PTO accrual

Offering employees paid time off (PTO) can help employers attract and retain talent, reduce unscheduled absences, and improve productivity. Before they can reap these benefits, however, they must decide how to make PTO available.

One option is to frontload or grant all PTO at the beginning of the year. This approach is easiest to administer, but it can prove costly if an employee leaves the organization early in the year and is entitled to a payout of unused time. A more fiscally conscious alternative to frontloading is the PTO accrual.

What is PTO?

PTO is a benefit that allows employees to get paid on days they are not working. Some employers allocate the time for specific use cases – vacation time, sick days, personal days, etc. Others bundle PTO and allow employees to take time off for any reason (also known as a yearly PTO bank). Neither approach is required, though employers must still comply with various paid leave laws in certain states and local jurisdictions.

What is accrued PTO?

PTO accrual means that employees must incrementally earn their time off before they can use it. This method can help employers manage costs. For example, if employees are frontloaded all their days on January 1 and one of them leaves the company on January 2, that individual may be entitled to the full payout of the unused time. Alternatively, if employees accrue time off, their employers may only have to pay them for the amount they’ve earned to date.

How does accrued PTO work?

To offer accrued PTO, employers must determine the total days employees are eligible to earn throughout the year and the accrual rate. Time can be accrued by the hour, day, week, month or pay period. These details should be documented in official PTO policy.

How to create an accrual-based PTO policy

A PTO accrual policy helps ensure that time off is administered via a defined set of criteria. At a minimum, it should answer the following questions:

• Who qualifies for PTO?
• How much PTO can eligible employees earn?
• When does PTO start accruing?
• How is PTO accrued (accrual rate)?
• How can employees request or schedule time off?
• What happens to unused PTO – is it carried over, lost or paid out at year’s end?
• Can employees donate PTO?
• What happens to PTO when employees leave the organization?
• Who is responsible for PTO administration?
• What are the applicable laws governing leave and the treatment of unused time off?

Eligibility

Employers who offer PTO to full-time employees generally have no obligation to extend it to part-time employees. In many cases, part-time workers are eligible for PTO on a prorated basis. However, businesses must follow all applicable state and local laws governing PTO.

Carryover and payout

Some states and local jurisdictions explicitly prohibit “use-it-or-lose-it” PTO policies. In such cases, employers must generally allow employees to carry over accrued, unused PTO from year to year or pay them for the remaining balance at year’s end. Employers may also be required to pay out any accrued, unused PTO when an employee leaves the organization. In some other states, use-it-or-lose-it policies are only permitted if the employer officially documents and communicates the rule to employees.

Encouraging use

Accrued, unused time poses a financial liability for employers. As such, they often encourage employees to take their earned days or adopt rules that incentivize PTO usage. For example, the policy may state that employees can only accrue so many days without taking time off. Until the balance drops below the designated cap, they are not eligible to earn additional PTO.

Maintaining adequate staffing

Employers generally have the right to control when and how much PTO employees take at any particular time. Their PTO policies should clearly communicate the parameters governing the use and approval process to take time off. They must also comply with any state and local laws that might be more beneficial to employees.

Additionally, employers should plan ahead for peak periods of activity. They might establish an early deadline for submitting PTO requests or designate blocked period periods, during which PTO is not allowed (to the extent permitted by state and local laws).

Donating PTO

Three forms of PTO donation programs exist:

• Leave banks – Employees anonymously donate their accrued paid time off to a centralized account, from which qualified recipients can apply to receive PTO.
• Leave sharing – Employees donate their PTO directly to a coworker who experiences a defined need, such as a medical emergency or major disaster.
• Charitable donations – Employees donate the value of their unused or unwanted PTO to a charitable organization.

These donation programs are popular amongst employees, but they can be difficult to administer due to tax implications. Employers must carefully analyze the regulations governing PTO donation to ensure legal compliance.

Accrued PTO and paid sick leave

Under many state and local paid sick leave laws, employers may not have to provide additional paid sick days to employees if they offer a PTO policy that meets or exceeds the legislative requirements.

How to calculate PTO accrual

Calculating accrued time is as simple as multiplying the number of hours worked by the PTO accrual rate. For example, if an employee works 40 hours per week and the hourly accrual rate is 0.038, that individual earns approximately one and a half hours of PTO each week. The calculation looks like this:

40 hours x 0.038 = 1.52 hours

How to calculate the accrual rate

The accrual rate can be achieved by dividing the total PTO an employee can earn by the total available work hours in the year. For example, if a business offers 15 PTO days per year and its employees work a standard 40-hour week, the hourly accrual rate is 0.058. The calculation looks like this:

120 hours (15 days x 8 hours per day) / 2,080 (52 weeks x 40 hours) = 0.058

Factors that can affect PTO accrual rates

An employee’s status – new hire, part-time, etc. – or length of service might affect the rate at which PTO is accrued.

Part-time employees

Employers often prorate PTO accruals for part-time employees because they work fewer hours than full-time employees.

New hires

Some businesses have policies specifying when new hires become eligible to accrue PTO. This approach helps minimize benefits costs while employers assess if someone is the right fit for their company.

Length of service

To reward employees for loyalty, employers might allow longer-tenured employees to accrue more PTO than newer employees. For example, the PTO policy might dictate that employees with less than five years of service can accrue 10 days of PTO, while those with five or more years of service can accrue 15 days.

Unlimited PTO

Some employers offer unlimited PTO to improve work-life balance, trusting that employees will use their professional judgment when deciding when and how much time off to take. Such policies can decrease the administrative burden of tracking PTO accruals and increase employee flexibility and autonomy.

However, unlimited PTO does present some risks. Employers may want to consider the following:

• Pre-approvals – Even though employees can take time off when needed, requiring them to request time off in advance can help employers maintain adequate staff coverage during absences.
• Performance issues – Employees must understand that they are still expected to meet deadlines and goals. If workers fall short of expectations, employers should identify and address the performance issues promptly.
• State considerations – In some states, businesses may have to pay employees for unused, accrued PTO before switching to an unlimited policy. Employers should check applicable state and local laws.

How time and attendance solutions can help manage PTO accruals

Time and attendance software automates PTO balance calculations to ensure they are always up to date and easily accessible online. It also accommodates projections, which helps employees manage their days off. They may pick a future date and see how much PTO they will have earned. Employees can also project how much time will be left over if their manager approves a PTO request.

Frequently asked questions about PTO accrual

What is a good PTO accrual rate?

It’s common for employees to accrue approximately 1.5 hours of PTO each week, which equates to two weeks, or 10 business days, of PTO annually. However, employers must always determine the accrual rate that works best for their organization.

What is the difference between PTO accrued and PTO available?

Accrued PTO is the amount of days off employees have earned under an accrual-based PTO policy. Available or granted PTO is the lump sum of days employees can use under a frontloaded PTO policy.

What is a reasonable PTO accrual balance cap?

Accrued PTO is usually capped at 10 to 15 days per calendar year. Some employers might further restrict PTO accruals to incentivize usage. In such cases, employees earn paid time off to a certain point, after which they must take time off to accrue additional PTO.

Is PTO accrual negotiable?

PTO may be non-negotiable, depending on the employer. However, some businesses allow employees with longer lengths of service to accrue more PTO than other employees. The terms of such an arrangement should be documented in a PTO policy to help ensure consistency and fairness.

Is unlimited PTO better than accrued PTO?

Unlimited PTO gives employees more flexibility and is easier to administer than accrual-based PTO. However, it may not be right for every business due to the risks of employee underperformance and inadequate staff coverage.

Can you roll over accrued PTO?

Some states require employers to roll over unused, accrued PTO to the following year or pay employees for the remaining balance. In other states, PTO forfeiture, also known as “use-it-or-lose-it,” may be permitted under certain circumstances. Absent state laws, employers may choose how they want to treat unused, accrued PTO.

Do employers have to pay out accrued time off?

Depending on state law, employers may have to pay out accrued, unused PTO at year’s end or whenever an employee separates from the company. Employers should consult legal counsel or state authorities for the applicable laws and regulations.

Are accrued time off and outstanding time off the same?

Accrued PTO is time that employees have earned but not yet used. Once they submit a time-off request, it may be referred to as outstanding PTO until their manager approves it.

What’s the difference between lump-sum and accrued PTO?

Lump-sum PTO means employees are frontloaded all their available time off, usually in January. Accrued PTO, in contrast, requires employees to earn their time off incrementally throughout the year.

This guide is intended to be used as a starting point in analyzing PTO time accrued and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax guidance or other professional services. Please consult with your legal counsel.