Paid time off (PTO) accrual is a PTO policy that describes how your employees will earn their PTO over time. With this policy, PTO is gradually accrued throughout the vacation year and is treated as a vested benefit.
Usually, employers will set a minimum number of hours that employees must accrue before they can take PTO. For example, you might set a minimum accrual of a full day’s work, i.e. eight hours. Once the employee has accumulated the minimum number of PTO hours, they can either use them immediately, save them for an extended vacation, or use them in smaller bursts throughout the year.
Is an Accrual Policy Right for You?
There are several different types of PTO policies, so it’s important to consider whether an accrual policy is right for your business needs. In addition to PTO accrual, you can also choose from banked PTO, unlimited PTO, or carryover PTO policies, which we’ll look at in more detail later.
Every PTO policy has its strengths and weaknesses. The strengths of the PTO accrual policy are:
- It prevents your employees from taking too much PTO at once. By setting a minimum number of PTO hours employees need to accrue before taking them, you can space out employees’ PTO, preventing too many workers from being on leave at once.
- It helps empower your employees to manage their PTO allowance. If employees accrue their PTO throughout the year, they’re more likely to take responsibility and ownership of it as it will feel like a reward. Helping your employees take accountability for their PTO allowance will lift some of the stress off your managers and support your team in working together.
- It prevents your company from having to make large, bulk payments for owed PTO allowance. If an employee leaves their job part way through the year with a large PTO allowance remaining, you may have to pay this as a lump sum in their final pay cheque. If you are a small business or startup, this may be financially challenging. Implementing a PTO accrual policy will prevent this as it ensures employees are only paid for PTO they’ve accrued if they leave their job.
However, while there are strengths to the PTO accrual policy, there can also be drawbacks:
- Employees’ PTO can expire. Depending on the policy, any accrued PTO not taken within the vacation year isn’t always carried forward to the next vacation year. This may remove the reward element from employees and demotivate them.
- The policy doesn’t account for emergencies. Your employee may experience an emergency at the beginning of the vacation year. However, they’ll have no PTO accrued to attend to this emergency. This may lower morale and lead to unplanned absenteeism within your workforce. To resolve this, you could consider implementing a banked PTO policy, whereby you grant your employees a certain amount of PTO at the beginning of the year—for example, 25%—and they accrue the remaining 75% as the year progresses.
While the accrual policy is a popular PTO policy, there are others you may consider.
As discussed above, a banked PTO policy will allocate employees a certain amount of PTO at the beginning of the year, and allow them to accrue the remainder as the year progresses. A banked PTO benefits employees as they have access to a number of PTO days at the start of a new year in case of sickness or personal emergencies.
However, this policy can cause issues for you as the employer, as you’re contractually obligated to pay any banked PTO if an employee leaves the business at the beginning of the year.
Some businesses allow employees to carry over their accrued PTO from the previous year to the new vacation year. This means they could have up to a whole year’s PTO saved from the previous year and then begin accruing the second year’s PTO as usual.
This policy can benefit employees by allowing them to save up their PTO allowance from the first year to take longer vacations in the second year. It can also benefit employers, as employees can focus all their energies on their work for a whole year, which will ultimately increase your business’s bottom line.
However, you should consider placing limits on the amount of PTO employees can carry over, otherwise they might not take any PTO for one or even several years with the goal of saving it up for an amazing vacation. While this might sound good in theory, this is likely to lead to burnout and increased stress levels as they stockpile PTO.
This policy could also be detrimental to the employer, as they will be liable for a large payout if the employee chooses to leave the business with two years of unused PTO.
Despite the name, unlimited PTO policies are very rarely actually unlimited. However, this policy ensures employees have sufficient time in the business to perform their roles but are also supported in balancing their work and personal lives.
You may also find with “unlimited” PTO that your employees are worried about taking too much leave, concerned this might make them look lazy or like they lack commitment to their workplace. As a result, employees may take very little or even no holiday, ultimately creating high levels of workplace stress and potentially leading to burnout.
If you adopt this policy, you should set firm guidelines for the minimum and maximum amount of PTO you expect employees to take per year.
Writing a PTO Accrual Policy
If you decide that an accrual policy is right for your business, your next step should be writing a robust PTO accrual policy. This ensures all employees know how much PTO they are entitled to and how they will accrue it.
Step 1: Consider your employees
When writing your PTO accrual policy, you should first consider your employees. Reflect on the culture you are trying to create and how the policy will support that. You should also consider how the policy will apply to part-time, full-time, and freelance employees.
The size of your organization will also determine how many employees you can feasibly have on PTO at any one time, so you should set limits for how many employees can take PTO from a single team or department at once.
Step 2: Consider your legal requirements
You must also consider federal and state laws when writing your PTO policy. Depending on your state, your employees may be legally entitled to PTO for specific personal events, for example, under the Family and Medical Leave Act (FMLA). You will need to consider these requirements when writing your policy.
There is no legal minimum for how much PTO you need to offer outside of FMLA guidelines, but most businesses in the US allow for one to three weeks of PTO per employee per year. Other countries tend to be more generous with their PTO allowances. For example, in the UK, employees are offered 25 days of PTO as standard, plus eight national bank holidays and paid sick leave on top!
Part-time employees are entitled to the same amount of holidays as their full-time colleagues, in proportion to their hours worked. For example, if a full-time employee working 40 hours is entitled to two weeks of PTO, a part-time employee working 20 hours will be entitled to one week of PTO.
Step 3: Specify the details of your PTO policy
When writing your PTO policy, take care to clarify its limits and details. This will help employees understand their PTO allowance and support them in balancing their work and personal life. Below is a list of factors you may want to consider when writing your PTO policy.
The first thing you’ll need to consider is how much PTO you will allocate to your colleagues. In a 2021 study, the average US employee with five years’ tenure received between 10 and 14 days of PTO each year. A generous PTO package can be a great way to attract talent to your business and help reduce your employees’ workplace stress by offering sufficient breaks throughout the year. Still, it can be expensive and difficult to negotiate, especially when many employees want to use their generous PTO package around the holidays. Setting specific parameters for your PTO allowances will help you manage this.
You should also consider the cost of offering your PTO package to your colleagues. As mentioned above, a generous PTO package can go a long way in attracting talent and reducing turnover. However, you should ensure you can afford the package you’re offering.
You should also specify the rate at which employees accrue their PTO. Usually, employees accrue a certain number of hours of PTO per pay period worked. You can multiply the accrual rate by the number of pay periods worked to calculate how much PTO your employee can take each year.
For example, if you offer 120 hours of PTO per year across 12 pay periods and your employee wanted to know how much PTO they would accrue by August, you would calculate:
120 / 12 = 10 Hours of PTO per pay period
August is the 7th month, so:
7 x 10 = 70 Hours of PTO accrued by August
For more examples of calculating PTO accrual rate, read our blog post on How to Calculate PTO.
You will also need to consider whether you want to offer a policy that increases PTO allowance with employee tenure. Many businesses increase the amount of PTO they offer to employees in line with length of service milestones, for example, an extra one or two days of PTO for every five years worked.
In this example, an employee offered 10 days of PTO would receive 12 days of PTO after five years of service and 14 days of PTO after 10 years.
The final thing you should consider is the limits of your policy. If you don’t limit the amount of PTO your employees can accrue or carry over, you may find yourself in a position where you have a lot of PTO to pay out later down the line. Putting a limit on PTO accrual will encourage your employees to take their PTO within the current vacation year, rather than carrying it over to the next year.
You should also clarify whether employees can carry over their PTO and, if so, how much they can carry over. Some workplaces also implement a use-it-or-lose-it policy, where any PTO not used during the vacation year can’t be carried over into the next year. This approach can help prevent a large carryover of PTO and will prevent employers from having to pay employees for their outstanding PTO allowance.
Step 4: Determine logistics
Once you have specified your budget and outlined your PTO policy, you will then need to determine the logistics of your policy. For example, you must consider who will approve employees’ PTO requests. Usually, the employee’s line manager approves these; however, your HR department can also support approving PTO requests.
You will also need to determine who gets priority in PTO requests. It is usually the case that certain times of year are more popular than others—for example, around the holidays or national sporting events. You can prioritize based on seniority, length of service, or first-come-first-served.
You should also decide how many employees you can have off at any time. If you are a small business or department, you may only be able to have up to one or two employees off at any time. However, larger companies may be able to spare more employees.
Step 5: Roll the policy out to managers
Once you’ve determined the features of your policy, you will need to set up a training session with your managers to ensure they understand the new policy. You could run this as a Q&A session to support your manager in understanding the new policy.
You’ll also need to ensure that the policy is easily accessible to your managers, either by sending it via email or through Connecteam’s in-app communication function.
Top Tips for Implementing Your Accrual Policy
Update your policy as needed
Your PTO policy will be a major part of your employees’ working life, so getting it right is really important. Your PTO policy will need to work for your business structure and employee working patterns, so seize the opportunity to change the policy if it’s not working for your business or if you feel like it could be improved.
Be flexible when approving employees’ PTO
As mentioned above, employees may want to take their PTO simultaneously, so encouraging flexibility among your team and managers will support employees in taking the time they need.
If you have a policy where only two or three employees can take PTO at once, consider extending that to four or five around the holidays to ensure everyone can take the time off they need.
Connect with other HR teams
Don’t hesitate to contact other local HR departments or consultants to discuss how they manage their PTO accrual policy. While every company has different needs and priorities, understanding how other similar businesses manage PTO may certainly help. It will also increase confidence within your HR department if they feel they have external contacts they can lean on.
When writing your PTO accrual policy, you should take time to balance your employees’ needs with your PTO budget. When your policy is written, make sure you fully understand its logistics and are ready to support your managers in its implementation.
Your PTO accrual policy will be crucial in attracting talent to your business and will help retain your employees in the long term. It will impact every colleague in your business, so take care and time to get it right to protect the happiness and well-being of your employees.