What is Accrued Vacation Pay and How to Calculate Accrued Vacation Pay?

Accrued vacation pay is the paid time off that an employee has accumulated according to the company policy but hasn’t yet received.

Like other accruals, the paid vacations accumulate over time too. An employee has the opportunity to receive cash or postpone the entitlement for future use.

What is Accrued Vacation Pay?

Accrued vacation pay is the amount earned by an employee for paid leaves but not yet received. It is also called Paid Time Off (PTO).

The paid time off or vacation pay are the same concepts in the HR dictionary. Both of these terms refer to the earned but unpaid leave payments by an employee.

There are no Federal Laws in the US to compel companies to the paid time off or paid leave. Therefore, private sector companies must make their leave pay policies to attract and retain the human capital they desire.

Accrual vacation pay happens when employees do not receive cash from the employer nor do they take paid leaves at the end of the specified period by their employer.

Thus, they keep accruing the paid leave balance and it creates a liability toward their employer to pay them accrued vacation pay at some point in the future.

A common practice in the private sector is to receive paid time off at the time of resignation or retirement from a company.

Do Employers Have to Pay Accrued Vacation Legally?

There are no Federal laws in the US currently that enforce a paid vacation policy. Some states have outlined the paid leave policies in their labor laws though.

Therefore, it is at the sole discretion of an employer to offer paid vacation to its employees. Some private sector companies offer paid leave to all employees and others offer selectively to their executives only.

In most jurisdictions, a common practice is to offer annual paid leave to employees to hire and retain the best talent.

Types of Accrued Vacations

If a company has a paid leave policy, it must grant paid leave of different types to its employees.

Sick Leave

It is granted to employees for sickness, accident, or illness of themselves or family members.

Employees must provide credible evidence for medical and sick leaves.

Parental Leave

A common type of paid leave is the parental leave that employees receive on the birth of their children.

Companies may have different parental leave policies with different numbers of off days from work.

Bereavement Leave

This type of leave is granted on the demise of an immediate family member. Again, the employer holds the discretion to decide who is entitled to the bereavement leave.

Paid and Floating Holidays

Floating holidays are offered to employees to either take vacations or carry over their holidays to the accrued vacation pay balance.

Jury and Community Duties

An employee may have to serve the jury duty designated by the US judicial authorities. Some employers may allow their employees to take part in social and community duties as well.

How to Calculate the Accrued Vacation Pay?

Accrued vacation pay is calculated by the company policy. Each employer may have a different paid leave policy.

The first step is to calculate the total paid leave granted by the employer. Then, these leaves are converted into hours.

In the next step, you must subtract the paid leaves received by an employee. The remaining hours or days will give you the current vacation pay outstanding for an employee.

This balance is then added to the previously earned (but not paid) leaves by an employee. The final result is the total accrued vacations by an employee.

The accrued vacation pay is periodically adjusted for pay rises as well. Paid leaves are always cashed out at the latest pay rates.

Example

Suppose a company offers 2 weeks of paid leave after one year. The hourly pay rate for the company is $18 for regular employees.

Total Workable Hours in a Year = 52 × 40 = 2,080

Paid Leave Entitled per Year = 2 × 40 = 80

Suppose the previous balance of accrued vacation for this employee was 760 hours. The employee cashed out 30 hours of this year’s leave and took 5 days (or 40 hours) off by using the entitlement.

Then, the new balance for the employee’s accrued vacations will be:

Previous Balance = 760 Hours

Adjustments for the Year = 760 + 80 – 30 – 40 = 770 hours

Accrued Vacation Pay for the Employee at $18 = 770 × 18 = $13,860.

Accrual Vacation Policies

As mentioned above, private companies must develop their paid vacation policies at their discretion in compliance with the state and local laws.

Some general guidelines and important points include the following:

  • An employer must decide on which type of vacation should be included in the paid leave policy.
  • A company must establish the vacation approval procedure and inform its employees.
  • It must establish clear instructions on the maximum number of paid leaves per month or year.
  • It must also guide employees on whether they can roll over paid vacations to the next period.
  • There should be clear guidelines on when an employee will be entitled to paid leave and whether an employee can receive cash or holidays or a combination of both.
  • An employer must state whether it will have special policies like a lump sum payment, “take it or leave it”, and the minimum delay period before the payment is cleared.

Vacation Accrual Vs Cashing Out the Vacation Pay

Whether or not to accrue vacations is a key question for an employer as well as the employee. Both options come with discrete pros and cons.

When an employer offers a carrying-over vacation policy, both parties feel relaxed and they can adjust their working schedules freely.

It boosts employee morale and offers them greater flexibility. Moreover, an employee can accrue a handsome amount for emergency uses later.

On the other hand, the “take it or leave it” policy works in favor of employers as employees must seek vacations or receive compensation on their current pay rates.

Employers may increase their operational costs through this policy though and employees may feel dejected by this policy too.

Ultimately, a balanced approach is advised that satisfies the needs of both parties and a clear vacation policy can reduce friction between them.

How Accrued Vacation and Outstanding Time Off (OTO) are Different?

The terms outstanding time off (OTO) and accrued vacation or precisely paid time off (PTO) are often used together but they are slightly different.

The outstanding time off refers to the unapproved leave request from an employee. It may or may not include paid time off (PTO).

For example, an employee may request a 5-day leave for a family visit. If the HR department puts that application on hold, it will be considered outstanding time off.

The employee then may decide to use the PTO or accrued vacation balance.

In other cases, outstanding time off may be a pending application to adjust paid vacations used by an employee.

Accrued Vacations – Pros and Cons for Employers

Pros:

  • The policy helps employers to attract and retain top talent.
  • It helps them comply with the state and local laws.
  • It motivates existing employees and rewards them for their hard work.
  • It creates a sense of equality and flexibility for employees.

Cons:

  • Managing accrual vacation pay can be a challenging task for growing employers with a high employee turnover rate.
  • Accrued vacation balances may increase liabilities heavily for employers.
  • An employer may face financial obligations at the wrong time and cause disturbance to the financial plans.

Accrued Vacations – Pros and Cons for Employees

Pros:

  • Employees can accrue a handsome amount for future savings through accrued vacations.
  • They get paid at the latest pay rates so deferring paid vacations suits them.
  • A paid vacation policy is an indicator of an established and regulated employer.
  • It helps employees stay fresh, and energized, spend time with family, and use paid leaves for emergencies.

Cons:

  • Employees may be tempted to switch jobs for higher paid vacation rates.
  • Employees may over-rely on paid vacations.
  • Employees must plan and inform their managers in advance.
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