PTO Accrual: What It Is and How It Works

All work and no play can lead to burnout, decreased productivity, and even lower employee morale. That’s why a strong paid time off (PTO) policy can make all the difference for your business and employees. 

While there are a few different ways to approach PTO, many businesses have time off hours accrue based on the time employees spend working. This allows individuals to earn time off to use for things like vacation, sick days, and personal appointments throughout the year. Aside from attracting and retaining top talent, offering employees paid leave also promotes better work-life balance and engagement.

Trying to determine which PTO policy is right for your business? In this article, we take a closer look at what PTO accrual is, examine common PTO models, and share the pros and cons of different approaches. We’ll also review PTO accrual rates, so you understand exactly how employees can earn their time off. 

What is PTO accrual?

PTO accrual is a process through which employees accumulate time off based on the amount of time they work. Businesses typically give their employees a set number of days for different types of PTO like vacation, sick time, and personal days per year that the individual collects over each pay period worked. How much time off an employee gets per year depends entirely on the company’s PTO policy, but some employers give more tenured individuals more days off per year to reward them for their loyalty. 

While there are currently no federal laws requiring businesses to offer paid vacation time or sick leave, some state laws do mandate the latter. As always, be sure to look into your local labor laws to ensure your PTO policies comply with applicable regulations. 

What are PTO accrual caps?

Many companies choose to impose limits on how much paid time off employees can accrue within a specified timeframe. This is called a PTO accrual cap. In practice, once an employee hits a specific amount of accrued PTO, like 80 hours, they are unable to accumulate more until they take time off. This keeps employees from hoarding their days off, while incentivizing them to take time off throughout the year and get the rest they need.

What are PTO payouts?

One way accrued PTO can benefit employees is through PTO payouts. At the end of the year, employees may be able to carry unused accrued PTO over into the new year or cash it out at their usual pay rate. Of course, PTO accrual caps may restrict the number of hours an employee has accumulated at the end of the year, which can impact their potential payout and carryover.

Employers may be required to offer PTO payouts to terminated employees as well, depending on state requirements. If your state has no such requirement, whether or not your business pays employees for unused vacation days depends on the specifics of your policy. 

Many employees like PTO payouts because they get a choice. They can decide if time off is worth more to them than cash that they can put toward discretionary purchases or expenses like rent or student loans. PTO payouts are considered supplemental wages, so they are still subject to a flat tax withholding, like bonuses and commission. 

Comparing Different PTO Models

PTO is a great benefit that allows employees to take dedicated time away from work without having to worry about money. If your business decides to offer paid leave, you have options.

Here are a few different PTO models you can consider when building your own employee time off policy.

• Traditional PTO accrual: This method uses a determined accrual schedule which is often based on your company’s pay periods (weekly, biweekly, semimonthly, and monthly). 
• Lump-sum PTO: Employees are given all of their available PTO days or hours at the beginning of the year and can start using them immediately.
• Unlimited PTO: With no cap on the amount of time off employees can take, unlimited PTO allows employees to take as much time off as needed, within reason.
• Flexible time off (FTO): Also called discretionary time off, FTO offers a set amount of paid time off that employees can use as needed, without strict guidelines on when or how it should be taken.

In most instances, employees are required to formally request time off and obtain approval from their manager. While leave for sickness, bereavement, and jury duty often receive prompt approval, vacation time is typically left to the discretion of the employer.

Let’s take a closer look at each of these policies and how they look in practice:

Whichever you choose, be sure to explain your PTO accrual policy in detail in your employee handbook. You’ll want to include information like: 

• Which employees can participate in the policy (full-time vs. part-time employees, for example) 
• How many days of PTO each employee gets
• Which types of absences are covered by the policy
• The rate at which PTO accrues
• How to check accrued PTO balances and submit time off requests
• What happens if an employee doesn’t use their PTO by year-end

That way, your employees can fully understand your time off program and make more informed decisions about when and how they take time off. 

Pros and Cons of Lump-Sum and Accrued PTO

Wondering which PTO policy is right for your business and employees? Here’s a brief overview of the benefits and downsides of offering a lump sum of PTO days versus having employees accrue days throughout the year. 

Pros of Lump-Sum PTO

• Enhanced flexibility for time off: Since employees know at the beginning of the year exactly how many days they can take off, they can better plan their vacations, personal days, appointments, and other leave.
• Increased employee satisfaction: Employees often appreciate having more control over their time off, which can lead to increased job satisfaction. This benefit can be felt even on an employee’s first day at your company. Since new hires can take advantage of their entire PTO balance immediately, they don’t have to worry about accruing time off and can use their PTO right away as needed.

Cons of Lump-Sum PTO 

• Less predictable workforce availability: Since employees can use their time whenever they please, employers may find it challenging to predict workforce availability throughout the year. This could lead to staffing shortages during peak business periods, especially around holidays.
• Pacing challenges: Since employees gain access to all their PTO days at the start of the year, they might feel inclined to take their vacations right away, leaving few or no days left for the latter half of the year. 

Pros of Accrued PTO

• Ability to cash out unused days: Employees can trade unused PTO days left over at the end of the year or their employment into cash. 
• Retains employees: Many businesses award loyal employees with extra PTO days based on their tenure with the company. This policy can make employees more committed to staying with the company, especially if they can cash out unused days at the end of the year. 

Cons of Accrued PTO 

• Delayed access to time off: Employees have to accumulate PTO days before they can take time off. This can be a disadvantage for new hires who need to take time off soon after joining or individuals who are planning a vacation for the beginning of the accrual period.
• Cash flow impact for employers: Employers will need to budget for potentially large payouts at the end of the year if an individual chooses to cash out their extra days or if an employee leaves the company with a significant amount of PTO. This can impact cash flow and financial planning.

Accrual Rates

If you’re interested in introducing accrued time off within your organization, you’ll want to understand just how employees can accrue hours and days off. Here’s a closer look.

How to Calculate PTO Accrual Rates

Before you jump into the calculations, you’ll need to identify the number of PTO days an individual is awarded annually and your company’s pay frequency. 

1. Determine the amount of annual PTO in hours.

Employees’ PTO allowance is often given in days, but you can multiply it by the length of an average workday (8 hours) to determine the annual PTO balance in hours. 

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So if an employee gets 14 days of paid leave per year, they have 112 hours of available PTO. 

2. Use your pay frequency to determine the accrual rate.

Next, you’ll divide the number of PTO hours by the number of pay periods your company has in a year. 

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If our employee from above is paid monthly, they would accrue 9.33 hours per paycheck. 

Example PTO Accrual Calculation

Say a full-time employee is awarded 20 days, or 160 hours, of time off per calendar year. The employee also gets paid biweekly, or 26 times per year. 

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This employee would accrue just over 6 hours of PTO per paycheck, earning them enough accrued time to take a full week of work off as of late March. 

If your employee wants to know exactly how much paid time off they accrue per hour worked, they can divide their annual PTO hours by the total number of hours worked in a year, or 2,080 hours based on 260 eight-hour workdays. 

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So for every hour the employee works, they earn about 0.08 hours, or 4.8 minutes, of PTO time. If you want to calculate it by workweek, the individual earns about 3 hours of vacation per week. 

Balancing Wellbeing and Productivity

According to the Pew Research Center, 46% of employees take less time off than is available to them. What’s holding them back? Among surveyed employees who didn’t use all their time off, 49% said they were concerned about falling behind at work, and 43% worried their absence would force coworkers to take on additional work. But 52% said they chose not to use all of their allotted PTO because they simply didn’t feel the need to take more time off.

Despite this, employees do want the flexibility to take time when they need it, with 62% of workers reporting that having a job that offers paid time off for vacations, doctor's visits, personal time, or sick days is extremely important to them.

Picking the right PTO policy requires businesses to strike a balance. If companies don’t offer employees enough time off, individuals can feel they have to report to work while injured or sick, which risks workforce health, harms work-life balance, and can cost your business money and productivity. And yet, even if businesses give employees significant time off, many employees are reluctant to use all their allotted days for various reasons. 

Whatever PTO policy your business picks, just remember to actively encourage your employees to take advantage of their PTO. From offering company holidays to having managers lead by example, your business should motivate employees to use and enjoy their time off. 

PTO Accrual FAQs

Still have a few lingering questions? Check out our frequently asked questions on PTO accrual: 

• What is PTO accrual? PTO accrual refers to the gradual accumulation of paid time off over a given period of employment. 
• How do employees accrue vacation time? Vacation time is just one of the types of PTO employees can accrue. Employees can accrue vacation days based on the number of hours they work per week and their annual PTO cap.
• Can you accrue PTO while working overtime? No, employees only accrue PTO during normal hours worked, not overtime. 
• Can you accrue PTO while on PTO? No. Like with overtime, you do not accrue PTO while on paid time off. PTO can only accrue during regular hours worked. 
• Can an employee’s accrued PTO be negative? Yes, if your business allows it, employees can take a portion of their days before they’ve accrued them. Depending on your policy, employees can restore their balance by accruing PTO by working, or by paying a portion of their salary toward the balance.

Managing PTO Accrual Using Lattice

Even with the best PTO policy in place, employees can only take time off if they can figure out how to request it. PTO requests can get lost in spreadsheets, forms, emails, and instant messages. That’s why having a user-friendly, straightforward way to request time off, check manager approvals, and view upcoming absences is crucial to business success. 
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Employees aren’t the only ones who benefit. PTO time tracking systems, like Lattice HRIS, also allow human resources teams to accurately and reliably keep tabs on PTO accrual and usage, so you can proactively prepare for budgeting and shift coverage. 

Looking to enhance your PTO management experience for your employees and team? Sign up for the Lattice HRIS waitlist today.