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How to Handle Accrued Time Off

Julie Ritzer Ross
Julie Ritzer Ross

Offering accrued time off is great for management and employee morale, but you need to know how to calculate it, what the law says about it and how to build company policies around it.

  • Accrued time off is paid time off that employees have earned but not yet used.
  • U.S. federal law doesn't require employers to offer accrued time off, but some states require companies to give employees paid sick time and/or payment for unused time off.
  • A comprehensive accrued-time-off policy should cover how paid time off is earned, when employees become eligible to earn it, how payments for unused accrued time off are calculated and more.
  • This article is for business owners and human resources professionals who want to know what accrued time off is, how it can benefit their business and how to manage it. 

Paid time off (PTO) ranks right up there with health insurance as one of the major benefits employees look for when job hunting: A study from TSheets found that 76% of the U.S. employees surveyed believe it's very important for employers to offer vacation time. Offering accrued time off is one way many employers handle PTO.

What is accrued time off, and are employers required to offer it?

Accrued time off is generally any type of paid leave – vacation, personal time or sick leave – that an employee has earned but hasn't yet used. Employees gain a certain amount of time as they work throughout the year rather than receiving it in one lump sum.

While some state laws require companies to give their employees paid sick leave, there are no federal or state laws that require employers to offer PTO or to pay employees for any accrued time off. However, in some states, laws dictate whether and under what conditions employees must be paid for unused PTO when they leave the company.

For example, such payments are mandatory in California, Illinois, Indiana, Massachusetts, Montana, Rhode Island and West Virginia. The majority of states require businesses whose employment contracts or policies include those terms to honor them. Some states – including Florida, Idaho, South Dakota, Virginia and Wyoming – have no laws mandating PTO payouts. (Paycor offers a chart breaking down each state's stance.)

No matter their states' requirements, some employers believe it's essential to offer employees accrued time off – and to be as flexible as possible about it – because it boosts staff morale and loyalty. Trond Nyland, founder and CEO of Cordless Drill Guide, ranks among them. Cordless Drill Guide employees get one paid day off for every month worked. Accrued time off typically can't be carried over to the following year, but Nyland has temporarily relaxed this rule during the COVID-19 pandemic and currently allows staff to use PTO earned in 2020 through June 30, 2021.

Another reason to offer paid accrued time off, regardless of state laws, is to minimize unscheduled absences that can have a negative impact on a small business's operations, said Mason Culligan, founder and CEO of Mattress Battle, as PTO can be planned ahead of time.

Key takeaway: Accrued time off is paid leave that's been earned but not yet taken. Businesses are not required by law to offer accrued time off, but some state laws govern when and if employers need to pay employees for unused accrued time off if they leave the company.

How to calculate accrued time off

Accrued time off can be calculated in a few ways. For example, employees can earn a certain number of hours for every certain number of hours worked, every week worked or every pay period.

HR consultant Rebecca Southern Mills, founder of Simplecated, considers the pay-period method the most effective way to determine accrued time off.

"Since the timing aligns with payroll, you'll know the number of hours worked," she said. "Employees also tend to appreciate accruing per pay period rather than having to wait a longer period of time."

Another option is to use employee tenure to determine accrued paid time off. Jacob Pinkham, founder and CEO of In Smooth Waters, finds this the simplest means of doing so.

"My employees are very happy with the [method], and it encourages loyalty to their role at the company," Pinkham said.

At In Smooth Waters, here's how annual accrued time calculation works:

  • Six months to one year = three paid days off
  • One to two years = 10 paid days off
  • Two to three years = 15 paid days off
  • Three or more years = 20 paid days off

The experts we spoke with said it's best to set a reset date for accrued time off so it's easy to cap. Some companies convert unused PTO into cash on the reset date, but others have a "use-it-or-lose-it" policy or insist that all employees use their accrued time off to ensure their mental well-being.

To calculate payouts owed to an hourly employee, multiply the hourly pay rate by the amount of accrued time off. For example, if an employee earns $20 per hour and has 32 hours of accrued time off, this is how you would calculate the amount owed:

$20 x 32 hours = $640 owed, minus federal, state and other taxes

To calculate payouts owed to a salaried employee, first figure out their hourly pay rate. Then, multiply that rate by the amount of accrued time off. For example, say an employee has an annual salary of $52,000 and has 86 hours of accrued PTO. Like many salaried employees, they work 40 hours a week, 52 weeks a year – or about 2,080 hours annually. Here's how you would calculate this employee's accrued-PTO payout:

  • $52,000 ÷ 2,080 = $25 in hourly salary
  • $25 x 86 hours = $2,150 owed, minus federal, state and other taxes

Key takeaway: Accrued time off can be calculated by the hour, week, pay period, month or year. It's important to put a cap on accrued time off and know how to calculate employee payouts for unused accrued time off. 

How to develop an accrued-time-off policy

As with any other company policy, your accrued-time-off policy should be developed carefully.

"PTO is a big deal to most employees, so having a fair, well-thought-out policy is important," said Camille Chulick, co-founder of Averr Aglow.

This requires you to balance employees' accrued-time-off needs with those of your company.

"Employers want to create a policy that's fair to all employees but protects the day-to-day operation of the business, too," said Michelle Higgins of J.J. Keller & Associates. For example, you might want to create a company rule that ensures all employees can't use accrued time off at the same time, she said.

Following these best practices should help you get it right:

1. Solicit employee feedback.

Ask employees what PTO accrual options they'd like to see in your company's policy given their needs and schedules. For example, would they rather accrue one paid day off for every month worked or follow an hourly accrual system? 

Within reason and in legal compliance, incorporate as many employee preferences as possible into the final PTO policy. The more your policy conforms with employees' preferences, the more cooperative and satisfied your staff will be.

2. Check out the competition.

Dwight Zahringer, president of Pure Cabo LLC, said you should figure out what the standard is in your industry for benefits such as vacation time.

"Keep an eye on administration patterns – such as infrequently used PTO, rollover habits and others – to craft better policy details," Zahringer said.

3. Review state laws.

Contact your state's Department of Labor or an employment attorney to ensure that your accrued-time-off policy complies with applicable laws.

4. Decide how many accrued-time-off "buckets" you'll need.

A one-bucket approach should work if you don't need or want to set separate vacation and sick-leave policies because your state doesn't require separate sick leave, or if you don't have  a preference regarding how employees use their accrued time off, said Adam Gordon, co-founder of PTO Genius

"In this case, all paid days off are grouped together and can be granted at the beginning of the year or spread over all pay periods," Gordon said. "But if you want or need to set different rules around sick leave versus vacation time, multiple PTO buckets would be used."

Key takeaway: Ask employees for their feedback and investigate competitors' accrued-time-off policies before writing your own. Think about how you want employees to use their banked PTO, and determine whether you need or want to treat vacation time and sick time differently. 

What should be included in an accrued-time-off policy?

When you're creating an accrued-time-off policy for your company, make sure to answer the following questions:

Eligibility

  • Who qualifies to accrue time off? Will all employees be eligible to earn it, or just full-time employees?
  • When does this eligibility begin? For instance, will it be after a probationary period, after six months with the company or after one year?

Accrual calculations and payment

  • How is accrued time off accumulated and calculated? For example, do employees get one day off for every month worked or one hour off for a certain number of hours worked?
  • Do these calculations vary by employee level and/or tenure with the company?
  • Is there an accrual cap? If so, what is the maximum number of PTO hours or days employees can earn in a given interval, such as a year?
  • How and under what conditions is unused accrued time off paid out, if at all?
  • Can accrued time off be rolled over from one year to the next, and if so, what's the deadline for using it once it's banked?
  • When does the accrual period stop and start again? Is it on the first business day of the year, the first day of the fiscal year or the anniversary of each employee's start date?

Procedures for requesting and using accrued time off

  • How long, if at all, must new employees wait to use accrued time off once they've earned it?
  • How much notice are employees required to give when they want to use their accrued time off, and does this vary depending on how many consecutive days off are being requested?
  • To whom should all requests to take accrued time off be submitted, and how?
  • For what purposes can accrued time off be used?
  • Does it include sick days?

Key takeaway: Policies that cover accrued time off should include detailed information on who's eligible to earn it and how, how it's calculated, and what the proper procedures are for requesting to use banked time.

Image Credit: fizkes / Getty Images
Julie Ritzer Ross
Julie Ritzer Ross,
Business News Daily Writer
Julie Ritzer Ross graduated from New York University in 1980 with a Bachelor of Arts degree in journalism. A two-time recipient of the Jesse H. Neal Award for business feature writing and, she has covered a wide variety of B2B topics—from general business and technology to marketing and human resources—for a wide range of publications. Before becoming a freelance journalist 25 years ago, she held a series of editorial positions with several New York City and Northern New Jersey-based trade magazine publishers. When she’s not writing, she enjoys reading, travel, cooking and spending time with family and friends.