If your business has employees, you may have a policy for paid time off (PTO). Many employers would find it simplest to just grant each employee PTO to use as sick leave or vacation time. The risk in granting PTO before the employee earns the total amount for the year is the liability the employer incurs if the employee takes the full allocation and then leaves the company. For safer and more accurate PTO calculations, companies instead allow employees to incrementally earn PTO with each pay period.
Determining PTO Amounts
Employers generally aren't required to provide benefits such as vacation time or paid sick time. The only exception to this is Executive Order 13706 that mandates paid sick leave for employees who work on federal contracts. For mathematical ease, let's assume that your company provides both vacation time and paid sick leave, and that you want to combine the two to make it easier for your payroll and benefits clerks. Based on a 40-hour workweek, if you provide two weeks each of vacation time and sick leave, the combined PTO is four weeks, or 20 days or 160 hours.
Calculation by Pay Period
Because salaried, exempt employees receive set compensation regardless of the number of hours they work, many businesses calculate their PTO in a straightforward manner. Calculating PTO by pay period allows you to evenly distribute these employees’ accumulation throughout the year.
Determine How Many PTO Hours Employees Receive Each Year
You will likely have employees earning PTO at different rates, typically with more senior employees earning more hours, or more days, per year than new hires. For example, a new employee with less than a year of service might earn 80 hours of PTO per year, while an employee with five years of service might have twice as many.
Divide Annual PTO Hours by Number of Pay Periods Per Year
Many companies pay employees every two weeks, so you will likely divide the number of PTO hours earned per year by 26. If you pay your employees weekly, divide by 52 instead; companies that pay twice monthly divide by 24 pay periods. If the employee earns 80 hours of PTO per year and gets paid every two weeks, he will earn 3.08 hours of PTO each pay period. He will earn 3.33 hours of PTO if the company pays employees twice monthly, and 1.54 hours each pay period if the company has weekly payroll.
Calculation by Hours Worked
If you have hourly or part-time employees, you may want to award PTO based on the number of hours worked. Calculating PTO hourly allows you to award less PTO for hourly employees who do not report to work or for part-time employees who do not always work the same number of hours in a pay period.
Determine How Many Hours the Employee Will Receive Per Year
While many businesses award full-time employees two weeks of PTO per year, you may choose to award part-time and hourly employees less than salaried, exempt employees.
Some businesses award part-time employees only 40 hours of PTO per year. Other businesses still award part-time employees two weeks of PTO each year, but the number of PTO hours is based on the employee’s average weekly hours worked. For an employee working 25 hours per week, two weeks of paid time off would require only 50 PTO hours.
Determine How Many Hours the Employee Will Likely Work Per Year
Multiply the employee’s average weekly hours by 52, the number of weeks in a year. For an hourly employee working 40 hours per week, this would be 2,080 hours per year.
If you have an hourly employee working 40 hours per week and earning 80 hours of PTO each year, you may choose to divide the PTO hours by 2,000 (50 weeks) rather than 2,080. This method allows you to award PTO hours for actual hours worked, meaning the employee is not accruing PTO while he is using PTO.
Divide Annual PTO Hours by Annual Work Hours
If your hourly employee earns 80 hours of PTO each year and works 40 hours per week, or 2,080 hours per year, divide 80 by 2,080. As a result, this employee earns 0.038 hours of PTO for each hour worked.
Using PTO in Advance
Because all methods of PTO accrual make it difficult for employees to take time off during the first few months of the year, many businesses allow employees to borrow PTO. Businesses typically limit the amount of time an employee can use in advance, but often allow at least 40 hours so employees can take an entire week off.