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Business Math: Ways to Calculate Vacation Accrual

Calculating by hand

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 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
  • Daily
  • Twice a month
  • Every 2 weeks
  • First of the month
  • Once a month
  • Yearly

Calculations

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, figure out how many hours your employee would work in a year if they worked full time. This would be 40 hours times 52 weeks, minus the time off (and any paid holidays). In this example the employee would work 2000 hours per year.

To get our accrual multiplier, we’ll divide 80 (hours in two weeks of work) by 2000 (hours worked in the year) to obtain .04. So for every hour our employee works he should earn .04 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.

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.

Example: 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.

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.

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8 Comments

  1. Doreen
    Doreen July 12, 2013

    Where does the 3 week vacation piece come into the equation?

    My total hours 290.75 divided by 25 week look back = 11.63 average hours worked per week.

    To Calculate By Hours Worked:

    If using 40/week as calculation:

    40 x 52 = 2080

    11.63 x 52 = 604.76

    604.76 ÷ 2080 = 0.2975 % of full-time hours/week

    So for every hour I work I should earn 0.2.975 hours of vacation. Is this correct?

    If using 37.50/week as calculation:

    37.50 x 52 = 1950

    11.63 x 52 = 604.76

    604.76 ÷ 1950 = 0.3101 % of full-time hours/week

    So for every hour I work I should earn 0.3101 hours of vacation. Is this correct?

  2. Jacalyn
    Jacalyn January 29, 2017

    If I work12 hrs.and I have4week’s vacation time what would that total ? Also is it right that the company changes your vacation time to PTO I’m sure they’re ripping my off that’s just what they do !

  3. Kelly Betlejewski
    Kelly Betlejewski February 22, 2017

    Hello,
    Looking for some assistance on explaining to our employees why we will be changing to PTO time off and that they will need to accrue time. I want to see this as a positive and not have them feel like some of these other comments “feeling ripped off” We need to protect our company as well. We have run into instances where and employee leaves right after their anniversary and received 2 weeks vacation that was not earned but they feel it was bc of years in. ahhh help me >

    • Peggy Emch
      Peggy Emch February 22, 2017

      Hi Kelly,

      Unless time off is a benefit of employment (given as soon as hired in some larger corporations), time off is an earned benefit. There are several ways in which you can “pay out” those earnings. You can either give employees their time off at the end of an employee’s first year – the employee has put in a year’s worth of work, they now receive their time off benefit for that previous year. In this case, if they left immediately after receiving their benefit, it would be okay because they put the year in to earn it. Or they can receive their time off earnings at each pay period – getting their time off for the work done in the previous pay period. Either way, employees have to put in the time to get their time off so I don’t think it really matters which accrual rate a company uses as far as fairness goes. I have some more pros and cons of the different rates in last week’s blog post that you might be interested in. https://www.timesheets.com/blog/2017/02/which-vacation-accrual-rate-to-use/

      Let me know if I can help further!

  4. Tom Juan
    Tom Juan February 22, 2017

    So I want to calculate the days vacation the have remaining.
    Do I take the Vacation Owed $625.00 divide by their rate/hr $19 divide by their work hours 8hr shift equals 4.11. So about 4 days of vacation owed. Right?

    • Peggy Emch
      Peggy Emch February 22, 2017

      Hi Tom. If you know you owe your employee $625 for vacation but aren’t sure how many hours that is, then, yes, divide that by the hourly rate to get 32.89 hours. That’s .89 more than 4 days.

  5. Caro
    Caro February 23, 2017

    i have a question an employee from my company was hired on Nov 1, 2016, and left Feb10, 2017. His package includes 120 hours of vacation. How many hours he accrued until his last day.

    based on the calculations he accrued 33.8hours is this wrong or right?

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