February 9, 2024

PTO accrual: What you need to know

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Organizational decision-makers often have the task of implementing a paid time off (PTO) accrual system. Creating and maintaining a PTO accrual system is essential, but it can prove challenging. To establish an effective approach, executives and management teams must incorporate policies that benefit both the organization and its employees.

The right PTO accrual system can accomplish this by prioritizing factors like labor law and union rule compliance, efficient leave management processes, and an optimal work-life balance for employees. These considerations enable the organization to align with legal requirements and internal regulations while meeting the unique needs of their staff. When organizations operate efficiently and employees feel empowered, everyone wins.

Understanding the nuances of different PTO accrual types, policies, and calculations is key to developing a system that meets organizational requirements and controlling costs. It’s also crucial for providing employees with compelling work-life balance opportunities that promote job satisfaction and enable organizations to retain their top talent. This article will take a comprehensive look at PTO accrual to familiarize you with its various aspects, explain your options, and help you make informed decisions when creating and implementing a PTO policy that benefits your organization and employees.

What is PTO accrual?

PTO accrual is a method by which employees earn paid time off incrementally. Rather than receiving a fixed amount of leave days at the start of each year, employees accumulate a certain amount of PTO hours or days based on the number of hours they work or their tenure with the company. This approach allows organizations to provide paid leave in a way that aligns with work performed and employee commitment.

Organizations set their own accrual rates, which determine how quickly employees earn their PTO based on factors like position, years of service, or hours worked. Although it’s not the only approach, PTO accrual is one of the most common policy types for providing employees with paid leave. It’s a method that resonates with many organizations due to its balance between rewarding employee tenure and managing leave liabilities.

Lump-sum PTO vs. accrued PTO

Lump-sum PTO is an alternative approach to accrued PTO where employers grant a set amount of paid leave days at the start of each year or employment period. This method is straightforward and provides employees with immediate access to their full leave entitlement. Some organizations have transformed their lump-sum PTO policies by opting instead for unlimited PTO, a modern approach that does away with a defined amount each year. This approach offers employees flexibility and trust in managing their own time off.

Accrued PTO, which is more common in practice, allows employees to gradually earn leave time over the course of the year. Employers may see this type of policy as more equitable, as it directly relates to the amount of time an employee has worked. Understanding how to calculate accrued PTO is crucial for companies considering this policy, as it impacts payroll, staffing, and budgeting.

If you’re looking to effectively manage your PTO policy, whether lump-sum or accrued, learn how TimeClock Plus can simplify your leave management and other time and attendance needs.

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How to calculate accrued PTO

Many organizations use automated time and attendance software to calculate accrued PTO because it simplifies the process significantly. However, some still manage this process manually, often because they’re unaware of their options or believe that automated time and attendance software is too costly for their organization.

Manual calculations can become complicated, especially with more complex accrual policies. It’s typically this challenge—and not the cost of software—that becomes costly, as human error can lead to issues like inaccurate reporting, legal penalties, and high turnover rates. If you choose to calculate PTO manually, here are some basic steps you can take:

  1. Divide: Start by dividing the number of hours worked by the employee by the number of hours required to earn one hour of PTO. This gives you the total hours of PTO accrued.
  2. Subtract: If an employee has already used some PTO, subtract the used hours from the accrued hours to find out the remaining PTO.
  3. Multiply: Next, multiply the accrued PTO hours by the employee’s hourly wage to calculate the monetary value of the accrued PTO. Knowing the monetary value of an employee’s PTO is beneficial when performing operational functions like budgeting and reporting. This step is particularly intricate for employees under complex accrual policies, where an automated leave management system proves invaluable.

While these steps may be helpful in calculating an employee’s current PTO accrual, keep in mind that they’re not reliable for forecasting PTO. They don’t take into consideration future PTO the employee has scheduled or provide insight into an employee’s projected PTO balance versus their current and scheduled balances. The right time and attendance software can automate these calculations for you accurately, no matter the type or complexity of your PTO accrual policy.

What are the types of company policies for PTO accrual?

Companies can tailor their PTO accrual policies based on factors like employee needs and organizational resources. Common policy options include:

  • Weekly Accrual: Typically used for full-time employees, this policy allows PTO to accumulate on a weekly basis.
    • Example: An employee might earn 2 hours of PTO for every 40 hours worked per week. To calculate this, divide 40 (weekly hours worked) by 20 (40/20 = 2 hours of PTO). If the employee’s hourly wage is $25, then the value of 2 hours of PTO is 2 x $25 = $50.
  • Biweekly Accrual: A common approach for full-time employees, accruing PTO every two weeks.
    • Example: An employee accrues 4 hours of PTO per 80 hours worked biweekly. In this case, divide 80 (biweekly hours worked) by 20 (80/20 = 4 hours of PTO). With an hourly wage of $25, the PTO value would be 4 x $25 = $100.
  • Monthly Accrual: Often chosen for full-time staff, PTO accrues each month.
    • Example: An employee accumulates one day (8 hours) of PTO each month. If an employee works 160 hours monthly, divide 160 by 20 (160/20 = 8 hours of PTO). At $25 per hour, the monthly PTO value equals 8 x $25 = $200.
  • Yearly Accrual: This policy grants PTO annually, implemented for both part-time and full-time employees.
    • Example: An employee receives 10 days (80 hours) of PTO at the start of the year. To calculate the annual value, if the hourly wage is $25, then 80 hours of PTO equals 80 x $25 = $2,000.
  • Hourly Accrual: One of the more complex and less common options, this policy involves accruing PTO based on the number of hours worked. This method is sometimes required by collective bargaining agreements (CBAs), contracts, and/or legal mandates. Hourly PTO accrual is one of the most challenging methods to calculate manually or with outdated systems because of its complexity, making automated time and attendance software critical for accuracy, efficiency, and compliance.
    • Example: An employee earns 1 hour of PTO for every 30 hours worked. For example, if an employee works 120 hours in a period, they accrue 4 hours of PTO (120/30). At $25 per hour, this is valued at 4 x $25 = $100.
  • Daily Accrual: Implemented for part-time and full-time employees, PTO accrues daily.
    • Example: An employee earns 1 hour of PTO for each 8-hour workday. To find out how many hours they earn in a 40-hour work week, divide 40 (the number of hours worked) by 8 (40/8 = 5 hours). With a $25 hourly wage, the weekly PTO value is $25 X 5 = $125.

Understanding these types of accrued PTO helps in choosing an approach that aligns best with the needs of your organization and workforce.

Creating a PTO accrual policy

There’s no one-size-fits-all PTO accrual policy, as the needs and objectives of every organization vary based on a number of factors. However, you can create the right policy for your organization by choosing an approach that aligns with your goals, keeps you in compliance, and allows you to offer your team the benefits they deserve. The range of possibilities may make creating a PTO accrual policy feel intimidating, but considering these components can help you ensure you incorporate the best ones for your organization:

  • Stair-stepping: This policy offers varying amounts of PTO based on an employee’s length of service. For example, a new employee might start with two weeks of PTO in their first year, which increases to three weeks in their second year, rewarding longevity and commitment to the organization.
  • Resets: Some organizations implement a “use it or lose it” policy, where employees must use their PTO within a given timeframe, typically by year-end. Alternatively, a reset policy may allow employees to carry over only a certain number of PTO hours into the next year. For instance, an employee might be able to roll over a maximum of 10 hours of unused PTO to the next year, while any number of hours beyond the maximum is reset.
  • Caps: This rule sets a maximum limit on the amount of PTO an employee can accumulate. Once the employee reaches this cap, they must use some of their accrued PTO before accruing more. For example, if the organization sets the cap at 120 hours, an employee must use PTO to bring the balance below this threshold before accruing additional time.
  • Compensatory (comp) time: In an organization that allows for comp time, employees earn additional time off instead of receiving overtime pay for extra hours worked. This approach—which only applies to the public sector—is critical to manage correctly, as it involves actual hours worked and must comply with legal compensation requirements. For example, an employee might work 10 hours of overtime and receive 15 hours of comp time in return.
  • Payouts: Here, organizations opt to pay employees for their unused PTO at the end of the year. This approach clears the PTO balance, starting the employee with zero hours at the beginning of the new year. For example, an employee with 40 unused PTO hours might receive a payout for these hours and start the new year with a fresh PTO balance.
  • Different rules for different groups: This approach tailors PTO policies to specific employee groups, often based on union membership, contract terms, seniority, types of employment, or job roles. For instance, unionized employees might have a different PTO accrual rate or cap compared to non-union employees, reflecting the terms negotiated in the CBA.

Accurately implementing a PTO policy is a complicated process for any organization to manage, especially if they have complex needs or preferences. Even the most reliable and experienced professionals are human, and the occasional human error is inevitable. When it comes to PTO accrual, those mistakes can be difficult—and expensive—to fix. Your team can streamline tedious tasks that lead to these common errors with a time and attendance software solution that’s designed to handle the intricacies of your PTO accrual policies with accuracy and efficiency.

Simplify your PTO accrual policy with TCP Software

An effective PTO accrual system benefits both the institution and its staff by facilitating business goals and empowering employees through respect and transparency. However, developing and managing an effective PTO accrual system can be challenging. Without the right platform, organizations risk creating policies that are costly, non-compliant, unproductive, and potentially detrimental to employee satisfaction and operational efficiency. Conversely, well-managed PTO policies can foster engagement, transparency, and job satisfaction, thereby improving the company’s bottom line.

TCP believes that organizations shouldn’t have to compromise between achieving their goals and ensuring staff satisfaction, regardless of the complexity of their needs. Manual processes often force organizations to choose between the two and make trade-offs that have negative impacts on their operations, teams, or both. We provide establishments across a range of public and private industries with fully customized and automated systems that enhance accuracy, efficiency, compliance, and employee experience.

To discover how much you can save on automating time and attendance with TCP’s solutions, explore the potential with our ROI calculator. If you’re ready for a time and attendance solution that’s designed to fit your needs—and not the other way around—speak with an expert to get started.