PTO Accrual

Chris Ruddy
Chris Ruddy
Is an accrual PTO plan right for you? In an age of increasing employee benefits driven by a competitive job industry, choosing the right paid time off plan is critical to attracting and retaining top talent. In this article, you’ll learn about accrual PTO plans and how you can implement one in your company!

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What Is PTO Accrual?

Paid time off (PTO) accrual, or accrued PTO, is the type of PTO that employees can earn over time. It is often treated like a vested benefit or “bank account” for time off, where PTO days are earned, saved and spent like money would be with a bank account. In some cases, employees can even cash out their unused PTO days when they leave the company. PTO accrual plans often include maximum balances, where employees cannot accrue over a certain amount each year or during their tenure at the company.

With accruing PTO, employees will earn PTO per a certain period of time throughout the year (chosen by the employer). Employees will be able to save that PTO for another year, instead of having it expire annually like with use-it-or-lose-it PTO policies.

Is an Accrual Policy Right for Your Company?

As with every benefit your company implements, it’s important to consider what experience and culture you are trying to foster at your company. Here are some reasons why an accrual PTO policy might be right for your company:

  • Your employees don’t currently have PTO. An accrual PTO plan is very standard across most industries and is a great place to start when setting up a PTO plan for your company.
  • You don’t want your employees’ PTO to expire. Accrual PTO plans are a great option if you don’t want your employees’ PTO to expire.
  • You want employees to own their PTO. Because accrued PTO does not expire like use-it-or-lose-it PTO, employees feel a sense of ownership over their PTO.
  • Your company is financially ready. You feel that your company is ready for any financial implications or payouts associated with accrued PTO. Some states require that unused PTO is paid out to the employee when they leave the company.

How To Implement PTO Accrual

While there is no set way to set up a PTO accrual policy for your company, here is a general guide to help you get started:

Step 1: Consider Why and for Whom You Are Adding a PTO Policy

Before writing your policy, consider why you are looking to create a PTO policy in general and why you want it to be an accrual policy instead of a use-it-or-lose-it policy. What work culture are you trying to foster at your company and how does an accrual PTO policy contribute to that? Also consider which employees will be added to the PTO policy (i.e., full-time, part-time, exempt, nonexempt employees).

Step 2: Consider the Legal Requirements To Offer PTO at Your Company, As Well as Potential Budgetary Costs for Payout

Take a look at the labor and PTO laws of the state(s) where you have employees. When drafting your PTO policy, you’ll need to consider what the requirements are for each state where you have employees. Some states may require a cash payout of PTO when an employee leaves the company. If this is the case in your state, you may want to consider the budgetary implications of such an accrual PTO policy.

Step 3: Decide the Amounts and Accrual Details of Your PTO Policy

Decide on how much and how often your employees will earn and accrue PTO. You may want employees to accrue PTO semi-monthly, monthly or even annually. Consider factors like turnover when making this decision to avoid unnecessary PTO payout costs.

You can also set up a system that allows for employees with longer time at the company to earn more PTO each year to promote longevity at the company.

And finally, you can add an accrual limit or maximum to encourage employees to use their PTO and limit the financial cost of a PTO payout should the employee leave the company.

Step 4: Determine the Logistics

Identify the system you would like to use to track earned, saved and spent PTO. This may be on spreadsheets that you create yourself or by using an HR application like Eddy to automate things for you.

Step 5: Write Your Policy, Revise and Communicate It to Your Company

Once you have determined the details and logistics of your accrual PTO plan, all you need to do is write out your policy, revise it and communicate it to your team. We recommend that you have a mentor, colleague or attorney review your policy and make suggestions before making it official at your company.

When communicating your new PTO policy to your company, you’ll want to make sure that it is accessible to all your employees. This can be done by sending out an email, adding the policy to the employee handbook and even providing a physical copy to your employees.

How To Calculate How Much PTO an Employees Has Accrued

While many HR applications may calculate PTO accruals for you, here are some guidelines for calculating accrued PTO for your employees should you need to pay out unused PTO or simply help an employee understand their balance.

For purposes of this article, an employee earns $20 per hour and accrues one hour of PTO for every 40 hours that they work. The employee has worked 2,000 hours.

Step 1 – Divide

Divide the number of hours that the employee has worked (2,000) by the number of hours it takes to earn an hour of PTO (40):

2,000 hours worked / 40 hours  = 50 total hours of accrued PTO

Step 2 – Subtract

If you want to know the employee’s current PTO balance, you can do so by subtracting the amount of used PTO (20 hours) from the total amount of accrued PTO (50 hours), which was calculated in Step 1:

50 total hours of PTO – 20 used hours = 30 hours PTO balance

Step 3 – Multiply

Now, since we have the amount of unused PTO hours (30), we can calculate how much money needs to be paid out for the employee’s PTO if they are leaving the company. We will need the employee’s hourly wage ($20/hr) to do this. We will multiply the number of unused hours by the hourly wage to get the total amount that is to be remitted to the employee:

30 hours of unused PTO * $20/hour = $600 to be paid out

Tips for Creating a Successful PTO Accrual Policy

Here are some additional tips for creating a successful PTO accrual policy.

Tip 1 – Cater Your Policy to Their Needs

Make sure that you cater your policy to the culture and needs of your employees, specifically as it relates to the frequency at which they accrue PTO. Employees at some companies may prefer receiving all of their PTO up front each year and then accruing their PTO from year to year, while some might prefer earning PTO on a monthly basis. It really depends on various factors including turnover frequency and average employee tenure at the company.

Tip 2 – Ensure Your Budget is Prepared

Make sure that your budget is prepared for payouts if that is required in your state or if you have employees in a state where a PTO payout is required upon leaving the company. These payouts can get really expensive, especially if you don’t establish an accrual limit or that limit is very high.

Tip 3 – Connect With HR Mentors

Consider connecting with HR mentors in similar industries to learn how they do PTO and how they think your employees would respond to a specific plan. While every company is different, there may be similarities between work cultures in the same industry. This may give you insights into how you can craft an effective accrual-based PTO policy.

Example Accrual-Based PTO Policy

Here is an example of an accrual-based PTO policy with carryover and accrual guidelines:

Purpose

[Company] has designed a paid time off (PTO) plan to assist employees with finding a healthy work-life balance. All full-time employees at [Company] will be added to this PTO plan, which combines all vacation, personal and sick leave into one singular program.

Accrual Schedule

PTO will be earned and accrue according to the following schedule and years worked at the company. PTO is accrued per pay period, which is semi-monthly.

0-1 years: 2.5 hours per pay period or 7.5 days per year

2-3 years: 3.5 hours per pay period or 10.5 days per year

4-5 years: 4.5 hours per pay period or 13.5 days per year

For purposes of this policy, there are 24 pay periods in a year, a day is 8 hours and the year begins on the employee’s date of hire.

Procedures

All PTO usage must be requested and approved by HR and the employee’s supervisor, using [Company’s] HR software. Employees will record PTO usage for vacation, sick, family and extra holiday leave. If needed and with approval of their supervisor, an employee may enter into a negative PTO balance before accruing their hours.

Employees must request PTO usage at least 2 weeks in advance of their intended absence. Requests made within 2 weeks of the intended absence date may be denied if there is a job-related scheduling conflict. For sick leave, employees should contact their supervisor the morning of their absence to notify them.

Employees may carry over a maximum of 30 hours of unused PTO time from one calendar year to the next and may hold a total maximum balance of 150 hours of unused PTO time at a time.

If an employee should leave the company with a balance of unused PTO, they will be paid for all of the said PTO in the form of their final paycheck and according to their hourly wage. Employees will not be able to receive a payout for PTO while they are currently employed by the company.

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Questions You’ve Asked Us About PTO Accrual

Do states have differing laws about PTO accrual?
Yes, they do. Before enacting your PTO policy in a new or different state, make sure you do your research about their PTO accrual laws. For example, some states may require a PTO payout upon leaving the company and some may not.
What’s the benefit of allowing employees to have unlimited PTO?
For many employees, the concept of unlimited PTO is the ultimate benefit because they are enabled to take off as much time as they need or want. As a result, employees with unlimited PTO may feel motivated to do their best work because they feel trusted by the company to perform well at their job and have a more flexible work schedule, balanced by plentiful PTO. There is no wrong or right way to do unlimited PTO or any standardized way to do it either, especially because many state labor laws are not equipped to regulate it. Make sure that you consult legal counsel before you consider an unlimited PTO plan and see what risks and rewards it might pose for your company.
Chris Ruddy
Chris Ruddy

Chris is an HR entrepreneur. Having worked with small businesses and start-ups throughout his career, Chris is passionate about pioneering HR departments in companies where they don’t currently exist. He currently works at Skill Struck, a local Utah tech company and is striving to be an expert in all things related to small business HR departments.

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