How to Calculate Paid Vacation for Hourly Employees

As a business owner, you are not legally required to provide paid time off to your employees, but paid vacation boosts employee morale and satisfaction with the company. Happy employees tend to be the best employees, so making room for vacation pay ends up being a worthy sacrifice even for small businesses.

That said, calculating PTO (Paid Time Off) can be a confusing task for some employers. It all depends on which “accrual rate” you decide to use. The first step to track employee vacation time is to decide how many hours you want to allocate to full-time employees each year. Based on a 40-hour work week, you may want to give 40 hours (1 week of vacation time), 80 hours (2 weeks), or some other number in between. Based on the accrual method you choose, you can calculate how much time employees accrue each pay period.

Common PTO Accrual Methods

Below are some of the most common accrual methods, complete with explanations of how to calculate PTO based on each method, as well as how to track vacation time for employees.

Yearly

The simplest way to award vacation time is in a lump sum yearly. Choose a time when your employees accrue their allotted vacation time – usually at the beginning of the year or on the employee’s anniversary date.  At the beginning of the year, add their vacation time. As the employee takes time off, simply subtract it from the current total. The main downside to this accrual rate is new employees have to wait a full calendar year before accruing any amount of vacation time. If you do not want them to wait, one of the other accrual rates may work better for you.

Hourly

This accrual rate is ideal for part-time employees who work variables shifts and are used to sick time. Their allocated time off is directly dependent on the number of hours they worked.

Calculation Example:

For the sake of an example, we will use the most common 40 hour work week.  To figure out how many hours your employee works in a year, multiply 4o hours by 52 weeks (the number of weeks in a year.) Then subtract the 40 hours off (or other amount of PTO.)

40 hours (Hours in 1 work week) x 52 weeks = 2,080 hours

2080 hours – 40 hours (Allocated PTO) = 2,040 hours

2,040 hours – 40 hours (5 paid vacation days off = 40 hours) = 2,000 hours per year

Now to get the accrual multiplier, divide the number of allocated vacation hours by the total hours per year as calculated above.

40 hours (Hours in 1 work week) ÷ 2,000 yearly hours worked = .02 hours

This means that for every hour your employee works, they will earn .02 hours of PTO.

 Daily

The daily accrual rate is another rate that is ideal for part-time employees. The only requirement is that the part-time employees work full eight-hour shifts. If the employees only work partial shifts or varying shifts, it may be better to choose a different accrual method.

 Calculation Example: 

You will first need to multiply the number of work days in a week by 52 weeks to calculate how many work days you have per year (remember to subtract any paid holidays and the days off per year).

5 (Days in a work week) x 52 (Weeks in a year) = 260 work days a year

260 – 5 (Allocated PTO) = 255 days

255 – 5 (Paid holidays) = 250 work days per year

Now to get the accrual multiplier, divide the number of allocated vacation days by the total work days per year as calculated above.

5 ÷ 250 (Work days per year) = .02 days

This means that for every day your employee works, they will earn .02 days of PTO.

Alternative Vacation Accrual Methods

Monthly, Twice a Month, or Every Two Weeks

After the yearly accrual method, these are the more common, simpler accrual methods used to calculate PTO.  Employees tend to be less confused because they will see the same amount on each paycheck.

 Calculation Example: 

You would take the number of yearly allocated PTO hours and divide it by 12 for monthly pay, by 24 for twice-monthly pay, or 26 for bi-weekly pay.

40 (Allocated PTO) ÷ 12 = 3.33 hours accrued per pay period

or

40 (Allocated PTO) ÷ 24 = 1.67 hours accrued per pay period

or

40 (Allocated PTO) ÷ 26 = 1.54 hours accrued per pay period

Whichever method (or variation of methods) you choose to use to calculate PTO for your employees, write it down. Make it policy. It avoids confusion and accusations of favoritism.

Planning for “Next Year”

While it’s normally difficult to make any drastic changes to your operations, it’s important to take time at the end of the year to consider what new innovations and techniques you can adopt going into the next year – including how you handle your PTO policy.

Taking the time to survey your employees and gauge how they’re feeling about their PTO can be a great help. Have there been complaints to the Human Resources department? Do they feel they’re lacking sick leave? What could you do to increase the satisfaction your valued, salaried employees have with your business?

Consider experimenting with different methods of PTO – either in practice or in theory – to see how they respond. As we mentioned earlier, increasing your employee’s job satisfaction could pay off in dividends if it results in greater productivity and an enthusiastic workforce.

It would also be beneficial for you to invest in a time tracking software that includes a PTO calculator. It can get tricky deciding between the functions of the software itself vs any built-in accrual calculator, so make sure to review your options to determine the best overall fit for your business. Our advice would be to narrow your selection to only include software with free trials so that you can directly test out how well they fit your operations.