything fair, but it doesn’t seem like the most common way to do things! Thank you.

    1. Hi Kristen,

      It sounds like you’re doing this exactly right. The “by hours worked” method is a very good choice to calculate vacation for an employee who works part time and random schedules. For employees who are full time, or part time and working a predictable number of hours, you can give them a set value of time per year. Like 40 or 80 hours, as an example, and then set the cap accordingly.

      Meanwhile for employees who work more randomly and less than full time, the by hours worked method gives a very fair way to allow them to accrue time off, but only for the time they worked. As for coming up with an appropriate cap for these part timers, there’s no real ‘standard’ way to do this. One way would be to assume they work full time, and calculate the cap as the amount of vacation they would earn if they worked full time for the entire year. Or as you mentioned you could do 1.5 times that value.

      1. The cap is really most applicable for the full-time employees anyways, as they’re the ones most likely to accrue a large number unused hours. We’re still deciding whether or not to set a cap, but I think we’ll just base it off of full-time hours if we do. Thank you!

  4. I am curious how you calculate vacation time for an employee after a pay increase is given? For example if a person was making $25 an hour and had 40 hours of vacation accrued on the books they would have a vacation accrual of $1,000 ($25 X 40). If that person is given an increase to $30 an hour what happens to the person’s available hours of vacation and vacation accrual. There seems to be two options. The first option is increasing the vacation accrued amount to match up with the increased rate. In this case since the person has 40 hours of vacation and their rate is now $30 an hour the vacation accrual would be increased on the balance sheet to $1,200 ($30 X 40) thereby allowing the employee to have the same number of vacation hours but costing the company more because the employee didn’t use their hours when they were given at a lower rate. The second option would be to reduce the number of hours available to the employee. Since at the time of their increase the employee had earned a vacation accrual of $1,000 then their available hours are now 33.33 ($1,000/$30). This would reduce the number of hours available to the employee but they would be paid the amount that was accrued for them. In this case the employee has less hours at a higher rate and their is no additional cost to the company as a result of the employee’s pay increase. Going forward the employee would accrue all additional vacation hours at the higher rate. The only issue is with the hours accrued prior to receiving their new rate. Are both options allowed? Is the company required to pay the employee the same number of vacation hours at a higher rate just because they chose not to use them before they were given a raise?

    1. Tim,

      That is a good question. I don’t know if it is standard to make any adjustments to an employee’s vacation pay based on a raise. I understand you concern, especially if an employee has a lot of time in the bank, but I tend to think of vacation accruals as time, not dollars.

      That said, you are probably free to deal with the situation as you please. Our federal government does not impose any rules on employers regarding vacation pay.

      This is from the Department of Labor website: “How are vacation pay, sick pay, holiday pay computed and when are they due?

      The FLSA does not require payment for time not worked, such as vacations, sick leave or holidays (Federal or otherwise). These benefits are matters of agreement between an employer and an employee (or the employee’s representative).”

      Beyond that, I would check the laws in your state.

      The society for human resources management put out this document detailing vacation laws by state: Vacation, Sick, PTO Laws. Revised June 2013

      If you are still not sure, please consult your lawyer.

  5. I’m trying to calculate based on “vacation is 1 hour for every 50 hours worked” so the standard calculations aren’t doing it for me. Any suggestions on how to calculate this?

    1. Hi Lily,

      I would do the calculation like this: First take 40 hours per week times 52 weeks, so 40 x 52 = 2080 to get the total hours a full time employee would work per year. Now divide the total yearly hours by 50 hours to get 41.6. This is how many hours a full time person would accrue per year under your system. Now divide 41.6 by 2080 to get .02. This is how many hours should accrue per hour worked for your employee. If you are using our hours accrual system, all you have to enter is that number, and the system will add the appropriate amount of time per hour. If you are doing it by hand, you would multiply .02 by the total hours on each paycheck. You can check your work by multiplying .02 by 50 to get 1.

  6. If an employee has 4.17 hours of accrued vacation time, and only took 1 day and 1 hour, how would you calculate the balance

    1. 1 day is presumably 8 hours, so 1 day and 1 hour are 9 hours. 4.17 – 9 leaves the employee with -4.83. This means he or she needs to accrue more time to bring the balance positive.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s