Vacation accrual, or accrued vacation, leave accrual, accrued vacation leave, etc., is the amount of vacation time that an employee has earned as indicated by a company's employee benefits policy, but has not been paid yet. Why is this important? Many employees and employers, may be unaware of the facets that make up accrued leave.

Understanding what paid time off, vacation pay, accrual leave, how these payments are calculated, how they impact a company and accrued vacation meaning are all crucial pieces of knowledge.

For now, let’s get into more detail on what vacation accrual is, why vacation accrual is essential for both employees and employers, and everything you need to know about vacation accrual, including how it’s calculated.

What is Vacation Accrual?

Vacation accrual, as mentioned, simply refers to the amount of accrued vacation pay that has yet to be paid by the employer. This is calculated based on the employee benefits of the company and can vary in how little or how much is to be expected to be paid for leave.

In other words, it means the outstanding value of vacation hours set by the employer based on current pay per employee. Vacation accrual is important for various reasons, none more so than the fact that employees should be compensated for their work based on PTO (paid time off) which can include holidays, paid sick days, or any absence from work that is paid by the employer.

How is Vacation Accrual Different From Paid Vacation?

In short, it isn’t. This might sound confusing, but paid vacation is similar to accrued vacation pay in many ways. Primarily, the concept of compensation regardless of work calculated by a percentage of hours/work is the main factor for both.

Types of PTO Accrual

On the topic of PTO, there is plenty of paid time off that can count towards accrued leave pay, and PTO is crucial in calculating accrued leave. Vacation accrual during maternal leave, for example, is time off that is part of vacation accrual entry.

Here are a few different kinds of PTO that can factor into accrued vacation days and accrued pay.

1. Accrued PTO

Paid time is accrued for every hour worked by the employees. PTO is accrued in a “PTO bank” which is a calculated total of their paid leave that can be taken out when the employee chooses. PTO rates per hour or period are calculated differently per employer.

Employers usually accrue PTO over different periods, such as:

• Daily: Most notably useful for shifts and part-time employees, daily PTO is calculated based on daily hours spent working.
• Bi-weekly: PTO accrues on bi-weekly periods.
• Monthly: A percentage of PTO is gathered by employers on a monthly basis. This is often the most common form of PTO calculation.
• Annually: Another common form of calculating PTO is annual. Employees with contracts long-term can have yearly PTO to use.

2. Fixed PTO

Fixed PTO is the most popular, wherein employers provide a fixed amount of paid time off per year for employees. Employees can choose to use as little or as much of the fixed amount of paid time off as they like. The PTO time renews each year, some employers offer rollover, so unused PTO can be used the next year.

3. Unlimited PTO

Although not as common as either accrued or fixed PTO systems, unlimited PTO has gained considerable prominence, especially for remote and flexible work in light of changes to the workplace due to Covid-19.

Unlimited PTO allows an unlimited amount of paid leave to be accrued for employees based on the completion of tasks as administered by employers.

Vacation Accrual for Employees

How Does It Help Employees

Part of the rights for employers, in particular, the value of vacation accrual Ontario rights fall under the Employment Standards Act. This means you are guaranteed as an employee paid time off, this varies depending on employment status (contract, part-time, full-time, length of employment) and by province.

In most workplaces, 10 days of PTO is the norm, while some may offer up to 3 weeks of PTO.

Vacation accrual is beneficial, especially for maternity leave. Vacation accrual during leave or vacation accrual during layoff are examples of how an accrual of vacation days provides security and stability for compensation during difficult times.

How Vacation Accrual Doesn’t Benefit Employees

During times of uncertainty in the workplace, it may be harder to receive accrued vacation pay when things are less than stable.

Likewise, dealing with a difficult employer to receive wages, especially when proper documentation is difficult, work wages or pay periods fluctuate, or contracts are less traditional, pose problems in receiving leave accrual.

Vacation Accrual for Employers

How Does It Help Employers?

Depending on the setup of a company, vacation accrual can benefit an employer by differing payment to later dates. Obviously, this isn’t always the case, but vacation accrual is necessary in the case of the various vacation accrual methods that will be listed further on.

The added benefit to provide vacation accrual during leave is necessary for certain instances. Maternity leave and workers' compensation are among two of the most important, aside from mandatory holidays.

Benefitting the well-being of employees is a task that should be among the highest priorities for an employer to improve psychological well-being, thereby improving workplace productivity.

How Is Accrual a Liability for Employers?

Unfortunately, while vacation accrual is beneficial for many reasons, to both employees and employers, it also poses some liabilities.

Accrued pay becomes a liability when it must be calculated to be paid in full to an employee, which can be under many circumstances. An example could be a sudden retirement and accrued pay during an uncertain time.

Obviously, sudden retirement for accrual pay is not as common, but liability is not always a negative when it comes to PTO and vacation pay. A liability on the balance sheet can also simply refer to the paid time that is owed, which may be easily paid by a company with well-managed accounting and payroll divisions.

In this case, professional payroll help is a necessity to ensure that liabilities are taken care of and that vacation accrual is easily managed. Accuracy, discretion, and professionalism are all benefits a business can take advantage of with professional accounting services.

Ways Accrued Vacation Can Be Paid

Accrued vacation pay isn’t paid the same way for every employer, and this provides an advantage for employers. Allowing your company to pay vacation or leave time in different ways is useful for payroll purposes.

In light of the pandemic, it can be incredibly difficult to manage costs. Whether it’s loss of business, changing management structure, or change of wages due to inflation reasons, there has been a gluttony of causes that have hurt a company's ability to properly pay their employees.

Thankfully, when it comes to paying accrued leave time, there is some flexibility. Here are some of the ways that vacation or accrual time can be paid:

1. Pay During Each Pay Period

During each pay period, an employer can choose to pay the vacation owing amount for vacationable periods. This doesn’t involve accrual pay at all.

This is the simplest method of payment, and it is most notable for seasonal work, part-time, or casual workers. Why is this used? When pay periods vary in terms of earnings, it’s harder to calculate on an annual term.

Choosing to pay during each pay period, as opposed to leave time through accrual pay, also reduces liability on balance sheets, something that is advantageous for a company's payroll and accounting department.

2. PTO/Paid Vacation Time

The most common form of accrued pay is PTO or paid vacation time, which is simply paying regular wages during time spent on leave from work. Hourly or fixed-paid (ex. salaried) employees are simply paid based on the fixed entitlement of PTO/vacation days in hours or days.

Why employers use this payment type for PTO/vacation time is that they don’t formally accrue vacation pay, instead they calculate time taken off by an employee. Time not taken off will be accounted for as accrued leave pay.

3. Accrued Hours - Pay Current

Accrued vacation by way of accrued hours is calculated as time, not wages or dollars.

An example:

• For employees entitled to 2 weeks of vacation time, whose regular work hours are 80 for a bi-weekly pay period, the employer might accrue vacation as of 3.25 hours earned for every pay period, up to the annual maximum of 80 hours.
• Vacation time taken in the next year is paid out as 80 hours at the current employer's rate. Just like vacation time, when time (not dollars) is accrued, the employer is required to ensure the regular pay for the time taken matches the correct employment standard minimum.
• This may not be met if hourly pay rates become reduced or if employees have exception pay that is vacationable like overtime pay (overtime is vacationable regardless of jurisdiction).

This method is more labor intensive for employers as all employee vacation time pay and entitlements must be tracked accurately which includes changes to pay periods (additions or reductions), or reductions due to time that is taken for leave.

4. Accrued Hours - Pay Balance

Accrued hours by pay balance, aka by dollars instead of hours, is calculated each pay period based on a percentage of an employee’s vacationable earnings.

Employees entitled to 2 weeks of paid vacation calculates to accruing vacation pay at 4% of vacationable earnings. A vacationable earning is any earning paid to employees that can qualify for vacation pay calculated to them. This includes regular earnings (salary, wages), commission-based earnings, and overtime pay.

Naturally, these will vary based on employment standards in different jurisdictions (ie. states, provinces). Employers must track the following based on accrued vacation pay dollars in an entitlement year:

• Accrued vacation balance owing (start of earning year).
• Accrued vacation pay for vacation pay earnings for that year.
• Vacation pay accrued or paid for vacation time the employee has taken.

Accrual pay can be very complicated on the outside looking in, but understanding how it is paid out and the ways it can be applied by employers or taken by employees is much more manageable when you understand how it works.

Now, let’s look at ways to calculate vacation accrual.

How to Calculate Vacation Accrual

Weekly accrual rate	120 / 52	2.30 hours accumulated for every hour worked
Bi-weekly accrual rate	120 / 26	4.61 hours accumulated for every two weeks worked
Monthly accrual rate	120 / 12	10 hours accumulated for every month worked
Quarterly accrual rate	10 x 3	30 hours accumulated for every three months worked
Half-yearly accrual rate	10 x 6	60 hours accumulated for every six months worked

Calculate the total number of work hours in a year, depending on the # of weeks a business is operational.

For example, a typical company will operate 8 hours a day, 5 days a week, for 52 weeks.

Per this calculation, the total number of work hours in a year is 2080 hours (52 weeks x 5 days x 8 hours = 2080 hours/yearly).

When calculating PTO accrual, subtract mandatory holidays of a business.

Additionally, Vacation pay is a percentage of the eligible wages earned by an employee during each year of employment. For every week of vacation time an employee is entitled to, you must pay them 4% of their “vacationable” earnings.” (Enkel).

Calculating vacation accrual and vacation pay can be confusing, but it’s much easier to understand using the basic formulas provided. It varies from jurisdiction to jurisdiction, but it is generally similar.

Conclusion

Vacation time, paid time off, paid leave, vacation accrual, and accrued pay, it can all get very convoluted and frankly, very confusing.

Figuring out how PTO and accrual work shouldn’t be a headache, especially as an employee on paid maternity leave, or the need to calculate vacation accrual, and it isn’t. Using the information in this article, hopefully, sheds light on vacation accrual in all of its many forms.