February 13, 2024
What is Discretionary Time Off? (DTO)
We’re in an age where new workplace terms are being thrown at us from all angles. One you might have heard ...
Managing PTO accrual can be one of the more complicated parts of a leave management system. Tracking it manually takes a lot of time, is error-prone, and takes energy and headspace away from other tasks.
There’s also a lot of confusion about PTO accrual, from HR professionals and startup founders we’ve talked to. That’s why we’ll explain everything you need to know, along with how to calculate PTO accruals, in this post.
PTO accrual is when employees steadily accumulate more paid time off (PTO) over time.
The PTO accrual rate and period can vary from business to business. Generally, employees will accrue PTO hours/days every week, two weeks, or each month. The most common accrual frequency is in line with the employee’s pay period.
It works kind of like a bank account for vacation time. As employees accrue paid time off, their balance grows, and they have more PTO hours available to spend.
Like a bank account, the employee may be allowed to go into overdraft on their PTO, putting themselves into a negative PTO balance, if agreed by the company. However, this is a case-by-case thing, and a lot of companies will only allow employees to take PTO if they have the available time already accrued.
Not all businesses do PTO accruals. The other option is a lump-sum approach to PTO. This allows employees a set amount of PTO per period, available as soon as that period begins.
It usually works over a year. As an example, employees may receive 15 days of PTO per year. In a lump-sum PTO policy, employees will be able to take from the whole PTO bank at the start of the year.
With a PTO accrual policy, it may work out that employees get 1.25 days of PTO per month. That would add up to the same yearly allowance (15 days PTO), but it’s not all available at once.
This can differ from business to business, depending on their own leave policy (along with any relevant leave laws).
For the majority, PTO starts accruing as soon as a person’s employment begins. This is one of the benefits of accrued PTO – that employees need to complete a certain level of service time until they are able to take an extended vacation.
However, some businesses stipulate that employees need to work for a certain amount of time, kind of like a probationary period, before they can earn benefits like paid time off. This is most commonly 30 or 90 days, but each company’s policy may differ.
Accrued time off usually applies for vacation days. It doesn’t make as much sense for other leave types to accrue over time.
Sick days, for example, should be available as and when needed. There may be a minimum service period required for access to paid sick leave, but it’s unusual to act as an earned benefit, like accrued vacation time would.
Other, less standard types of leave may accrue, but at a different rate and period to vacation time. Employees may receive long-service leave, or allowance for a sabbatical, which accrues every year (or longer), as opposed to weekly/monthly.
Unused PTO generally works a little differently with accrued PTO vs lump-sum PTO.
With a lump-sum policy, leave may expire at the end of the year. For example, employees get 15 days of PTO to use at the start of every year, and that balance expires on December 31st.
With accrued paid time off, employees don’t receive their full leave balance until the end of the year. So they need to have the opportunity to take their earned PTO hours/days.
In this case, PTO may expire one year after it was accrued. So if someone accrues 1.25 days of leave in January, only those 1.25 days expire the following January.
More commonly, accrued PTO takes longer to expire, or doesn’t expire at all. Alternatively, there might be an upper limit – for example, employees may be able to earn PTO up to a total number of hours or days, at which point they need to take or cash out their PTO.
Whether or not leave expires, and how long until it does, is usually up to the company to decide (as long as they follow the requisite laws in regards to leave expiry and “use it or lose it” vacation policies).
Calculating accrued PTO is one of the most difficult parts of the process. It can be complicated and confusing, especially when doing it manually.
With a tool that calculates PTO accruals automatically, it’s much easier. But you should still know how the process works.
Here’s a step-by-step to help make it easier to figure out.
To implement PTO accrual, start by figuring out how much total annual leave each employee will get, working a full, normal year.
For example, this might be 15 vacation days per year. Once you have this figure, you can work backwards and figure out the accrual rate and frequency.
Next, decide on the accrual frequency.
This could be:
Standard procedure is to accrual PTO at the same rate as the employee’s pay period. This way, at the end of the pay period, the employee can get a payslip showing their wages paid along with how much PTO they have had added to their balance.
Once you figure this out, it’s simple to figure out the accrual rate. Just divide total annual leave by the number of periods in a year, to get the employee’s PTO accrual rate.
(e.g.: for 15 days annual leave, accruing each month, divide 15/12. The rate equals 1.25 days of annual leave accrued each month)
Ensure employees’ leave balance gets the correct amount added per pay period.
Employees need to have up-to-date information on how much leave they have available, so they can make plans to take their accrued vacation time.
If wages and paid time off work hourly, instead of a regular weekly/monthly/yearly salary, you’ll need to calculate PTO accrual a little differently. Yet it’s still fundamentally the same.
You’ll need to figure out the total hours worked in a regular year, along with the number of hours of PTO each employee should get per year.
Let’s use the same example of 15 days PTO per year. Then, let’s say a regular working day is 8 hours, over 5 days a week, 52 weeks in a year.
For hourly employees, you generally calculate it by hours worked. This way, if someone works more hours (picking up overtime or extra shifts), they earn more PTO. In our example, employees would earn 0.05 hours of PTO per hour worked.
However, the employee may only have PTO added to their balance along with the pay period. So if pay periods are weekly, employees may actually earn 2 hours of PTO per week (40 x 0.05), assuming a normal working week.
We built a free PTO accrual calculator that makes it easy to figure out how many days or hours of PTO an employee will earn in any given period, based on their accrual rate.
Try it out below:
Choose a date range above to use for calculating time accrued.
Select how many day(s) of leave you begin with.
Select the maximum number of day(s) of leave you can accrue (0 for unlimited).
In most cases, it’s not mandatory to run your PTO this way. You can usually choose whether to do accrued PTO or lump-sum (or adopt a flexible leave policy, such as unlimited PTO).
There may be exceptions in the region your business operates, if the law dictates something specific in regards to how PTO should operate. You should definitely check with a legal professional to make sure you have the correct, up-to-date advice on what applies to your business.
You’ll often find that if the law in your location dictates that employees should get a certain amount of PTO per period (e.g. week/month), a lump-sum yearly balance should satisfy your legal requirements as well.
Assuming it’s up to your company’s discretion over whether to accrue PTO or make it available all at once, here are some pros of implementing a successful PTO accrual policy:
Here are some of the reasons that accruing PTO may not be a good idea, compared to the alternatives:
PTO accrual is standard business practice. That’s not to say it’s always the best idea, though.
The PTO accrual bank approach gives companies more control, and makes it more straightforward to see how employees earn their benefits over time.
Yet it takes more work to manage this approach. Manually calculating PTO accrual takes a ton of legwork, so you really do need to rely on a tool to help you manage accruals.
You may find it’s simpler to offer PTO as a lump-sum approach. If you do, just take care to manage your vacation calendar so that you don’t have too many people applying for leave at the same time, as they’ll all receive their yearly allowance at the same time.
Whichever way you choose to run your PTO policy (as well as if you decide to institute an unlimited vacation or mandatory vacation policy), it’s just important that you’re generous with your PTO allowance, and you have a solid vacation tracking system in place to manage paid time off.
PTO is essential for ensuring your staff can take time away from work to rest, recharge, and maintain a healthy work/life balance, and is also necessary to stay competitive in the hiring market.
A tool like Flamingo allows you to offer all the paid time off and vacation time your employees need, without disrupting productivity, and with little work required for your HR team. Tracking vacation time with Flamingo helps you build a more positive, healthier, and more productive work environment.
Flamingo makes managing your team’s paid time off a breeze.