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How to Accurately Calculate Vacation Time for Hourly Employees

iconHourly Employees icon3 min read
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Summer and early fall are popular times for 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.

How to accurately calculate vacation time

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

The federal government doesn’t require employers to offer paid time off (PTO) 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 are eligible for vacation time

Once you know how much vacation time you can provide, determine how employees become eligible for PTO. A common practice is to wait until an employee has completed 90 days, or the equivalent number of hours, of work before they become eligible. However, some 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-week notice shortly after taking PTO.

3. Crunch the numbers

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

Tom is a full-time hourly employee who can earn up to two weeks’ (80 hours) of PTO or about 4% of the maximum hours he could work over 52 weeks, excluding overtime. But why 4% a year? This percentage is Tom’s PTO accrual rate. This is the key to properly calculating PTO 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.

Quote #1 How to accurately calculate vacation time

4. Calculate the vacation pay formula

To figure out a vacation pay formula, divide the total hours of PTO allowed per year (in this case, 80) by the total number of hours an employee is expected to work in a year. Say the employee works 40 hours a week and gets paid biweekly, so they can work 2,080 hours each year.

80 hours divided by 2,080 hours is 3.85%, which our company rounds to our 4% rate of accrual. So for every hour the employee works, they can earn 0.0385 hours of PTO. Based on his rate of accrual, an employee 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.

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