How to Handle Accrued Time Off in Your Business

Paid time off (PTO), including vacation days, sick days, and holidays, is a popular employee benefit. According to the Bureau of Labor Statistics, 77% of employees receive paid vacation days, 77% receive paid sick leave, and 79% receive paid holidays. But when employees don’t use up their PTO, they’re left with accrued time off.

If you have a paid time off policy, handling PTO accrual is your responsibility. Some states regulate how you treat accrued hours, while others leave the decision up to you. So, what is accrued time off?

Heads up! The FLSA does not require sick, vacation, or holiday pay.

Some employers are confused about what the FLSA, or Fair Labor Standards Act, does and doesn’t require. Our FLSA cheat sheet can help. Download it to learn FLSA rules, what the FLSA does not require, and other labor laws you should know.

What is accrued time off?

Accrued time off is time off an employee has earned but not yet used. PTO accrual especially comes into play at the end of the year or when an employee leaves your business.

Employees might earn general personal time off hours that they can delegate toward vacation, sick, or personal time. Or, employees might earn separate sick and vacation days.

In many businesses, accrued time off expires at the end of the year. The employee might be able to decide whether they want to roll over time off, cash it out, or do a mix of the two options. And when an employee leaves your business, you may need to pay out accrued time off and include it in their final pay.

Depending on your business’s personal time off policy, employees may earn PTO after a certain number of hours worked, weeks, or months. For example, an employee earns one hour of paid time off for every 20 hours worked. After working 400 hours, the employee has 20 hours of accrued time off.

Any PTO that employees haven’t earned is not accrued time off. As a result, you are not responsible for paying it out or rolling it over to the next year.

Some employers put limits on how much accrued time off an employee can roll over or cash out at the end of the year. Establish a sick or vacation accrual policy in your employee handbook. Include things like how much paid time off employees earn and what employees can do with accrued time off.

Other businesses have a use-it-or-lose-it policy when it comes to paid time off. If an employee doesn’t use their accrued time off by a particular day, they lose it.

accrued time off is sick, vacation, or personal time an employee has earned but not yet used

How to calculate accrued time

To ensure you roll over or cash out the correct accrual amounts, you need to know how to calculate accrued time off. You don’t need a PTO accrual calculator, but you do need to know the process.

First, calculate the number of paid time off the employee earned. Depending on your policy, you may include sick and vacation accrual.

Next, subtract the number of hours the employee used from their earned paid time off. Then, you can roll over or cash out the employee’s accrued time off.

If you are cashing out the employee’s paid time off, multiply the remaining accrued time off by the employee’s hourly rate. Make sure to withhold taxes from accrued paid time off before paying your employee.

Accrued time off calculation example

Let’s say an employee earns $15 per hour. The employee earns one hour of vacation time for every 30 hours worked. You terminate the employee after they work 1,500 hours during a calendar year. The employee used 10 hours of paid time off.

Use the following steps to determine the employee’s gross wages for accrued vacation time.

To calculate the number of accrued vacation the employee earned, divide their hours worked by 30 (1,500 / 30). The employee earned 50 hours of vacation time.

Next, subtract the number of hours the employee used from what they earned (50 – 10). The employee has 40 hours of accrued vacation time.

Finally, multiply the employee’s hourly rate of $15 by their accrued vacation time ($15 X 40). You owe the employee an accrued vacation payout of $600 before taxes.

PTO accrual by state

Some states require that you pay employees for PTO accrual. Depending on your business’s locality, you might not be able to establish a use-it-or-lose-it policy for PTO. Some states consider accrued time off wages, and failing to give employees these wages is illegal.

Be sure to check with your state for more information.

Looking for a simple way to track your employees’ accrued time off? Patriot’s online time and attendance software integrates seamlessly with our payroll software. Get your free trial of both today!

This article has been updated from its original publication date of October 29, 2018.

This is not intended as legal advice; for more information, please click here.

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