Empowering Employees: Understanding PTO Accrual & Battling Burnout

Masha -

A solid paid time off (PTO) policy is the cornerstone of any balanced benefits plan - and a perk that most workers value. One particular provision, PTO eligibility, stands out as a formula that employers can turn into a customized plan that employees will truly value.

Guidelines for accruing PTO vary by company and industry. While "use it or lose it" plans encourage employees to take time away from work, others offer the option to roll over time into the next year or even convert PTO into cash to cover expenses.

Since 4 in 10 U.S. employees don't use all of their free time, offering a PTO payout can help employees maximize the benefits in their own way. You can use the extra money to pay off a loan, pay for unexpected repairs, or boost your retirement nest egg.

With IceHrm, managing free time is a breeze. Our time tracking software makes it easy to create a custom PTO policy, approve time off requests, automatically track vacation time, and more. In this article, we'll explain what PTO is, how it can become a valuable benefit, and more.

What is PTO Accrual?

PTO Accrual or PTO Earned is a type of paid leave in which time off gradually increases depending on how much the employee works or how long they have been with the company. Whether it's separate sick, vacation and personal days or a more general PTO plan, this system relies on careful accounting to function smoothly. Common PTO rates include:

  • Hourly PTO accrual: Employees receive time off based on the number of hours worked.
  • Periodic PTO: Time off is accrued over a specific period of time (e.g. daily, weekly, biweekly, monthly, or quarterly).
  • Annual PTO entitlement: At the beginning of each calendar year or on their anniversary, employees are suddenly granted time off, which increases depending on their length of service.

Unlimited PTO vs. PTO credits

Unlimited PTO eliminates the need to calculate accruals and allows employees to take as much or as little vacation as they need. Whether PTO requests are approved is still at the manager's discretion, but there is no PTO balance to track and there is no risk of the balance going negative. It's a generous policy that can simplify many processes, but its success in improving the employee experience depends on company culture and attitudes toward time off.

In other words, good internal communication is key to maximizing the benefits of unlimited PTO. There's no guarantee that employees will take enough time off to maintain a healthy work-life balance despite unlimited PTO, but it's worth doing further research to find out if it's a good solution.

Flexible PTO vs. Traditional PTO

Traditional PTO policies divide time off into categories (e.g. 5 sick days and 10 vacation days). With flexible PTO, these categories are eliminated, allowing employees to use their allotted time as they see fit.

How does PTO accumulation work?

Paid vacation is not only managed by the HR department, but also by the accounting department for the payment of vacation days. This is typically required when an employee leaves the company, but some companies pay out unused PTO at the end of the year. These departments take two factors into account:

  • Hours Earned: A formula is used to calculate how much free time each employee has accumulated at a given point in time.
  • Payout Amount: Accumulated hours are converted into dollars based on the employee's hourly wage.

According to the U.S. Chamber of Commerce, accumulated PTO balance is converted into a payout as follows:

  • Step 1: Calculate the number of PTO that will carry over from the previous month.
  • Step 2: Add the number of hours the employee earned in the current month.
  • Step 3: Subtract the number of hours the employee used.
  • Step 4: Multiply the remaining amount by the employee's hourly rate.

Example of PTO accrual

Let's assume Miguel is a full-time employee who works 40 hours per week and receives 15 vacation days, which reset on January 1st of each year. Since his business is open 2,000 hours per year, the formula for his accrual rate is:

120 hours of PTO / 2,000 work hours per year = 0.06

This means that for every hour worked, he earns 0.06 hours of PTO. If you break this down even further, the following picture emerges:

  • Daily PTO credit: 0.48 hours of PTO per day
  • Weekly PTO credit: 2.4 hours of PTO per week
  • Biweekly PTO entitlement: 4.8 hours of PTO every two weeks
  • Monthly PTO entitlement: 9.6 hours of PTO per month

This breakdown is helpful when developing a PTO policy. Employers use them to illustrate how vacation time correlates with employee work hours and how much time off employees earn per pay period.

PTO payout example

Miguel's company is required to pay his employees unused PTO as taxable wages. If he makes $35 an hour and has 40 hours of unused PTO at the time of his retirement, his payout would be calculated as follows:

$35 hourly wage x 40 hours of unused vacation time = $1,400 gross wages

Using this number, his accounting department can deduct the appropriate taxes and pay Miguel before he rides off into the sunset.

Tips for Setting Accrued PTO (PTO) Policies

As an employer, you have a lot of latitude to create a thoughtful PTO plan that works for your company and your employees. Below are some guidelines to help you design your policies and make it easier to manage your accumulated free time:

  • Waiting time to build up time credits: Some companies require new hires to wait a few weeks or longer to become eligible for PTO. In other companies, you can assert your claims from day one.
  • PTO Balance Cap: Some companies set a maximum amount of PTO that an employee can earn in a given year, while other companies allow the employee to carry over as much PTO as they want.
  • PTO Forfeiture: In certain states, companies may adopt a "use it or lose it" PTO policy to incentivize employees to take time off from work.
  • PTO carryovers: Under this rule, earned PTO can be carried over into the next accrual period.
  • Tenure Milestones: PTO can serve as a reward for loyalty to the company by gradually increasing the longer employees stay with the company.
  • PTO payout: Employees can have unused PTO paid out at the end of a year and/or when they leave the company.

Make sure all employees know where to find this policy once you have it in place. Most companies add this to their employee handbook with examples to make the rules and application of special arrangements clear.

Also, don’t forget to build a positive attitude toward PTO into your company culture. Proactively reducing the guilt associated with taking time off work promotes a happier, healthier work environment in which employees feel comfortable taking advantage of your new arrangement.

PTO Laws and Regulations

Under the Fair Labor Standards Act (FLSA), private companies are currently not required to pay employees for time when they are not working. However, individual state laws vary. Some states require "use it or lose it" PTO policies, while other states prohibit them because the law considers paid vacation as wages. In some states, companies are also required to pay out accrued vacation time at the employee's current wage rate (not the starting wage).

Research your state's employment laws to ensure your company's PTO policies are compliant.

What is a “good” PTO accrual rate?

A good PTO rate allows employees to accrue paid vacation on a timely basis, so ideally there will always be time available when they need a break. If you're early in this process, research what other companies in your industry are offering and figure out what you can reasonably offer without disrupting organizational flow.

Pro tip: It's also helpful to find out what employees really want.

A good PTO policy helps increase employee satisfaction, improve work-life balance, and combat burnout. They can also be used as a recruiting tool to help your company attract potential applicants and stay competitive in the market. To create a plan that meets the needs and expectations of today's workforce, it's important to know what potential employees are looking for.

Your strategy should also be supported by an accurate tracking system. As your business grows, switching from spreadsheets to software can help. Time tracking software that automatically updates PTO balances and provides employees with built-in calculators ensures that all calculations are accurate, up-to-date and can be found at a glance.

Implementing a well-crafted PTO policy is crucial for employee satisfaction and productivity. IceHrm simplifies PTO management, ensuring fairness and compliance. Take control of your PTO policies today!