How to Accurately Calculate Vacation Time for Hourly Employees

Summer and early Fall sees a swell in vacation requests. From small businesses to large corporations, organizations of all sizes will have to field a number of time-off requests from employees. If you haven’t implemented a strategy to calculate vacation pay for hourly employees, it can feel like a daunting task. Read onward to learn how to accurately calculate vacation pay for hourly employees.

1. Determine how much paid time off your employees can earn

The federal government doesn’t require employers to offer paid vacation to hourly employees, but most companies opt to offer paid time off. On average, hourly employees with a year of experience typically qualify for 11 days of PTO a year.

Allowing employees to take paid time off is a great way to increase employee satisfaction, productivity, and decrease turnover rates. It also attracts better-qualified candidates and reduces revenue risks associated with turnover. But let’s get back to the question at hand: how many paid days off are your employees eligible for? To start calculating vacation pay, determine what you’re willing to offer and what you can afford.

2. Decide how hourly employees will be eligible for vacation time

Now that you know how much vacation time you can provide, determine how employees will be eligible for it. A common trope is to wait until an employee has completed 90 days, or the equivalent number of hours, of work before they become eligible. However, lately you’ll find that more companies are offering vacation time upfront.

If your company has a high turnover rate, or largely hires seasonal employees, you may want to implement an accrual policy for earned PTO. This way your business will be safeguarded from paying for large amounts of vacation time to employees who may turn in their two-weeks’ notice shortly after taking PTO.

3. Crunch the numbers

Once you’ve settled on the amount of vacation days you’re willing to offer and how employees are eligible to receive them, you can start calculating how much PTO they’ve earned. Let’s examine a common example to reduce complications.

Tom is a full-time hourly employee who can earn up to two weeks’ vacation. Tom’s total PTO equals 80 paid hours a year, or about 4% of the maximum hours he could work over 52 weeks, not counting overtime. But why 4% a year? This percentage is Tom’s rate of vacation accrual. This is the key to properly calculating vacation time for hourly employees. Let the numbers reflect your employee as if they’re working, despite being paid to be on vacation. If they’re getting paid for a full eight hours, they’re using earned time whether they’re actually in the office and on the clock or not.

4. Calculate the vacation pay formula

Let’s look at our example employee Tom to figure out a vacation pay formula. Divide Tom’s total hours of PTO allowed per year (in this case, 80) by the total number of hours he is expected to work in a year. Tom works 40 hours a week and gets paid biweekly, so he can work 2,080 hours each year.

80 hours divided by 2,080 hours is 3.85%, which rounds to our 4% rate of accrual. So for every hour Tom works he also earns .0385 hours of PTO. Based on his rate of accrual Tom will earn $1,200 in gross wages and $46.15 towards his vacation time per pay period.

It may seem complicated, but it’s easy to check your math. Multiply the employee’s estimated vacation pay (in this case, $46.15) for the pay period by how many paychecks they receive per year (in this case, 26). If your calculation is close to what their total paid vacation time is worth ($1,200 for 80 hours) you’re doing the math right.

Calculating vacation pay can be a complicated procedure, but it doesn’t have to be. Dominion offers a cloud-based Time & Attendance software perfectly suited to managing and calculating employee hours. Request a demo today and simplify the management process.