How to Calculate PTO Rates
Calculating PTO rates can be complex, but it's essential for both employers and employees to understand. Learn how to accurately calculate PTO rates with our step-by-step guide.
Do you want to know how your company can attract top professionals, deepen employees' engagement, and reduce turnover? Offering competitive paid time off (PTO) is a great place to start.
In the war for talent, companies are upping their value game to attract and retain the best employees.
One important benefit that can make or break a job is time off (PTO), and employers need to understand how to properly calculate PTO rates to stay competitive.
Why PTO is Important
According to the SHRM Employee Benefits Survey, PTO benefit systems are strong, with 99% of employees offering paid vacation and sick time and 96% of employees banking PTO.
It underscores how important it is to adopt PTO in the modern workplace.
Yet, it must be noted that calculations of PTO rates are not always straightforward.
Meanwhile, without understanding how PTO is calculated, employers might fail to provide fair and competitive compensation.
Besides, accurate PTO calculations are a must-have for keeping employees happy and focused on our goals.
PTO Key Concepts
Paid Time Off is defined as time that employees can take off work and yet still be paid their wages.
PTO can accumulate over the course of a year in relation to the number of hours an employee works, or given as an annual grant. The rules that govern accrual rates, usage and carry-forward policies are defined by each employer differently.
Time off (PTO)
This is paid time off for which an employee receives pay. It can include vacation, sick time, personal time off, and more.
Accrual rate
This is the rate at which an employee earns PTO over time. It is usually expressed as a limit, such as “1 hour of PTO for every 40 hours.”
It is the most common way employers offer PTO.
37% of employers use an accrual system for PTO. This is a key fact for those calculating PTO rates, as they'll need to decide on an accrual method (e.g., per pay period, annually) alongside the total amount of PTO offered.
The accrual rate defines how fast employees can earn PTO and how much time they can actually take off. It could depend on organizational practices and employees' service length.
Carryover rule: It determines whether PTO use can be carried over to the next year, and if yes, sets the limits and procedures of time transfer.
Factors Affecting the Calculation of PTO Rates
The following are some factors that affect the calculation of PTO rates.
Law-specific
Each state has its own employment laws that determine how low are PTO credits. . These rules may vary based on collection rates, shipping policies, and eligibility criteria.
Industry Standards
Some industries or firms may have industry-specific standards or collective agreements that specify PTO rates and calculation methods.
Company Policy
Every company has its own PTO policy, which may exceed the minimum legal requirements. These policies may vary based on accrual rates, types of PTO offered, and eligibility criteria.
Other Rulings
PTO Banking: Some companies allow employees to "bank" PTO. Employees will receive a set number of paid time off (PTO) days each year.
PTO Purchase: Some companies give employees the option to buy additional PTO.
PTO Limit: It sets the maximum amount of PTO an employee can take or use during a given time.
Alla Chernets
With the right strategy and legislation, businesses can strengthen processes and ensure that employees get the time they deserve—but what tools can help you manage it at best?
How TMetric Helps with PTO Rate Calculation
TMetric, a powerful time tracking software, can be a valuable tool for calculating PTO costs, especially for organizations with complex PTO policies or large teams.
Here are some ways it can help.
Time Tracking
TMetric accurately records an employee’s hours worked, making it easy to calculate PTO costs based on time worked.
Automatic Time Entry
For repetitive tasks, TMetric can automatically enter time, reducing the risk of errors.
Rules Easy Setup
TMetric lets you set up a variety of PTO rules such as hourly, daily or continuous, incremental, and even unlimited PTO.
Carryover Rules: You can set a rule to carry unused PTO to the next year or period.
Employee Tracking PTO Balance
Employees can easily access their PTO balance and track their PTO balance.
Claim Approval
Employees can submit PTO claims online through TMetric, streamlining the approval process.
Reporting and Analysis
TMetric provides detailed reports on PTO usage, calculated with bookings, allowing you to analyze the time taken by your team.
Payroll Integration
TMetric can integrate with payroll systems to facilitate payroll processing.
How PTO is Calculated
Consider special requirements
Determine if there are any particular admission criteria, such as work hours per week.
Setting the Accrual Method
When deciding how employees will earn paid time off (PTO), you must choose an accrual method. This method explains the rate at which PTO accrues during a specific period.
Below we look at common formulas used to calculate PTO accruals.
How to Calculate Hourly PTO Accrual
How it works: Employees earn PTO based on the number of hours worked.
🧮PTO Hours Accrued = (Hours Worked × PTO Accrual Rate) × Pay Period Frequency
- Determine the accrual rate (e.g., hours per pay period)
- Calculate the total hours worked in the pay period
- Multiply the total hours worked by the accrual rate
- Ensure adherence to company policies regarding PTO accrual
- Review the formula for accuracy and compliance
Example: If an employee works 40 hours per week, they earn 1 hour of PTO for every 40 hours worked, then they are paid 1 hour of PTO per week.
How to Calculate Daily PTO Accrual
How it works: Employees earn PTO based on the number of days worked.
🧮 Daily PTO Accrual = (Annual PTO Hours) ÷ (Total Working Days in a Year)
- Identify the standard PTO accrual rate for the organization.
- Determine the total number of work hours in a pay period.
- Calculate the total PTO hours earned per pay period based on the accrual rate.
- Set up a formula to convert the total PTO hours into a daily accrual amount.
- Include necessary adjustments for part-time employees, if applicable.
- Verify the formula by applying it to a sample employee's work schedule.
- Document the formula for reference and ensure it is easily accessible to employees.
Example: Sarah is entitled to a total of 120 hours of paid time off annually, which is convertible to fifteen days. To calculate how much PTO Sarah earns each day, we divide her annual PTO by the number of working days in a year:
120 hours ÷ 250 days = 0.48 hours per day
This means that by the end of the week, or each working day, Sarah builds 29 minutes of PTO.
How to Calculate Paid Time Off
How it works: Employees earn PTO based on the number of paid time worked.
🧮 PTO Hours = Annual Work Hours × PTO Rate
- Determine annual work hours
Typical full-time: 2,080 hours (40 hours/week × 52 weeks) - Calculate PTO rate
Example: 2 weeks PTO = 80 hours ÷ 2,080 hours = 0.0385 or 3.85% - Apply formula
2,080 hours × 0.0385 = 80 PTO hours per year
Key variables affecting calculation:
- Company policy
- Years of employment
- Full-time vs. part-time status
- Employee classification
How to Calculate Tiered Accrual
How It Works: Employees earn PTO at different rates based on seniority and other criteria.
🧮 Create accrual rate tiers based on employee tenure
For example, 0-2 years = 10 days/year, 3-5 years = 15 days/year, 6+ years = 20 days/year
Choose Calculation Method
- Hourly accrual: Total annual PTO hours ÷ work hours per year
- Monthly/pay period accrual: Divide annual PTO by number of pay periods
Example: For a 2-year employee working 40 hours/week
- Annual PTO: 10 days = 80 hours
- Hourly accrual rate: 80 hours ÷ 2,080 annual work hours = 0.0385 hours per worked hour
- Per pay period (biweekly): 0.0385 × 80 hours = 3.08 PTO hours earned
Tracking Considerations
- Use time tracking software to automate tracking
- Update tier rates based on employee's tenure anniversary
- Set maximum PTO balance cap if needed.
How to Calculate Unlimited PTO
How it works: Employees can take as much time off as they want without compromising their work responsibilities.
🧮 No special formula is required
Example: An employee can take a month of vacation without worrying about losing PTO.
How to Calculate Yearly PTO
How it works: PTO is typically accrued over time, usually based on the number of hours worked or years of service. Companies may allow employees to carry over a fixed number of unused PTO to the next year.
🧮Yearly PTO = (Base PTO Days) + (Tenure Bonus Days) - (PTO Used)
- Base PTO: Standard days given annually (typically 10-15 days)
- Tenure Bonus: Additional days based on years of employment
- PTO Used: Days already taken during the year
Example
- Base PTO: 12 days
- Tenure Bonus: 2 days (after 2 years of employment)
- PTO Used: 5 days
- Remaining PTO = 12 + 2 - 5 = 9 days
How to Calculate PTO for Part-Time Workers
How it works: PTO for part-time workers is usually prorated based on the number of hours they work compared to full-time employees.
🧮 (Part-time employee's hours per week ÷ Full-time employee's hours per week) x Total PTO for full-time employees
- Identify the weekly hours for part-time employees.
- Identify the weekly hours for full-time employees.
- Divide the part-time employee's weekly hours by the full-time employee's weekly hours.
- Obtain the total Paid Time Off (PTO) for full-time employees.
- Multiply the result from the division by the total PTO for full-time employees.
- Review the final calculation for accuracy.
Example: If a full-time employee works 40 hours per week and earns 10 days of PTO, a part-time employee working 20 hours weekly would earn 5 days of PTO.
PTO Accrual Guidelines
- PTO is accrued at a flat rate for each pay period.
- PTO can be accrued at the end or beginning of the year.
- PTO can be accrued based on the number of hours worked.
Calculate by Using the Correct Formula
- Hourly Employees Rate = Total PTO Hours ÷ Total Hours Worked in Year
- Calculate the total number of hours the employee works in a year.
- Divide the total number of PTO hours allowed by the total hours worked.
- The result is the rate at which the employee earns PTO hours for each hour worked.
- Salaried Employees Rate = Total PTO Days ÷ 12 (Months)
- Divide the total number of PTO days allowed by 12 (months).
- The result is the number of PTO days the employee earns each month.
As mentioned above, your accrual rate is the number of hours of PTO you earn each year. This rate is based on your completed years of service and your work schedule.
Any PTO hours you have used or taken will be deducted from your balance (the number of PTO hours you have).
This includes any PTO you use for vacation, sick days, or other purposes.
To calculate your PTO balance, you can use this formula:
Starting balance + Accrued PTO - Used PTO = PTO balance
Your starting balance is the amount of PTO you had when you started working.
Depending on your employer's policy, the amount may be zero or several hours. For example, if your base amount is 80 hours, your total is 120 hours, and you used 40 hours of PTO, your PTO amount will be:
80 hours + 120 hours - 40 hours = 160 hours
Victoria Novák
✍️Compare to Company Policy: The calculated total rate should match your company's PTO policy.
Track Accrual
Set up a system: Use a time and attendance system or specialized PTO tracking software to track and record PTO accrued by each employee.
Make regular updates: Ensure that the system is updated to reflect changes in employment status or PTO policy.
Calculate Usage
Track PTO Usage: Keep track of when employees request and take PTO.
Balance update: Subtract used PTO from accumulated balance to determine PTO balance.
Prepare a carryover policy: If your company allows employees to carry over unused PTO to the next year, adjust the balance.
Set limit: Set a limit or limit for migration to prevent exceeding the total limit.
Generate Reports: Generate regular reports on PTO balance, utilization and revenue collected.
Make a compliance review: Ensure PTO calculations and compensation are consistent with labor laws and company policies.
Additionally, fix inconsistent PTO calculations because they can result in errors.
Alla Chernets
Key Insights
- Reduced downtime and overtime: Employees work fewer hours per week and receive less PTO.
- Increased regular time off for full-time employees: Full-time employees receive PTO at the same rate regardless of length of service.
- Other Employers: Some companies allow employees to carry over unused PTO to another year.
- Maximum Pay: There may be a maximum number of PTO hours an employee can accrue.
- Pro-Rata Accrual: For new hires and employees who leave during the year, PTO may accrue based on their time with the company.
Defined PTO vs. Unlimited PTO
The tech industry has seen a surge in unlimited PTO policies as companies compete for highly skilled employees.
Here are a few well-known examples.
⭐Netflix: One of the pioneers of unlimited PTO, Netflix has been offering this policy for years.
⭐ HubSpot: This marketing automation software company is known for its flexible work culture, including unlimited PTO.
In addition to a company-wide week off in July, HubSpot has unlimited vacation. You decide when and for how long to take time off. Vacation can be used however you want; for tropical trips or flexible day-to-days. We also have Vacation Quota Relief (VQR) to make sure it’s truly unlimited for all.
⭐Gusto: As a payroll and benefits provider, Gusto offers unlimited PTO to its employees.
⭐Adobe: The creative software giant also provides unlimited PTO to its staff.
⭐Spotify: The music streaming service is another company that offers unlimited PTO.
Whereas these companies claim unlimited PTO, the reality is that the amount of time off you can take might be influenced by unwritten rules or company culture.
Tracking Unlimited PTO in the Workplace
Although unlimited PTO policies are flexible, they do not eliminate the need for vacation time and related administrative duties.
This means that even though unlimited PTO policies do not have a set date, they must still be counted.
There are several reasons for this.
Tax issues: Employers must report regular employee wages, including wages earned during PTO time.
Time Off: Some companies have a paid policy for PTO, although there is no limit. This means that employees can calculate some time before they work overtime.
Payment Processing: The payment system must track payments and withdrawals.
Compliance: Companies must comply with local labor laws and regulations, which may contain special provisions for tracking and calculating vacation time.
Alla Chernets
The Reality of Unlimited PTO
Unlimited PTO means that the company can afford to offer flexibility to its employees, - this benefit proves to have a positive impact on work-life balance.
While this idea is appealing, it does not imply that organizations give automatic permission to abandon time tracking.
- Data is important because it allows companies to analyze usage patterns, see potential biases and follow fairness policies in distributing workload.
- Managers must ensure that their team members take sufficient rest time, - the company regulations must be clear about timeoff policies. Employees who overwork must be reminded to take vacation to prevent burnout and excessive workload.
- Managers should implement strategies to encourage time off, even without a use-it-or-lose-it policy.
- The use of time off must be analyzed to ensure fair treatment.
- It is also crucial to review time off usage regularly to address any systemic breaches similar to reviews of equal pay.
Conclusion
By understanding how to calculate PTO costs, setting up an effective tracking system, and using tools like TMetric, companies can create a PTO policy that fits their goals.
This approach does not only benefit the employees but promotes better work and productivity.
