Some states regulate vacation pay, classifying the time as wages and subjecting vacation accrual to the same regulations as wage payments. For example, California employees earn vacation pay as the hours are worked, and it would not be permissible to base vacation accrual on a full month worked. For this reason, employers must be able to calculate the hourly accrual rate of vacation. Once an employer knows the hourly accrual rate, it can pay employees appropriately for each hour, work week or pay period and can also determine the accrual rate for part-time employees.
Review personnel policies and union contracts to identify the annual vacation benefits for the job classification. The policy will typically state that a managerial employee with up to five years of service earns 10 days per year, with up to 15 years of service earns 15 days per year and after 15 years of service earns 20 days per year.
Identify the rate used by your company to calculate the total hours in a year. Most companies use 2,080—factored by multiplying 40 hours per week by 52 weeks—although some organizations use 2,087, which is the actual amount averaged over time, including leap years.
Verify if the vacation is paid only on hours actually worked, or if employees earn vacation time while on leave. In most cases, the employee will earn vacation while on vacation. In this case, you will not need to perform any additional calculation. However if the vacation is earned only on hours worked, deduct the amount of annual vacation from the total annual hours. For example, an employee earning 10 days vacation per year would deduct those 10 days—or 80 hours—from a total of 2,080 days in the year, to get a new figure of 2,000.
Multiply the number of days of vacation by eight to get the total annual amount in hours. Then divide that amount by 2,080—or adjusted amount, if vacation is only earned on hours worked—to get the hourly accrual rate. For example, an employee eligible to earn 10 days per year would calculate the hourly accrual as follows: 10 x 8 = 80; 80 / 2,080 = 0.038461538461538 per hour.
Calculate the accrual rate per day by multiplying the hourly accrual rate by 8. Obtain the weekly rate by multiplying the hourly accrual rate by 40, and get the biweekly pay period rate by multiplying the hourly rate by 80.
Calculate pro-rated annual vacation for part-time employees by figuring the hourly vacation accrual rate for the job classification, then multiply that rate by the number of regular hours the employee will work; for example, 1,040 for a half-time employee.
Remember that workers exempt from the Fair Labor Standards Act may need to be calculated on a daily basis as opposed to hourly for payout purposes. In this case, divide the total annual vacation hours by 260 instead of 2,080 to get the daily accrual rate.