Accruals (Leave)

What is paid time off accrual?

Paid time off accrual is the method that a company uses to distribute paid time off. Paid time off (PTO) is a benefit that is offered by many organizations. It is a benefit that provides employees with a specific number of days they can use for whatever purpose. 

Paid time off can be used for personal matters, doctor’s appointments, vacations, or days when you fall sick. The number of PTO that employees have depends on the company and its PTO policy. A tip to job seekers: know the details of your company’s PTO policy to avoid any confusion once you are onboard. 

What to do with paid time off (PTO)? 

It is up to employees if they will use PTO or not. Some employees maximize PTO and use them until the last day. For others, taking time off may not be a priority. What do you do with unused time? It depends on the employer. Companies often offer employees the option to cash out on the unused time. In short, the PTO that you do not use is converted to cash at the end of the year. A certain amount of unused PTO may also be carried over to the following year, adding extra PTO on top of next year’s PTO. Companies can do a blend of both options. When employees resign from a company, employers may cash out their unused accruals. The amount will be given together with the final pay. Any PTO that was not earned or accrued does not to be cashed out. 

Is there a difference between annual leave and accrued leave?

Yes, there is a difference between the two. Annual leave is given to an employee at the beginning of the year. The number of days of an employee’s annual leave is stipulated in the employment contract. Employees can use the annual leave right away, provided that they have it scheduled and approved. On the other hand, accrued leave is earned and accrued by an employee as the year unfolds or progresses. 

Let’s provide an example: Lily has been with her company for 2 years. She is entitled to an annual leave of 4 weeks which is effective at the start of the year. Lily can decide to use all 4 weeks anytime or bit by bit throughout the year. Meanwhile, her sister Jane works for another company that offers accrued leave. Based on their policy, Jane earns 1 week of leave every 3 months that she works for the company. Overall, Jane also has 4 weeks of vacation leave. However, Jane has to wait by the end of the year to have gained all 4 weeks. 

How is annual leave accrual computed?

Calculating annual leave accrual involves different rates. The specific rate that you will use depends on the organization. No matter which accrual rate you will use, the first step in calculating the annual leave accrual is by first finding out how many hours of PTO or accrued leave each employee is offered annually. 

After that, you can decide the type of accrual rate: yearly, monthly, bi-monthly, daily, or by hours worked. 

Let’s look at each one.

• Yearly
  • This calculation is the most basic among all the others. Using a yearly accrual rate is good for employees who have worked for the company long-term. 
  • When an employee takes time off, just subtract it from the running total of the hours that they can accrue. 
  • By the end of the year, any unused hours can just be carried over to the following year.
  • While this is the easiest to calculate, most companies do not want their employees to wait a full year to have time off. 
• Monthly/Bi-monthly
  • This accrual rate is easy to monitor because it will be consistent the entire year.
  • For monthly accruals: 
• Divide the total number of hours that can be accrued by 12
• Example: Employees are given 2 weeks of vacation time per year which is 80 working hours (at 40 work hours per week).
• 80 hours divided by 12 is 6.67 hours monthly.
• For bi-monthly accruals:
  • Divide the total number of hours that can be accrued by 24
  • Example: Employees are given 2 weeks of vacation time per year which is 80 working hours (at 40 work hours per week).
  • 80 hours divided by 24 is 3.33 hours bi-monthly.
• Daily
  • This accrual rate is good for part-time employees but the catch is that they must work full 8-hour shifts. Hence, this accrual rate is not that beneficial for part-timer employees who work less than 8-hour shifts. 
  • Divide the number of hours to accrue by the number of working days per year. 
  • How to get the number of working days per year:
    • Since there are 52 workweeks in a year, multiply that by 5 days. This amounts to 260 working days. 
  • Example: Employees are given 2 weeks of vacation time per year which is 80 working hours (at 40 work hours per week).
  • 80 hours divided by 260 working days per year will give you 0.307. You can multiply 0.307 by the total days an employee worked in a pay period. 
• Hourly
  • This type of accrual rate is good to use for part-time employees who work less than 8-hours per shift or variable schedule.
  • Example: Employees are given 2 weeks of vacation time per year which is 80 working hours (at 40 work hours per week). 
  • If there are 2,000 working hours in a year, divide 80 (hours in 2 weeks of work) by 2,000 (hours worked in a year) and you will get 0.04. 
  • This means that for every hour that employees work, they earn 0.04 hours of paid time off. 

Will employees accrue PTO while they are on leave?

The answer to this question depends on the employer. Employers will decide if they will let employees accrue PTO while on PTO or if it will pause while the employee is on PTO. Again, it is best to check your company policy to verify this.