How to Calculate Vacation Pay for Hourly Employees

Your staff needs time off—a restful vacation brings employees back refreshed and re-engaged—but calculating vacation pay can feel confusing and complicated.

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

You may even become frustrated with the process and decide to avoid offering paid vacation time at all, leading to unhappy employees.

Luckily, understanding how to calculate vacation pay is simpler than it seems. We’re here to walk you through it step by step and make sure you’re considering all the necessary details.

Important Terms to Know

The ins and outs of vacation pay can be confusing at first. Below, we’ve listed key terms and their definitions so you can understand how they differ from and relate to vacation pay.

• Vacation time refers to time off for leisure or relaxation specifically.
• Paid time off (PTO) includes all types of paid leave, like sick time or holiday pay as well as vacation time.
• Vacation accrual is the process by which employees gradually earn vacation time according to a specific schedule.
• Vacation accrual rate is the amount of vacation time an employee earns in a specific time period. It’s typically expressed as a percentage of time worked. For instance, an accrual rate of 5% means that for every 100 hours an employee works, they earn 5 hours of vacation time.
• Vacation pay is the compensation an employee receives while using vacation time. This is typically equal to their hourly wage or salary. 
• A vacation payout is a lump sum paid to an employee for unused vacation time. Payout  typically happens when the worker leaves the company or a certain period of time elapses, such as when a new year starts. 

What is Vacation Pay?  

Vacation pay is compensation companies provide to employees during their time off work. Employees can relax, recharge, and maintain a good work-life balance all while receiving their usual pay. 

Offering employee paid time off (PTO) like vacation time isn’t mandatory at a federal level, but it contributes toward a happier and more productive workforce. Without receiving paid vacation time, some workers may not take time off, thus risking burnout. 

There are two main ways vacation time is offered:

Advanced vacation 

With an advanced vacation time policy, all time off in a certain time period is made available to employees from a specific date, such as their start date. For instance, if your company provides 2 weeks (80 hours) of paid vacation per year, you can make all 80 hours available on January 1 each year.

Accrued vacation 

Under an accrued vacation policy, employees earn vacation time based on the number of hours they work. For example, workers can earn a portion of the 80 total hours every few months, like 20 hours every 3 months. 

Or, you can set a vacation accrual rate percentage and enable workers to earn vacation time up to 80 hours per year. For example, an accrual rate of 8% means your team will earn 8 hours of vacation time for every 100 hours they work. After 1,000 hours worked, they will have access to all 80 hours of vacation time.

How is Vacation Accrual Calculated?

The first step to paying employees for their vacation time is understanding how to measure their accrued time. The formula to calculate accrual is straightforward. 

Accrual rate

The accrual rate is calculated by using this formula:

Accrued vacation rate = Annual vacation / Annual working hours

Imagine your employees work 40-hour weeks, or 2,080 hours a year, and you offer 2 weeks of vacation, or 80 hours. To find the hourly accrual rate, calculate:

80 hours / 2,080 hours = 0.038 hours of vacation earned per hour worked. This is your accrued vacation rate. As a percentage, it’s expressed as 3.8%.

You can then apply this to other calculations. 

Accrual per period

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

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

For instance, for an 80-hour pay period, you’ll calculate:

80 hours x 0.038 accrual rate = 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 0.038 accrual rate = 6.46 hours accrued per month

520 hours per quarter x 0.038 accrual rate = 19.76 hours accrued per quarter

How is Vacation Pay Calculated for Hourly Employees?

Vacation pay and PTO are usually calculated based on an employee’s salary, in the case of salaried workers. For hourly employees, it’s typically calculated based on their wages. 

Vacation pay is usually calculated based on an employee’s salary, in the case of salaried workers. For hourly employees, it’s typically calculated based on their wages. 

To calculate vacation pay, there are a few straightforward steps. First, you need some information:

• Details on your organization’s vacation policy, particularly whether it includes any specific provisions for hourly workers. 
• Accrual rate. Scroll up if you need a reminder of how to calculate this.
• Hours worked. This data must be as accurate as possible, so we recommend using an app like Connecteam, which lets employees and managers easily track shifts, clock-in and clock-out times, and time off requests.
• Vacation pay rate. Typically, this is an employee’s regular hourly rate.
• Requested vacation hours—or, in the case of a payout, the number of unused hours.

Vacation pay and payout for current employees

To figure out how much to pay your employee for an upcoming vacation, multiply the vacation hours by their pay rate. 

Vacation time x Pay rate = Vacation pay owed

If your employee is using 40 hours of vacation time and makes $25 an hour, the calculation you’ll use to determine their vacation pay is:

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

This calculation can also apply to vacation payouts for current team members when they’re left with unused vacation time that doesn’t roll over.

For instance, say your company’s policy notes that employees must take all 80 hours of vacation time within a calendar year, unused doesn’t transfer from one year to the next, and the company must pay out any unused vacation time.

Imagine an employee who earns $30 an hour is left with 20 hours of unused vacation time on December 1, 2023. Say they can’t feasibly take that time off before January 1, 2024, when all your employees’ vacation time resets.

To determine how much payout they’re owed, here’s how to calculate vacation payout:

Vacation time x Pay rate = Vacation payout

20 hours x $30/hour = $600 to be paid out

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 vacation time the employee has accrued and not used. As a reminder: 

Accrued vacation = Hours worked x Hourly accrual rate

Let’s assume the employee made $25 an hour in their role and has 40 hours of unused vacation remaining. The payout calculation is the same as for employees taking time off:

Vacation time x Pay rate = Vacation payout

40 hours x $25/hour = $1,000 to be paid out

You can include a vacation payout in a departing employee’s final paycheck rather than as a separate lump-sum payment.

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 and hours worked each year, which equals the accrual rate
• Hours worked per pay period
• Vacation hours earned per pay period
• Any vacation payouts

Things to Consider When Structuring and Calculating Paid Vacation  

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

Vacation time vs. PTO

First, determine whether your company will offer general PTO that includes vacation time or if you’ll offer vacation time as just one type of PTO. Most companies offer general PTO that workers can use for any kind of leave, including vacations.

Learn more about the differences between vacation time and other types of paid time off.

Advanced or accrued vacation 

Next, decide how your company is going to offer vacation time. 

The benefit of advanced vacation time is that there are fewer calculations required—all hours are available on a certain date. But there are risks, too. Employees can use all hours as soon as they want, which might lead to too much time off early on.

On the other hand, accrued vacation helps limit the amount of time employees take off, but requires more work to track. 

Full-time vs. part-time employees

You also need to establish eligibility criteria. Do employees need to work a specific number of hours to qualify to earn vacation time, or is everyone eligible? 

Offering eligibility to everyone is the best way to ensure fairness, but you’ll need to decide how vacation hours correspond to working hours. 

It’s typical to base vacation accrual for full-time workers on a 40-hour week, but the calculation for part-time employees depends on the number of hours they work. If your part-timers work 20 hours a week, 2 weeks of vacation equals 40 hours per year, or 1.5 hours per biweekly pay period.

State laws

There are no laws requiring companies to offer PTO, but if a company provides it, they’re beholden to certain laws. These vary by state, so be clear on which apply to your employees. 

If you have employees in multiple states, you’ll need to understand the legal requirements in each state. For example, some states require companies to pay out unused vacation time when an employee leaves. A few states bar “use it or lose it” vacation policies, which require employees to give up unused vacation time just before a new year begins.

PTO/vacation time carryover

Consider whether you’ll enforce a “use it or lose it policy” or let employees roll over unused vacation time to the next year. If you choose to allow for PTO/vacation time carryover, decide whether workers can carry over all unused hours or only a portion. 

For example, some companies allow a week of PTO/vacation time to roll over. Some companies set a cap so employees can roll over all unused time but when they hit a certain number, they stop accruing additional time until they use some.

Going into the negative

If an employee is out of PTO/vacation time but needs time off, can they accrue a negative balance (using future vacation hours to pay for retroactive time off) or take unpaid time‌ off? 

Both are common options, but allowing a negative balance accrual requires more oversight and tracking. Decide what course of action would work best for your company.

Unlimited PTO

Managing carryovers and negative balances can feel daunting, so you may want to consider the benefits and drawbacks of offering unlimited PTO. 

Such a policy can attract new hires and reduce burnout among existing employees, but it can also lead to abuse of the system or uneven employee treatment. Weigh up the pros and cons and make the decision that feels right for your organization.

Conclusion 

Offering paid vacation time to employees is necessary to ensure they maintain a healthy work-life balance, and knowing how to calculate vacation pay for your workers is equally essential. It’s also important to understand what vacation payouts are: Compensation employees receive in exchange for unused vacation time. 

You can calculate vacation accrual and vacation pay and payouts with a few simple formulas and track vacation pay using a powerful digital solution such as Connecteam.

There are a number of things to consider when you’re structuring and refining your paid vacation policy, as well as when you’re calculating vacation pay. These include state laws, provisions for part-time employees, negative balances, and more.

For more information, check out our guide to PTO and vacation trackers. 

FAQs

How does PTO work for hourly employees?

Paid vacation days are considered PTO, but PTO isn’t only vacation days–it includes other types of paid time off, too, like holidays and sick days. To calculate PTO for your hourly workers, you would do so in the same way you would for vacation time: 

PTO hours x Pay rate = PTO pay owed

For example, if your employee is using 20 hours of vacation time and makes $25 an hour, the calculation you’ll use to determine their PTO pay is:

20 hours x $25/hour = $500 owed

How do you calculate vacation hours into days?

To calculate vacation hours into days of vacation, you can take the number of accrued vacation hours and divide it by the hours you work in a day. For example, if you have 40 hours of PTO banked, you can divide 40 by 8 hours per day. The result is 5 vacation days.

What is a good PTO accrual rate?

Vacation accrual rates vary, but a rate of 4 hours per biweekly pay period is generally considered good, according to Zippia. This works out to about 2.5 weeks of vacation per year.