Understanding Vacation Accrual

Vacation time is a valuable benefit that many employees look forward to. But how does it work? How much vacation time do you earn? And how can you calculate your vacation accrual?

In this detailed guide, we’ll unpack everything you need to know about vacation accrual, including how it works, how to calculate it, and how to track it.

What is Vacation Accrual?

Vacation accrual is earning paid time off (PTO) or vacation time based on the number of hours an employee works. It means that employees earn a certain amount of vacation time for every hour an employee works.

Vacation accrual is typically based on an employee’s hire date, and the amount of vacation time earned increases the longer an employee works for a company. For example, an employee may earn 2 weeks of vacation time after their first year of employment, 3 weeks after their fifth year, and so on.

How Does Vacation Accrual Work?

Vacation accrual works by calculating the amount of vacation time an employee earns based on their hire date and the company’s vacation policy. This calculation is typically done on a yearly basis.

For example, let’s say an employee earns 2 weeks of vacation time for every year of employment. If they were hired on January 1st, they would earn 2 weeks of vacation time on January 1st of the following year. If they were hired on June 1st, they would earn 2 weeks of vacation time on June 1st of the following year.

How to Calculate Vacation Accrual

Calculating vacation accrual can be done manually or with the help of an excel formula. Here’s how to calculate vacation accrual based on an employee’s hire date:

1. Determine the amount of vacation time an employee earns per year based on your company’s vacation policy. For example, if an employee earns 2 weeks of vacation time per year, that would equal 80 hours (40 hours per week).
2. Divide the amount of vacation time earned per year by 12 to get the monthly accrual rate. In this example, the monthly accrual rate would be 6.67 hours (80 hours / 12 months).
3. Determine the number of months an employee has worked since their hire date. For example, if an employee was hired on January 1st and it is now July 1st, they have worked 6 months.
4. Multiply the monthly accrual rate by the number of months worked to get the total amount of vacation time earned. In this example, the employee would have earned 40 hours of vacation time (6.67 hours x 6 months).

Excel Formula to Calculate Vacation Accrual Based on Hire Date

If you prefer to use an excel formula to calculate vacation accrual, here’s how to do it:

1. In cell A1, enter the employee’s hire date in the format of MM/DD/YYYY.
2. In cell B1, enter the amount of vacation time earned per year based on your company’s vacation policy.
3. In cell C1, enter the following formula: =B1/12
4. In cell D1, enter the following formula: =DATEDIF(A1,TODAY(),”m”)
5. In cell E1, enter the following formula: =C1*D1
6. The result in cell E1 will be the total amount of vacation time earned based on the employee’s hire date.

How to Track Vacation Accrual

Tracking vacation accrual is important for both employees and employers. For employees, it allows them to know how much vacation time they have available and when they can take time off. For employers, it helps them manage employee schedules and ensure that employees are taking the appropriate amount of time off.

There are several ways to track vacation accrual, including:

• Using an excel spreadsheet: You can create a simple excel spreadsheet to track vacation accrual for each employee. This can be done manually or with the help of an excel formula.
• Using a vacation tracking software: There are many software options available that can help you track vacation accrual for your employees. These tools often have additional features such as time-off requests and approvals.
• Using a payroll system: many payroll systems have the ability to track vacation accrual for employees. This can be a convenient option if you already use a payroll system for other HR tasks.

Vacation Accrual Policies

(Photo by Weiqi Xiong)

Every company has its own vacation accrual policy, which outlines how much vacation time employees earn and when they are eligible to take it. It’s important for both employees and employers to understand the vacation accrual policy to avoid any confusion or disputes.

Some common vacation accrual policies include:

• Accrual based on hours worked: This is the most common vacation accrual policy, where employees earn a certain amount of vacation time for every hour worked. Note that in some regions like BC, employees are entitled to vacation pay after completing 5 calendar days of employment, regardless of the number of hours worked during that period.

• Accrual based on years of service: Some companies may choose to base vacation accrual on the number of years an employee has worked for the company. For example, BC and Ontario employees are entitled to two weeks’ vacation after completing their first year of employment. The vacation time is to be taken during the second year of employment, with the vacation pay calculated as 4% of the total wages earned in the first year. Explore our blog post on vacation pay calculation for a complete understanding of vacation benefits

Vacation Accrual and Payouts

Vacation accrual and payouts go hand in hand. As employees earn vacation time, they can choose to take time off or receive a payout for their accrued vacation time. However, it’s important to note that not all companies allow for vacation payouts.

If your company does allow for vacation payouts, it’s important to understand the policy and any limitations. For example, some companies may only allow for a certain amount of vacation time to be carried over into the next year, while others may have a “use it or lose it” policy.

Conclusion

Vacation accrual is an important aspect of any employee’s benefits package. By understanding how it works, how to calculate it, and how to track it, employees can make the most of their vacation time and employers can effectively manage employee schedules. Use the tips and information in this guide to ensure a smooth and fair vacation accrual process for all.

Seeking Professional Advice

Always seek advice from a payroll professional or contact Service Canada when in doubt. It will ensure your calculations are compliant with the current laws and regulations. Our professional payroll team at BrightenCPA is just a click away. 

(Featured Photo by Xavier Mouton)