The Art of Calculating Vacation Accrual (And How to Do It Right!)
Calculating vacation accrual is not the most desirable task to a small business owner, and for good reason.
Calculating paid time off can be a daunting, complicated, and overwhelming process – especially if your company has no one who specializes in vacation tracking.
It’s not as simple as plugging a couple of random numbers into a calculator and hitting the “=” button. There’s more to it than that.
- You need to take into account if the employee is long-term or short-term.
- You need to decide the best rate to use for your calculation (yearly, monthly, bi-monthly, etc.)
- You need to know how to properly calculate the rate you choose.
This article will help you complete the three above tasks in an efficient and timely manner while keeping errors down to a minimum.
Long-Term Employees Versus Short-Term Employees
Most new business owners tend to use a yearly rate to calculate vacation accrual for their employees: the reason being because a yearly rate is the simplest type of accrual rate to calculate.
But they often run into early complications with their employees. Why? Because no one wants to work for a year before accruing vacation time.
While a yearly rate may work for long-term employees (those who have already been with the company for over a year), it’s the least efficient rate for calculating vacation time for short-term (or part-time) employees.
For those types, a vacation accrual rate that relies on a shorter duration of time worked is much more efficient.
So your first task is to ask yourself the following question:
How many long-term employees does my company have? If all of them are long-term, then a yearly rate could still suffice. If only some are long-term, then a shorter rate is recommended.
Your answer to that question will dictate the best rate type for your vacation accrual calculation:
- For long-term employees (1+ years with the company): a yearly (annual) accrual rate or semi-annual accrual rate is recommended.
- For short-term employees (6+ months with the company): a monthly, bi-monthly, or weekly accrual rate is recommended.
- For part-time employees: an hourly accrual rate is recommended.
Before we move on to how to calculate some of the above-mentioned rates, there’s one important point that needs to be addressed…
Use as few rates as possible.
If your company houses more long-term employees than short-term, then try and exclusively use a long-term accrual rate.
If your company houses more short-term employees (or part-time employees), then try and stick to a short-term accrual rate.
How To Properly Calculate Vacation Accrual Rates
If you’ve decided to stick with or switch to a yearly accrual rate, you can skip this section altogether. The calculation is as simple as choosing the number of hours each employee will get for vacation each year.
But for other rates, you’ll need to do a little more. Here are the simplest ways to manually calculate each (and we’ll show you and even simpler way in just a bit):
For Monthly Vacation Accrual
Divide the number of vacation (or PTO) hours that can be accrued (most often 40 or 80 hours) by the number of months in a year.
40 Accrued Vacation Hours/12 months = 3.33 vacation hours earned/month
For Daily Vacation Accrual
Divide the number of hours that can be accrued each year by the number of working days in that year.
40 Accrued Vacation Hours/(5 working days x 52 weeks) = .154
Then, take the quotient (.154) and multiply it by the number of days the employee worked in the pay period.
.154 x 5 days worked = .77 hours of vacation earned for this pay period
For Bi-Monthly Vacation Accrual
Divide the number of hours that can be accrued for the year by 24 (twice a month x 12 months = 24).
40 Accrued Vacation Hours/24 = 1.67 hours earned each pay period
For Every Two Weeks Vacation Accrual
Divide the number of hours that can be accrued for the year by 26 (52 weeks in a year/ every 2 weeks).
40 Accrued Vacation Hours/26 = 1.54 hours earned every two weeks
For Hours Worked Vacation Accrual
Divide the number of hours that can be accrued for the year by the number of hours typically worked in a year by a full-time employee (commonly 2080 hours).
40 Accrued Vacation Hours/2080 = .019 hours earned per hour worked
The Simplest Way To Track Vacation Accrual For All Employees
All of the methods above have two things in common…
- Your employees must manually calculate each.
- Your employees must manually record and keep track of each.
While both can be accomplished without assistance, they can also potentially cost your company thousands of dollars each year.
A much safer (and cost efficient) way to calculate and keep track of vacation accrual is to automate it. And that’s where we can help.
Our web-based attendance tracking software will do the following for your company:
- Handle complex accruals and carry-overs. For all employee types in your company (long-term to short-term to part-time).
- Calculate any type of accrual, no matter the complexity. Our software has every calculation you could imagine built into its system. All you have to do is have your employees and/or supervisors input employee’s shift and data information.
- Detailed reports at your fingertips. Get detailed information on current accrued vacation time, carry-over time, and more in seconds (from our secure online database.)
And that’s just scratching the surface of how SoftTime Online can benefit your business.
If you want to learn more, we invite you to contact us today and find out how you can try our software for FREE for 30 days (no commitment required).