How to Calculate Vacation Pay for Hourly Employees

Everyone needs a break. But calculating how much vacation time and pay your staff needs shouldn’t be a headache. 

Without knowing how vacation pay is calculated, you risk incorrectly paying employees for their time off.

If you’re frustrated with the process, you may want to avoid offering paid vacation time at all, which can lead to unhappy employees.

Luckily, calculating vacation pay is simpler than it seems. In this article, we walk you through it step by step and make sure you’re considering all the necessary details.

Important Terms to Know

Vacation pay can be confusing. Below, we’ve listed key terms and their definitions so you can become a pro when it comes to vacation pay.

• Vacation time: Paid time off for rest or personal use.
• Paid time off (PTO): All types of paid leave, including vacation, sick leave, and holidays.
• Accrual: How employees earn vacation time for their hours worked.
• Accrual rate: The amount of vacation time an employee earns per hour worked. (For example: 5% = 5 hours earned per 100 hours worked). 
• Vacation pay: The wages paid when an employee uses vacation time.
• Payout: A lump sum paid to an employee for unused vacation time, usually when an employee leaves or at the end of the year. 

What is Vacation Pay?  

Vacation pay is the money employees earn during their time off. It helps maintain a good work-life balance without sacrificing income.

While the federal government doesn’t require employers to offer paid vacation, paid time off (PTO) is a good way to keep employees happy, productive, and reduce burnout. 

Here’s how vacation time is offered: 

Advanced vacation 

With an advanced vacation time policy, employees receive all their time-off upfront, usually on their start date or the beginning of the year. For example, if your policy offers 2 weeks (80 hours) of paid vacation per year, all 80 hours might become available on January 1.

Accrued vacation 

Under an accrued vacation policy, employees earn time off as they work. For example, instead of receiving 80 hours upfront, they might earn 20 hours every 3 months. 

Alternatively, you can set an accrual rate. If your accrual rate is 8%, your team will earn 8 hours of vacation time for every 100 hours they work. After 1,000 hours worked, they’d accrue the full 80 hours.

Need to include PTO? Try our payroll hours calculator for hourly employees.

How is Vacation Accrual Calculated?

The first step to paying employees for their vacation time is knowing how much they’ve earned. Luckily, calculating accrued time is simple with the right formula.

Accrual rate

To find the accrual rate, let’s use this formula:

Annual vacation ÷ Annual working hours = Accrued vacation rate

Let’s say an employee works 40-hours a week, or 2,080 hours a year. You offer 2 weeks (or 80 hours) of paid time off a year. 

To find the hourly accrual rate, calculate:

80 hours ÷ 2,080 hours = 0.038 accrued vacation rate, or 3.8%.  

Accrual per period

To calculate how many hours an employee will accrue per pay period, use this formula:

Hours in pay period x Hourly accrual rate = Accrual per pay period

Let’s use our accrual rate (3.8%) and assume the pay period is 2 weeks (80 hours):

80 hours x 3.8% = 3.04 hours accrued per pay period. 

You can use similar formulas to determine how much vacation an employee accrues per week, per month, or per quarter. Just take the hours in that time period and multiply them by the hourly accrual rate. 

Accrual per month or quarter

To calculate monthly or quarterly accrual, multiply the period’s work hours by the accrual rate. While no two months or quarters are exactly the same, here are a couple of examples: 

170 hours per month x 3.8% = 6.46 hours accrued per month.

520 hours per quarter x 3.8% = 19.76 hours accrued per quarter.

How is Vacation Pay Calculated for Hourly Employees?

For exempt employees, PTO is usually based on an employee’s salary. For hourly employees, vacation pay is typically based on the hourly wage. To calculate it accurately, you need a few key details: 

• Your company’s vacation policy, especially any specific rules about hourly workers.
• Accrual rate, how much vacation time an employee earns per hour worked.
• Hours worked, which must be accurate. Time tracking apps like Connecteam make it easy to track clock-ins, shifts, and time-off requests.
• Vacation pay rate, usually an employee’s regular hourly rate.
• Vacation hours used or accrued, how many hours they’re requesting or haven’t used (for payouts).

Vacation pay (and payout) for current employees

To figure out how much to pay your employee for an upcoming vacation, multiply how many vacation hours they’re taking by their pay rate. 

Vacation hours x Pay rate = Vacation pay owed

Let’s say your employee is taking 40 hours of vacation and makes $25/hour. Here’s how to calculate their vacation pay: 

40 hours x $25/hour = $1,000 owed.

If unused vacation time doesn’t roll over, it usually needs to be paid out. For example, if your policy requires employees to use 80 vacation hours by the end of the year an employee has 20 hours left on December 1, they’ll need a payout if that time can’t be used. 

Let’s say the employee earns $30/hour. Their vacation payout would be:

20 hours x $30/hour = $600.

How are vacation and PTO payout calculated for departing employees?

If you’re calculating a payout for an employee who’s leaving the company, you’ll need to know the amount of unused vacation time the employee has accrued.

Let’s say your employee made $25/hour and has 40 hours of unused vacation remaining. You calculate the payout the same way you would for vacation taken: 

40 hours x $25/hour = $1,000.

Try it out with the Vacation Pay Calculator

Use our free vacation pay calculator to automatically find how many vacation days and pay your employee has accrued. Here’s how it works:

1. Enter your Annual Vacation Hours and Annual Working Hours.
2. Fill in the employee’s Hourly Pay Rate (optional).
3. Add the Hours Worked and choose the Time Period.
4. Click “Calculate Vacation Pay” and view your results.

Try it out for yourself:

How to Track Vacation Pay for Hourly Employees

Tracking PTO for hourly employees starts with finding the most accurate way to monitor who’s off when. Using a spreadsheet to track vacation pay may seem simple and affordable, but you risk human error and high administrative costs. It also requires significant time and effort.

Instead, we recommend using a vacation pay tracking app. They’re quick and easy to use, automate many manual tasks, and reduce the risk of costly errors. They accurately record employees:

• Hourly pay rates 
• Annual vacation hours
• Annual hours worked
• Hours worked per pay period
• Vacation hours earned per pay period
• Any vacation payouts

What to Consider Before Offering Paid Vacation  

When structuring and calculating paid vacation, there are a few things to keep in mind:

Vacation time vs. PTO

Start by deciding if you’ll offer general PTO, which can be used for any leave, or separate vacation time. Most companies offer general PTO for flexibility, but be clear on how different leave types are categorized and tracked. 

Advanced vs. accrued vacation 

 Advanced vacation is easier to track, since employees get their full vacation hours upfront. But it’s risky, especially if employees take all their vacation time early. Accrued vacation builds over time and offers more control, but requires more detailed tracking. 

Full-time vs. part-time employees

Define who is eligible for vacation time. Can part-time employees earn time off? Most companies prorate vacation for part-time employees based on their hours. This means that if someone works 20 hours/week, they might earn 40 hours of vacation per year (full time employees work 40 hours/week, so they would earn 80 hours of vacation).

State laws

There are no federal laws requiring PTO, but state laws apply if you offer it. Some states require vacation payout when an employee leaves, or ban “use it or lose it” vacation policies. If your business operates in multiple states, make sure to know the local laws.

Carryover rules

Decide if you want to let unused vacation time roll over into the next year. Some companies set a cap on how many hours can roll over, or stop accrual when balances hit a certain number. 

Negative balances

If an employee runs out of vacation, will you let them go into a negative balance (borrowing against future time) or require unpaid leave? Both options are valid, just be consistent and clear.

Unlimited PTO

Unlimited PTO eliminates tracking issues and can incentivize employees, but it can also lead to abuse of the system or unfair treatment. Consider your team’s needs before implementing this option.

The Bottom Line 

Offering paid vacation is essential to a healthy work-life balance, and knowing how to accurately calculate vacation pay (and payouts) is just as important.

With tools like Connecteam, you can easily track time off, automate accruals, and manage payouts. Set your policy rules and Connecteam can handle the rest. 

For more information, explore our full guide to PTO and vacation tracking.

FAQs

How does PTO work for hourly employees?

PTO includes vacation, sick days, and holidays. For hourly workers, calculate PTO pay by multiplying PTO hours by the hourly rate. For example: 20 hours × $25/hour = $500. Tools like Connecteam make PTO tracking simple and ensure accurate payouts.

How do you calculate vacation hours into days?

Divide total vacation hours by daily work hours. For example, if an employee has 40 vacation hours and works 8 hours/day: 40 ÷ 8 = 5 vacation days. 

What is a good PTO accrual rate?

A common accrual rate is 4 hours per biweekly pay period, or 2.5 weeks off a year. You can adjust this rate to reflect your company’s policy and employee status.