What is Accrued Leave? Everything You Need to Know

With a growing business you might find yourself stuck in the mire of complicated HR terms, particularly when it comes to managing annual leave (aka paid time off/vacation).

One thing you might be confused about is accrued leave. You might wonder what this means, how it should work, and whether you really need to go through the hassle of it all.

If this is you, keep reading. We’ll explain everything you need to know about accrued leave if you’re a startup owner, HR professional or anyone else for whom this is relevant.

What Does Accrued Leave Mean?

Accrued leave is when the amount of paid time off employees get steadily increases relative to how much or how long they work.

The employee might get leave hours (or days) for each pay period, for each month/quarter/year of service time, or as a fraction of the number of hours they work.

Examples of Accrued Leave

For salaried employees, accrued leave could mean an employee receives 1.5 days of paid leave for every month they work. This will add up to 9 days’ leave after 6 months, and 18 days’ leave per year.

For hourly employees, it could mean that employees earn 0.05 hours’ paid leave per hour worked.

With a 40 hour work week, that would equal 2 hours of accrued leave per week. The employee would thus earn 52 hours of paid leave every 6 months, and 104 hours (a little over 2 and a half weeks) of paid leave per year.

What’s the Difference Between Accrued Leave and Annual Leave?

Technically speaking, these can be the same thing. But often, when people say “annual leave” they refer to leave given as a yearly entitlement, rather than leave accrued over time.

For example, you may have two employees, working in different businesses, with the same employee benefits. One gets accrued leave, the other gets standard annual leave.

Both get 18 days of leave per year. The first gets 1.5 days for every month they work, with their leave balance increasing over time.

The second gets all 18 days at once, as soon as the business year begins.

Halfway through the year, the first employee will be able to take up to 9 days off, whereas the second will be able to take up to 18.

The benefits work out to be equal eventually, but the timing and availability is different.

(This doesn’t take into account if the employees have unused annual leave from the previous year – any leave carried over here would be added on to their earned leave balance).

What Types of Leave Can Be Accrued?

Exactly how accrued leave works, and which types of leave it applies to, is generally up to each business to decide.

It can apply to any type of leave, but it’s most commonly used for vacation days. The longer employees work, the more vacation time they bank up. This makes sense, as it becomes an earned benefit employees get for time worked in the business.

For other leave types, accrual doesn’t make as much sense. Maternity and paternity, for example – these are not going to be accrued leave. You may set it so that employees need a minimum length of service time before they’re eligible for parental leave, but the length of parental leave is not going to be directly relative to time worked.

Sick leave is another which can be accrued, but generally it makes more sense for sick leave to be a set entitlement per period (e.g. year), rather than being an “earned” benefit. Employees should have sick leave or medical leave available when needed.

Things like bereavement leave, jury duty, don’t make sense to accrue. Personal time, mental health days or stress leave may accrue, or may just be available as needed.

If your business offers a paid sabbatical, this could also be accrued leave. However, it would likely accrue at a more prolonged rate. Instead of accumulating by day/week worked, it would more likely be accrued as a number of days per year, starting from a specific length of service time.

How to Calculate Leave Accrual

You can calculate leave accrual in a number of ways, such as:

• Accrued leave by hours worked (best for hourly employees, or employees with varied schedules).
• Accruing by days/weeks/months worked (common accrual structures are usually weekly or monthly).
• Accrued by a set period, as above, but starting from a certain point (e.g. the employee receives 9 days’ annual leave after working for 6 months, then 1.5 days per month added to employee accrual balances after that).

Figuring it out for your business takes the following steps:

1. Decide on the total yearly leave entitlement (e.g. 18 days per year).
2. Choose how often leave will accrue (e.g. weekly, monthly).
3. Divide the total yearly entitlement by the number of working periods (e.g. weeks or days) in a year to get your accrual rate.

For example, if you have 18 days of annual leave per year, and you decide leave will accrue each week, you will divide 18 by 52, resulting in 0.35 days of annual leave accrued per week.

Free PTO Accrual Calculator

We built a free tool to let you calculate how much PTO a person will accrue, based off the selected period and accrual rate, including any starting balance and maximum accrual amount.

Check it out below, or learn more about how Flamingo’s PTO accrual calculator works here.

Is PTO/Vacation Always Accrued?

You don’t have to do accruals. It’s up to how each business decides to shape their leave policy.

You can choose to do accruals, or offer a standard annual leave entitlement – as long as it complies with all relevant leave laws in the company’s location.

In some countries/states, it’s legally required to offer employees x number of paid vacation days per a specific period (e.g. per month). However, a standard yearly entitlement, available immediately at the start of the year or employment period, will usually satisfy this requirement.

Thus, in most cases, you’re not legally required to do accruals (again, be sure to check with an employment law professional to get the final answer on this). But there are some pros and cons of doing accruals vs not.

Pros and Cons of Accruals vs Standard Leave Entitlement

Accrued leave is, in general, a bit more complicated than a simple annual leave entitlement.

Accruals do make it easier to provide workers with the proper amount of paid time off when they start part way through the year, or work irregular schedules.

For example, if your business year runs from January through to December, yet someone starts the job in April, you need to adjust their leave balance to match.

You can either change their leave year to start on their employment start date (which will get complicated with a lot of employees with different start dates), or prorate their vacation allowance for the first year (also a little complicated).

With accrued vacation, it doesn’t matter when an employee starts relative to the company’s leave year. It all works out equal.

The same goes for part time employees, or those with non-standard schedules.

Another pro of annual leave accrual is that employees need to earn their benefits. You don’t worry about someone starting a job and then disappearing a few weeks later, already on vacation.

Though you can offset that by requiring a waiting period (e.g. 3 or 6 months) before someone can take vacation days.

You might find it’s simpler to do a regular leave entitlement, and just prorate it for new employees. This is also easier on employees, as they always know where they stand with their leave allowance, and can plan ahead easier.

Alternatively, you could make it even simpler with an unlimited PTO policy. Consider what the right option is for your business.

Final Thoughts: Is Accrued Leave a Good Idea?

Accruing leave is a more structured approach to a leave policy. It’s generally favored by more traditional companies, those with more of a corporate structure.

Newer, modern startups tend to favor a flexible approach, based on trusting their employees. For this, a standard annual leave entitlement tends to be better. It’s easier to manage, easier on employees, and trusts that you don’t need to strictly control employees’ benefits.

For your own business, the choice is up to you. Just ensure that if you do accrued leave, you have an automated process in place to easily keep track of PTO accruals.