Paid time off — abbreviated as PTO — is a benefit that employers tend to offer to their employees. While there’s no legal requirement for companies to offer paid time off to their team members, it’s borderline necessary to attract and retain top talent. Furthermore, once a time off policy is outlined, employers are required to adhere to it as outlined in their employee handbook.
There are various ways to offer PTO. Ultimately, the goal is the same: giving employees paid time off work, which they can use in the form of vacation days, sick leave, personal time, or more diverse types of employee leave.
Some companies offer an annual bank of hours or days to their employees, which they can use by making a PTO request. Others offer unlimited PTO. But some companies use the ‘accrued PTO’ method, whereby employees acquire time off based on the number of hours that they’ve worked. The more work hours, the more PTO they have.
In this blog, we’ll run through the ins and outs of PTO accruals and answer the question of how PTO accrual rates are handled.
Note: If you’re looking for a way to eliminate some of the guesswork and automatically calculate hourly accrual rates, tracking software like our very own Buddy Punch can make it a lot easier to manage employee PTO. With features such as Paid Time Off Management, PTO Accruals, and more, it’s easy to see why over 10,000 business owners have turned to using Buddy Punch. Click here to learn more.
How are PTO hours accumulated?
PTO hours are accumulated over a period of time. The more hours that the employee works, the more accrued time they will have. How much time the employee accrues depends on the company’s policy; they may allocate personal days on a weekly, biweekly, monthly, semimonthly, or yearly basis. There really is no set number of options a company can choose from to determine their vacation policy.
For instance, let’s say that an employee has worked at the company for one year on a full-time basis. During the following year, they may be entitled to 160 hours of PTO time (the equivalent of 20 workdays). This is a straightforward approach; things can get a little more complicated when managing part-time employees since an hourly approach to vacation accrual is generally more appropriate.
How do you calculate PTO hours?
A good starting point for calculating PTO is to determine how much you would offer a full-time, salaried employee over a one-year basis. From there, you can divide your full-time hours by the number of days of PTO you wish to offer, as well as how you want to reward them (Will you make it a lumpsum at the end of the year, or will you let the PTO bank grow with a daily PTO accrual or weekly PTO accrual system building up over a year? Furthermore, will you allow it to rollover into the next year?)
Let’s say a full-time employee works 2080 hours a year. You want to offer 160 hours of PTO for full-time employees. The employee would gain one hour of PTO for every thirteen hours worked. You can apply the same calculation to your part-time employees; if they work 39 hours in a month, they will accrue three hours of PTO.
How does PTO accrue?
PTO usually accrues in a set amount per hour worked. Starting from the beginning of the year (or after a probationary period for new hires), the more hours an employee works, the more PTO they will receive. Companies can manage their PTO accrual policy in a variety of ways and will depend on whether the employee is in a salaried or hourly position. Ultimately, PTO accrues in line with the amount of time that the employee spends working for the company. The more hours they work, the more PTO they will be entitled to, per the company’s PTO policy.
How is PTO payout calculated?
PTO payout is calculated in two ways, depending on whether the employee is in an hourly or salaried position. Ultimately, the end result is the same: you’re paying the employee for the unused PTO hours they have accrued once they leave your employment. (Note, federal law does not mandate businesses have to offer PTO. It merely mandates that they must stick to what they offer.)
For hourly employees, you simply multiply the employee’s hourly rate by the number of PTO hours they have accrued. For example: they earn $10 an hour and have accrued 6 hours of PTO. Their PTO accrual amount would be $60.
For salaried employees, you must first calculate the employee’s hourly rate. You can do this by dividing the value of their salary divided by the number of hours they have worked. (example: $40,000 a year/2080 hours = $19.2 an hour). From there, you multiply the number by the amount of PTO hours they have accrued. (Example: they have 17 hours. 17 x 19.2 = $326.40).
How is time off accrued?
Time off is accrued over a set period of time that is defined by the company. The employee may gain PTO accrual based on how many hours, weeks, or pay periods they’ve worked at the company. The more that the employee works, the more PTO they will accrue. There’s usually a cap on how much the employee can accrue (for example, all PTO must be taken before the end of the calendar year).
What does 20 days PTO mean?
20 days PTO means that the employee has twenty days of paid time off to use as vacation days or sick time. They will take the twenty days in line with the company’s PTO policy; for instance, they may be able to take the time off all at once (twenty consecutive days) or have to break it up into smaller chunks. 20 days is effectively the same as ‘four workweeks’ if the company follows the usual Monday – Friday schedule.
What does accrued PTO mean?
Accrued PTO is paid time off that has been earned over a period of time. For example, an employee may ‘accrue’ paid leave for every forty hours that they work for the company. This differs from ‘banked PTO,’ which is when a company has a standard PTO policy that applies to all its employees. PTO accrual is favored by small businesses as it’s a convenient way to offer a much in-demand benefit without having to put together an expensive benefits package.
What is my PTO worth?
Employees can determine what their PTO accrual is worth by calculating the number of hours they have accrued and multiplying it by their hourly rate. If an employee has 18 accrued PTO hours and an hourly rate of $10, then the value of the PTO would be $180. Salaried employees can find their hourly rate by dividing their salary by the number of hours they’ve worked. To calculate PTO can then multiply the hourly rate by the number of hours they have accrued.
When does PTO have to be paid out?
In some cases, an employer has to pay out their employees’ unused vacation time when a team member leaves the company. This is due to some state laws requiring a full “cash out” – accrued vacation hours being paid out after a job termination.
Which states require PTO to be paid out?
As of this post’s writing, there are 24 states that require businesses to pay employees for their unused paid holidays:
Alaska, Arizona, California, Colorado, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, North Dakota, Nebraska, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, Tennessee, West Virginia, and Wyoming.
This payout has to be done regardless of if employees are leaving on their own or are being fired.
If you live in one of these states, it’s incredibly important to be accurate about calculating PTO, or you could open yourself up to being sued for unused vacation time.
How to Use Time Tracking Software to Handle PTO Accruals
As everything we’ve outlined reveals, calculating annual PTO and vacation time for your employees can be a complicated task. The days of relying on self-reporting and templates are long gone. This is why many business owners turn to time tracking software to automate much of the process and eliminate hassle.
If you’re considering using a time tracking software, here are some of the functions you might want to look out for:
- Paid Time Off Tracking
Ideally a time tracking software would include the most common types of PTO (such as holiday leave and sick days) in addition to leaving room for you or your team members to create custom types of PTO.
Optionally, you might want to check and see if a time clock option you’re considering allows a self-service approach to PTO. For example, our tool Buddy Punch has this option for employers who build up trust with their team members and are alright with them requesting time off without requiring supervision.
- PTO Accruals
To eliminate the need to calculate banked PTO yourself, you might want to find an online time clock that has accrual calculations built in. For example, Buddy Punch allows you to create custom rules for how PTO accrues (frequency, amount, etc.).
- Time Off Reports
Lastly, you’re going to want to look for detailed reports you can access to see PTO balances and usage for all of your employees. In our opinion, the more detailed the better since you’ll be able to save these to your records for accuracy’s sake.
Once you’ve found a tool that includes all or most of these features, you should experience a drastically streamlined PTO calculation experience. Most of these functions will handle the hard work for you (based on your entered parameters) and you’ll always be able to refer back to your reports if you want to verify calculations.
By the way, there’s a reason we highlighted these specific features. They’re the exact functions we wanted when we were looking to automate our PTO accumulation process – which is why we built them into Buddy Punch.
Calculating PTO with Buddy Punch
The major advantage of using Buddy Punch to calculate PTO is that it handles aspects of calculation and accrual automatically.
With Buddy Punch’s Paid Time Off Tracking Feature, you can create custom PTO types at will and set them to automatically accrue based on your chosen rules. Whenever a team member applies to use their accrued PTO, you’ll be sent a notification so you can immediately approve or deny the request.
Additionally, you can enable a self-service approach to PTO, allowing trusted team members to be automatically approved for any time off they request.
Meanwhile, Buddy Punch’s Time Off Accruals Feature can be easily toggled on or off, allows for negative balances, lets you set maximum hours allowed, and can even be configured to allow carry over balances – all depending on how you personally want to handle accruals.
Once you’ve set up how you’re going to track, accrue, and approve or deny PTO, you can use Buddy Punch’s PTO Summary Report at any time to get a full overview of your team members’ PTO balances.
PTO accrual can sound tricky, but breaking it down into manageable pieces or turning to a powerful piece of software can streamline the entire process. However you choose to handle it, it’s worth investing in a comprehensive PTO solution since it’s a great way for companies to attract talent without breaking the bank.
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