Accrued leave is the amount of paid leave an employee has earned under an organization’s benefits policy that they have not yet used.
Accrued leave is one way to calculate the paid leave your employees are entitled to as part of their employee benefits. Depending on your leave policies, it can be calculated for different types of paid leave such as general paid time off (PTO), vacation, or sick leave.
Accrued leave is different from annual leave. Annual leave is automatically given to an employee at the start of the year to use immediately—subject to approval. Accrued leave, on the other hand, accumulates as the year progresses—employees are unable to use it until they have accumulated it.
If your organization uses accrued leave to calculate paid leave entitlements, you need to clearly outline to employees how it is accrued and any rules that apply.
Why It’s Important To Understand Leave Accruals
Understanding leave accruals is important for both employers and employees.
Leave accruals are a liability for your organization. Tracking accrued leaves gives you an accurate picture of the leave situation in your organization. It also helps with financial planning and managing staff movements when a leave request is made.
Employees are also entitled to transparency around how their paid leave is calculated. This allows them to be fully aware of the amount of leave they can access at any given time.
How To Calculate Leave Accruals
If your organization uses accrued leave, you should set out how accruals are calculated for each type of leave and any rules that apply.
There are two factors to take into consideration when calculating accrued leave.
- How much total paid leave—either PTO as a whole or a specific type—an employee can accrue in a year
- The rate at which they accrue it—hourly, daily, weekly, monthly, or annually
The amount of paid leave an employee can accrue in a year is a decision for your organization—subject to any minimum statutory requirements.
You can also choose the accrual rate according to your organization’s needs—again subject to any relevant laws or regulations. The choice is often influenced by the types of workers you employ. For example, a monthly accrual rate is unlikely to be suitable for your part-time employees who work short shifts. However, if your workforce is made up of permanent, full-time employees, a monthly accrual rate may be a practical approach.
In the below examples, we take a look at how to calculate the hourly, daily, monthly, and annual leave accruals for a full-time employee entitled to 80 hours of paid vacation leave each year.
To calculate an hourly accrual rate, divide the amount of leave an employee can accrue in a year by the number of hours they are expected to work during that year.
In our example, a full-time employee is expected to work 2080 hours in a year. 80 / 2080 = 0.038. The employee accrues 0.038 hours of vacation leave for every hour they work.
To calculate a daily accrual rate, divide the amount of leave an employee can accrue in a year by the number of days they are expected to work during that year.
In our example, a full-time employee is expected to work 260 days a year. 80 / 260 = 0.308. The employee accrues 0.308 hours of vacation leave for each full day they work.
To calculate a monthly accrual rate, divide the amount of leave an employee can accrue in a year by 12.
In our example, 80 / 12 = 6.66. The employee accrues 6.66 hours of vacation leave each month.
If you use an annual accrual method, an employee is required to work for a full year before they are then entitled to the full amount of paid leave. For this reason, few organizations use this approach. Organizations that do use an annual accrual method tend to limit it to long-term employees.
In addition to the calculation method, organizations often set additional rules around leave accruals.
They may set a cap, which prevents employees from accruing any more paid leave until they use their existing balance. This is often done with vacation leave to encourage employees to use it regularly.
As part of their retention strategy, some organizations link the amount of leave an employee is entitled to with their length of service. The longer an employee works for an organization, the more PTO they are entitled to accrue. In the same vein, new employees may need to wait a certain amount of time before they can take their accrued leave.
Accruing PTO while on paid leave
You also need to decide whether or not employees continue to accrue PTO while they are on paid leave. This decision is typically guided by financial considerations. If accruals stop when an employee is on leave, you need to factor this into your accrual rate calculations and adjust the number of working hours/days/months accordingly.
You also need to address unused leave accruals at the end of the year. Included below are some options for dealing with unused accrued leave.
- Employees can cash out their outstanding leave balance without taking the leave
- Employees can carry over some or all of it to the next year
- Employees can donate their leave to a company pool for employees who have used up their leave but need time off for personal or medical emergencies
- Any unused accrued leave expires—also referred to as the “use it or lose it” approach
Some countries regulate how some types of accrued leave can be calculated and the rules around it. For example, several US states prohibit the “use it or lose it” approach or regulate how it is applied. Before deciding on how your organization will calculate leave accruals, first confirm whether any relevant laws apply.
Under an accrued leave system, employees are required to earn paid leave before they can apply to take it. They accrue leave in regular increments over the year according to the number of hours, days, or months they have worked.
Subject to any legal requirements, you can set the amount of leave your employees are entitled to and choose the rate at which they accrue it. Having a clear approach to leave accruals ensures transparency around the leave your employees can access and helps you budget for it.