How to Calculate PTO Rates

Why PTO is Important

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.

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.”

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.

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.

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

1. Determine the accrual rate (e.g., hours per pay period)
2. Calculate the total hours worked in the pay period
3. Multiply the total hours worked by the accrual rate
4. Ensure adherence to company policies regarding PTO accrual
5. 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)

1. Identify the standard PTO accrual rate for the organization.
2. Determine the total number of work hours in a pay period.
3. Calculate the total PTO hours earned per pay period based on the accrual rate.
4. Set up a formula to convert the total PTO hours into a daily accrual amount.
5. Include necessary adjustments for part-time employees, if applicable.
6. Verify the formula by applying it to a sample employee’s work schedule.
7. 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

1. Determine annual work hours
   Typical full-time: 2,080 hours (40 hours/week × 52 weeks)
2. Calculate PTO rate
   Example: 2 weeks PTO = 80 hours ÷ 2,080 hours = 0.0385 or 3.85%
3. 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

1. Identify the weekly hours for part-time employees.
2. Identify the weekly hours for full-time employees.
3. Divide the part-time employee’s weekly hours by the full-time employee’s weekly hours.
4. Obtain the total Paid Time Off (PTO) for full-time employees.
5. Multiply the result from the division by the total PTO for full-time employees.
6. 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.

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.

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.