For many workers, paid time off (PTO) is the most important benefit to consider when deciding where to work. That’s why businesses need to implement policies that will help them stay competitive. But that’s just one part of a larger conversation around PTO. Here’s what you need to know about accrued time off—the most common method for earning PTO.
What is accrued time off?
Accrued time off is PTO that workers earn over time. It’s different from lump-sum PTO, for instance, wherein a worker receives all their PTO at once. With accrued time off, workers earn PTO hours each week, pay period, or month.
Generally, companies cap the number of PTO hours a worker can accrue in a year. A year may start with the company’s fiscal year, the calendar year, or an employee’s hire date.
Companies often reward loyalty by increasing the number of PTO hours an employee can accrue in a year. They might also allow senior members to roll over more PTO hours into the next year. Here’s an example from the Society for Human Resource Management:
- An employee with two years or fewer under their belt can accrue up to 10 days of PTO, or 3.07 hours per pay period.
- An employee who’s been with the company for over 10 years can accrue 25 days of PTO, earning 7.69 hours per pay period.
Are accrued time off and outstanding time off the same?
Accrued time off and outstanding time off are separate concepts, though they overlap. To recap, accrued time off is PTO that someone earns over time. For instance, each week, you might earn two hours of PTO. In a month, you would have eight hours of PTO. For most people, that’s enough PTO to take a day off.
Outstanding time off is time off that a worker has requested that their manager hasn’t approved. It can refer to time off that a worker has taken or will take. Someone might have several hours of outstanding PTO if their manager hasn’t approved their PTO requests.
But accrued time off and outstanding time off often intersect. That’s because the same person who is accruing time off may also have outstanding time off. Remember those eight hours of accrued time off? Say you submit a request to take a day off work, but your manager is out of the office. Until your manager approves that time, you have both accrued time off and outstanding time off.
What’s the difference between lump-sum and accrued PTO?
Lump-sum PTO, also known as front-loaded PTO, is the most common alternative to accrued time off. Rather than accumulating PTO hours over time, workers with lump-sum PTO receive all their paid time off at once. Here’s an example of that in practice:
- An employee with accrued time off might earn two hours of PTO each week. By the end of 10 months, they’d have 80 hours of PTO—enough for 10 workdays off.
- An employee with lump-sum PTO would receive 80 hours of PTO (based on their employer’s plan) at the beginning of the year. They’d have the whole year to use it as they wished.
Like accrued PTO, the amount of lump-sum PTO an employee earns each year may depend on how long they’ve been with the company. Tenured employees could receive double the number of PTO days as a newly hired colleague.
6 examples of how to accrue time off
Federal labor laws don’t require employers to give employees paid time off. That means there also aren’t any parameters around how much time off employees should accrue in a year. These are details each business owner can decide for themself. Business owners looking to set up a new PTO accrual policy may choose from six common options:
- Accrue PTO hours each pay period.
- Accrue PTO hours each week.
- Accrue PTO hours each month.
- Reset PTO accrual by the calendar year.
- Reset PTO accrual by fiscal year.
- Reset PTO accrual by each employee’s work anniversary.
The latter three examples assume that the business puts a cap on how much PTO an employee can accrue in a year. But each year has to have a date when an employee can once again start accruing PTO and taking time off. That reset date varies from business to business, as some reset on January 1, while others go by fiscal year or work anniversary.
How to calculate accrued time off
Calculating accrued time off can be a challenge. That’s why most businesses use a PTO accrual calculator, typically embedded into their time tracking or payroll software. QuickBooks Time, for instance, makes it easy for managers to track employee PTO. They can even configure the app to allow employees to request or approve their time off.
But say you only want to know how many hours of PTO you’ll accrue in a month. Maybe you want to take a vacation and are wondering if that’s possible. Here’s how to figure out the answer.
- Know how many hours of PTO you accrue each week. If you accrue PTO hours by pay period, and each pay period is two weeks, divide that number in half.
- Multiply the number of PTO hours you accrue by the number of weeks you plan on working before your time off. For example, say you earn two hours of PTO each week, and you want to take a vacation in three months (12 weeks). Multiply two and 12 to get 24 hours of PTO.
- Find out how many hours of PTO equals one workday. For most employees, one workday is eight hours. So 24 hours of PTO would equal three workdays off.
Do employers have to pay out accrued time off?
Currently, no federal or state laws mandate that employers give employees vacation pay. However, should an employer provide PTO, some states require them to pay out any unused PTO when an employee leaves the company. If a company contract or policy promises to pay out PTO, the employer must abide.
Arkansas, California, Colorado, and Illinois require businesses to pay out any earned PTO. Review out your state’s labor laws for updates on similar PTO requirements. Whether your business has been doing lump-sum PTO or is new to offering PTO, you can’t go wrong with an accrual-based structure.