Paid Time Off is a key part of any employee benefits package, but what really matters for running your business is how time off is earned and tracked. This process is called PTO accrual.
PTO accrual systems let employees build up time off gradually as they work, giving you a fair and organized way to manage leave. When running a small to mid-sized organization, understanding PTO accrual is key to staying compliant with labor laws, managing your budget accurately, and supporting employee well-being.
This guide explains how PTO accrual works, why it matters, and how you can manage every step of the process.
What Is PTO Accrual?
PTO accrual is the process by which your employees earn their paid time off gradually instead of receiving the full amount of days off all at once. They receive days off to use based on how long they’ve worked or how many hours they’ve completed.
Accrual is like a savings account or a bank of time. Each pay period, a “deposit” of PTO is added to the employee’s balane. The longer time they spend at the company, the more paid time off they earn. This PTO can be “spent” as normal whenever they want to or need to take time off for vacation, sick leave, or other personal matters.
Example: Imagine your business offers 15 days of PTO per year. Instead of giving all 15 days to your team on January 1, you set up a system where employees earn the days off over time, setting a certain amount earned for each month or a certain number of hours per pay period. By the middle of the year, they’ll have about half of their PTO available free to use.
Why it matters? PTO accrual benefits both employers and employees. It spreads out PTO evenly throughout the year, which helps prevent misuse (like a new hire taking a long vacation right away after onboarding) and makes payroll and accounting more predictable.
PTO vs. Vacation: What’s the Difference?
While many people use “PTO” and “vacation” as if they mean the same thing, there’s an important difference.
Many people use “PTO” and “vacation” interchangeably as if they mean the same thing, but there’s an important difference.
- Vacation refers to paid time off for rest or leisure.
- Paid Time Off (PTO) is a broader term that can include vacation, paid sick leave, and other leave types.
Example: If your company gives 15 total days of PTO per year, employees can decide how to use them, maybe 10 days for vacation, 3 for illness, and 2 for personal matters.
Common Types of PTO Included in Accrual
When creating your PTO policy, one of the first steps is deciding which types of paid leave should be accrued. As mentioned above, PTO includes more than just vacation. It includes several categories of paid leave that employees can accrue as they work. Let’s take a look at these types so you have a good understanding of each in terms of compliance and fairness.
Most PTO accrual systems include:
- Vacation days: Time off for rest, travel, or personal enjoyment, earned gradually throughout the year (for example, 1.25 days per month for 15 days annually)
- Sick leave: Paid time off for illness, medical care, or caring for a family member, often required by law and accrued at a set rate (like one hour for every 30-40 hours worked)
- Personal days: Flexible paid days you can use for mental health, errands, or family matters, accrued the same way as vacation or sick time
- Floating holidays: Optional days employees can use for cultural, religious, or personal observances, which can either accrue or be given at the start of the year
Some employers also offer additional paid leave (like bereavement, jury duty, or voting leave) but these are usually approved as needed rather than accrued over time. There also other types of leave that you should know about, including unlimited PTO so you can decide what is best for your team. Whether you track all time off in one PTO balance or separate categories, you should record every hour earned accurately to establish compliance and fairness across your team.
Why PTO Accrual Matters for Employers
Understanding PTO accrual isn’t just about tracking days off — it’s about managing compliance, finances, and employee well-being. A clear system helps your business stay legally sound, control costs, and keep employees satisfied and productive.
PTO accrual is important to understand in order to manage compliance, your business finances, and the well-being of your team. When your system is clear and easy-to-understand for everyone, you can ensure that your business stays safe legally, while also controlling costs and ensuring that your team is satisfied.
Compliance with Labor Laws
Despite not having any federal laws requiring companies to give their employees paid time off, many states and cities have their own rules to follow for how PTO accrual should work, including earning it, the amount carrying over, and payouts. For example, some states require that employees accrue 1 hour of PTO for every 30-40 hours worked, while states like California and Colorado prohibit “use-it-or-lose-it” policies and require the carryover of unused PTO.
In several states, PTO counts as earned wages, meaning you have to pay it out when an employee leaves your company. The Family and Medical Leave Act allows employees to use accrued PTO during unpaid leave, and the ADA may require PTO as part of reasonable accommodations.
A compliant PTO accrual policy (with clear rules on accrual rates, rollover, payout) keeps your business out of legal trouble and protected from fines and penalties.
PTO Liability & Operational issues
Unused, accrued PTO can become what is known as a PTO payout liability. This is money your business owes employees.
For example: 80 unused hours at $25/hour equals $2,000 owed. Across an entire team, that can become a major expense. Tracking accruals helps you budget and forecast your costs, preventing surprises and cash flow issues if multiple employees leave at once.
Managing and tracking accruals give you visibility into employee availability, making it easier to plan coverage and keep your business running smoothly. Accrual caps can also encourage your team to use their time off regularly, that way you an avoid large carryovers and burnout.
Boosting Retention and Engagement
When your team understands how their time off is accrued, tracked, and carried over, they will feel that the system is fair and takes their wellbeing into account. A transparent PTO accrual policy builds trust and loyalty. Also, the regular use of PTO encouraged by an accrual policy supports the mental health and productivity of your team, increasing the rate of long-term employee retention.
How PTO Accrual Works
Now that you know why PTO accrual matters, let’s look at how it actually works.
The rate and method of accrual depend on your company’s policy, how often you run payroll, and whether your employees are full-time or part-time.
There are four main accrual methods used by most businesses: by hours worked, by pay period, by lump sum (front-loaded), or based on employee tenure. Some businesses also offer bonus or incentive-based PTO as a reward for performance or employee loyalty.
Let’s take a look at how each method works:
1. Accrual by Hours Worked
Commonly used for hourly or part-time employees, under this system, PTO accrues based on the number of hours an employee works.
For example: Employees accrue 1 hour of PTO for every 40 hours worked. If that person works 1200 hours across several months, they accrue 30 hours of PTO.
2. Accrual by Pay Period
With this method, accrual is tied to your company’s payroll schedule. Full-time mployees earn a fixed amount of PTO each pay period, regardless of how many hours they work.
For example: if a full-time employee earns 120 hours (15 days) of PTO per year and you have biweekly pay periods, they would accrue 5 hours of PTO per pay period.
3. Lump-Sum or Front-Loaded PTO
Front-loaded PTO means your team receives their entire PTO balance at the start of the year instead of earning it over time. With this approach, you don’t have to calculate accrual rates. To manage the risk of employees leaving the company after having used their paid time off without technically earning it, you ould use a hybrid system.
4. Tenure-Based and Tiered Accrual
PTO can also be used as part of a reward system for long-term employees by increasing their PTO accrual rate the longer they spend at the company.
For example:
- 0–2 years spent at the company: 10 days of PTO per year
- 3–5 years: 15 days
- 6+ years: 20 days
You can use this system to improve employee retention.
5. Incentive or Bonus PTO
Another method of using PTO as a reward is by granting it for good performance or hitting certain milestones.
For example: you might award an extra day of PTO for reaching annual goals or maintaining perfect attendance.
Choosing the right accrual method depends on your workforce and goals. For hourly and part-time teams, by-hours-worked systems ensure fairness. For salaried employees or consistent schedules, by-pay-period or front-loaded methods are simpler to manage and track. Tiered and bonus-based systems are great for long-term employees.
Whatever method you choose, make sure to define your accrual rules clearly and track the hours. This way you can keep your company compliant and your system fair.
How to Calculate PTO Accruals
After choosing your accrual method, you need to calculate PTO acurately. Besides clear, well-written policies, a few basic formulas are all you need to get started.
Step-by-Step Formula for PTO Accrual
General formula for PTO accrual:
(Total annual PTO hours ÷ Total work hours per year) × Hours worked in the pay period = accrued PTO
Here’s what you need to calculate accrual:
- Total annual hours of paid time off: the number of hours an employee can earn each year (for example, 120 hours = 15 days)
- Total work hours per year: usually 2080 hours per full-time employee (40 hours x 52 weeks)
- Hours worked in a pay period: the number of hours worked by the employee during the specific pay cycle
Use the data and the formula above to calculate accrued PTO for each member of your team. Try our free PTO accrual calculator to save the time it takes to set up your own spreadsheet.
Example 1: Full-Time Employee
Here’s an example of a full-time employee earning 15 days (120 hours) of PTO per year.
How to calculate their accrual rate:
120 hours ÷ 2080 work hours per year = 0.0577 hours of PTO earned per hour worked.
If they work 80 hours in a two-week pay period:
80 × 0.0577 = 4.62 hours of PTO earned per pay period.
Over the year, accruals add up to 120 hours (15 days) of paid time off.
Example 2: Part-Time Employee
Next, here’s an example of a part-time employee earning PTO at the same rate as full-timers, but based on fewer hours.
If your company uses the same 0.0577-hour accrual rate and an employee works 20 hours a week:
20 hours × 0.0577 = 1.15 hours of PTO earned per week.
Over 52 weeks, that equals about 60 hours (7.5 days) of PTO per year.
PTO Payouts and Termination Policies
In many states, unused PTO is treated the same as earned wages. When an employee leaves, you must pay it out in their final paycheck.
In other states, payout is optional, but only if your company’s policy states this clearly and employees have agreed to it.
To keep things fair and ensure compliance:
- Share a written PTO policy in writing with each employee during onboarding
- Make sure everyone understands your policies and agrees to it
- Always track PTO accruals accurately
Probationary Periods and Rollover Limits
Some companies delay accrual during the probation periods (30 to 90 days) of new employees and only allow PTO being used after this period.
Rollover limits work the same way, which control how much unused PTO can carry over into the next year and when those days must be used. This limit helps prevent large unused balances of PTO that translate into PTO liabilities over time.
Check your state’s rules to make sure you do things correctly.
Managing Accrual During Leave
Your policy should also communicate clearly whether employees continue accruing PTO while on leave, for example during sick leave. Most employers only allow PTO accrual to continue during paid leave, not unpaid leave periods. For example, if someone takes unpaid leave under FMLA, their PTO accrual will pause during that time period.
Using Tech to Track PTO Accrual
Tracking your PTO accruals manually may work for a small team, but it’s easy to make mistakes. As your business grows, spreadsheets will not be enough to keep up and you will quickly run into mistakes that can really cost your company in fines and payout fees.
An HR tool like Factorial’s Leave Management Software takes the stress out of managing time off by automating every step of the PTO process from accrual calculations to approvals and reporting.
Give Factorial a try to automate:
- Accrual tracking: Set up your rules and policies and the system updates everyon’s balance automatically.
- Compliance: Customize settings to fit your state’s laws, even if you have teams spread out across multiple locations.
- PTO costs: Built-in reports help you plan ahead and avoid surprise expenses.
- Time-off requests: Your team can check their balances and request time off through their portal, while managers approve or decline with one click.
- Payroll and attendance: All data flows directly into payroll thanks to integration, keeping records accurate and consistent.
Get a demo of Factorial to see the software in action!
PTO Accrual FAQs
1. Does PTO accrual reset every year?
It depends on your policy and state laws. Some companies reset PTO each year or let employees roll over a set amount. States like California and Colorado don’t allow “use-it-or-lose-it” rules. With Factorial, you can set rollover limits or caps automatically.
2. Do employers have to pay out unused PTO?
In many states, yes. Unused PTO is often treated as earned wages and must be paid when someone leaves. Factorial keeps PTO balances updated so final payouts are fast and accurate.
3. How can employers keep PTO accrual from hurting productivity?
Plan ahead and track requests. Factorial’s shared calendar helps managers see who’s off and avoid scheduling conflicts or burnout.
4. How does PTO accrual work for part-time employees?
Part-timers earn PTO based on hours worked usually at the same rate as full-timers but less total time. Factorial adjusts accruals automatically by schedule.
5. Can employers set a probationary period?
Yes, in most states. Some require PTO to start accruing right away, even if employees can’t use it yet. Factorial makes it easy to set these rules while staying compliant.
