How to Calculate Vacation Pay for Hourly Employees

In this article, “How To Calculate Vacation Pay For Hourly Employees,” you’ll discover the steps needed to accurately determine your employees’ paid time off (PTO). You will explore the significance of paid vacation days, decide the amount of PTO your employees can earn, understand how to distribute vacation time, get into the math behind PTO calculations, and finally, learn effective methods to track this vacation pay.

Key takeaways:

• Calculating vacation pay accurately is essential for both employee satisfaction and budget planning.
• There are various methods of vacation time distribution, including upfront payments or accrual over time, each with its own benefits and drawbacks.
• A standard vacation pay formula involves dividing the total vacation hours per year by the potential work hours in a year.
• Effective tracking methods, such as manual spreadsheets or automated timekeeping systems, are crucial for keeping records consistent and accurate.
• Establishing a robust PTO system early on helps streamline the vacation tracking process and enhances your business’s competitive edge.

Knowing how to calculate vacation pay for hourly employees is part of managing your team.

Employers are not required by federal law to offer paid vacation days, but most companies do: More than 90% of all full-time employees in private industry receive paid vacation and for good reason: they need a break and a chance to recharge.

Taking time off has been proven by researchers to increase employee productivity and decrease employee turnover—some of the biggest employment risks to small business owners’ revenue. Providing PTO (paid time off) can also give your business a competitive edge and help attract top talent.

If it’s your first time tackling paid vacation time, don’t panic. It’s actually not that difficult.

We’ve put together a simple guide to help you understand how to calculate vacation pay for hourly employees and make sure you and your employees get the time off they deserve.

1. What vacation pay for hourly employees will look like

Vacation time and PTO aren’t exactly the same thing, but they’re close.

Vacation time is just that: a time to relax. PTO is different. It could be any kind of paid leave, including sick leave or holidays. PTO is a more general term, and most companies offer general PTO that can be used for any kind of time off. This makes tracking and calculating paid time off for hourly employees easier.

Vacation pay is generally the same hourly wage they get when working, but not always. If you chose to match the two, keep in mind that a wage increase also affects vacation pay. 

Employees who don’t use all their vacation time might have the option to be paid a lump sum for the days they didn’t use, though in some states, the law might allow for a “use it or lose it” approach.

Again, while there is no requirement that you offer vacation pay for hourly employees, once you do offer it, most states have laws that would affect how your PTO policy is handled.

Creating a paid time off policy for hourly employees is better than figuring it out as you go. Such a policy would cover all aspects of PTO, including eligibility and restrictions. A big part, though, is answering the question of how to calculate vacation pay for hourly employees.

2. Decide how much vacation your hourly employees can earn

In the U.S., an hourly worker with a year of experience averages 11 days of paid vacation a year. Nearly 76% of small business employees receive paid vacation days, with most receiving either 5-9 or 10-14 paid vacation days.

So first questions first: how many paid vacation days are your employees able to earn per year? Are full-time hourly employees eligible to earn more compared to part-time employees?

This is completely at your discretion. In order to start tracking and calculating vacation pay, decide what works best for your business (and what you can afford) and work back from there.

3. Determine how employees receive their vacation time

Once you’ve determined how much paid vacation time your employees can earn, the next step is to decide how you’ll hand out the time.

Some companies pay out vacation upfront at the beginning of each year, while others set PTO on an “accrual” basis, where employees earn vacation time as they work. Others don’t provide paid vacation benefits until workers continue to stay with the business anywhere from 30 days to 6 months.

If your business is built on hourly employees and you often experience high turnover rates, it may make more sense for your employees to accrue PTO gradually. That way, you aren’t handing over large chunks of vacation time at once, and you aren’t left hanging financially should you pay out an employee only to have them walk away.

4. Start digging into the math

The key to calculating vacation pay is to let the numbers treat your employees like they’re working, even when they’re on vacation. If they’re getting paid for vacation, they’re using earned time whether they’re actually on the clock or not.

Let’s say that you’ve decided to offer your full-time hourly employees two weeks of paid vacation per year, and they’ll accrue their paid vacation on an ongoing basis. How would you know the amount of paid vacation they’ve earned at any given time?

Calculating vacation pay for hourly employees is simpler than you think. 

Try out this example: you have a full-time hourly employee, Anna, who is eligible for up to two weeks’ vacation pay. Anna’s total vacation time equals 80 paid hours per year, or roughly 4% of the max possible hours she could work over 52 weeks, not including overtime. That’s Anna’s rate of vacation accrual. 

5. Use the vacation pay formula

Finding the vacation accrual rate is easy.

An accrual rate is determined by dividing the total annual vacation hours by total annual working hours. 

Divide Anna’s total hours of vacation pay per year (80) by the total number of hours she can expect to work per year. Since Anna works a maximum of 40 hours a week and gets paid biweekly, that means she can reasonably work up to 2,080 hours per year.

80 hours divided by 2,080 hours equals 3.85%, rounded up to the 4% mentioned above. This is the formula for Anna’s rate of vacation accrual. 

From there, employees accrue vacation time by multiplying total hours in a pay period (or whatever time period you’re using) by that rate. 

In our example, for every hour Anna works, she also earns 0.0385 hours of vacation. If Anna makes $15.00 in an hour, then she also makes $0.58 each hour in vacation pay.

Based on her rate of accrual, Anna accrues 3.2 vacation hours each pay period, which is typical for most hourly employees. She should earn $1,200 in gross wages and about $46.15 in vacation pay per pay period.

To check your math, multiply your employees’ estimated vacation pay ($46.15) for the pay period by how many paychecks they receive per year (26). If the answer equals or is close to what their total paid vacation time is worth ($1,200 for 80 hours), then you’re on the right track.

Note: this is a popular vacation accrual formula for a typical employee scenario. What your employees will earn in vacation pay can ultimately depend on holidays, sick leave, and other factors throughout the year as laid out in your overall PTO policy. To try out a few different scenarios, download our vacation pay spreadsheet.

 6. Track vacation pay

If you’re not entirely sure what happened right there, you’re not alone. Calculating vacation pay can be time-consuming, even if you just have a single employee. Once you’ve calculated the vacation pay for your hourly employees, you also need a clear way to track the hours.

Below are a few options to make tracking and calculating vacation pay for hourly employees a little easier.

Use a spreadsheet to manually track vacation pay for hourly employees

If you’re an Excel enthusiast, try creating your own spreadsheet with functions based on the calculations above. You’ll need to include:

• Employee hourly pay
• Max vacation hours per year
• Max workable hours per year
• Rate of vacation accrual
• Hours worked per pay period
• Vacation hours earned per pay period
• Vacation pay earned per pay period

There are also plenty of PTO accrual templates available online you can tweak to fit your company’s individual PTO plan.

Use your timekeeping system to automatically track vacation pay for hourly employees

Depending on your timekeeping system, your software may provide vacation-tracking features along with attendance tracking.

You might be able to connect it to your payroll provider as well to save you the heavy lifting to make sure hours and vacation pay stay consistent and accurate.

Take a look at what your timekeeping system offers. You might already be tracking vacation time and not be aware of it.

Conclusion

Tracking and calculating vacation pay for hourly employees doesn’t have to leave you needing a vacation of your own. Determine what PTO structure works for your team, run the numbers to see what makes sense for your budget, and find a tracking method that works best for you.

Putting your system in place now will keep vacation tracking a breeze for seasons to come—even if you’re not at the beach. If you don’t already have a time tracking system in place, and you’re scheduling your employees with pen and paper or a spreadsheet, give When I Work a try. Sign up today for your free 14-day trial and you could have the software calculating vacation pay for your employees automatically!

How is vacation pay calculated: FAQ

How do I calculate vacation pay for hourly employees?

First decide how many vacation days your employees can earn. Then determine how they’ll receive this time, either upfront or on an accrual basis. Next, calculate their vacation accrual rate by dividing their total vacation hours per year by the total number of hours they can work per year.

How do I distribute vacation time for hourly employees?

Vacation time can be distributed upfront at the start of the year or on an accrual basis where employees earn vacation time as they work. Some companies don’t offer paid vacation benefits until workers stay with the business for a certain period, ranging from 30 days to six months.

What is the vacation pay formula for hourly employees?

The vacation pay formula for hourly employees involves dividing the total hours of vacation pay per year by the total number of hours the employee can work per year. This gives you the employee’s rate of vacation accrual.

How can I track vacation pay for hourly employees?

Tracking vacation pay for hourly employees can be done manually with spreadsheets or automatically with timekeeping systems. You’ll need to record details like employee hourly pay, max vacation hours per year, max workable hours per year, rate of vacation accrual, hours worked per pay period, vacation hours earned per pay period, and vacation pay earned per pay period.

How does vacation pay for hourly employees benefit a business?

Providing vacation pay can increase employee productivity, decrease employee turnover, and attract top talent. It can also give your business a competitive edge in hiring and customer service, particularly if it’s structured well and makes sense for your budget.