PTO Accruals - Yearly Lump Sum or Per Pay Period?
Transitioning from a manual PTO tracking process to using an online, automated PTO tracking system like Built presents a great opportunity to re-evaluate time off policies. One of the main things to consider during this transition is whether your current accrual frequency is still right for your organization.
Under a manual PTO tracking process, it is often in the company’s best interest to keep things as simple as possible. When it comes to accrual frequency, this often means choosing to do as few accruals as possible. The more frequent the accruals, the more time your HR and accounting staff will spend calculating, verifying, and running the accruals.
With a sophisticated time off tracking product that is capable of automated accruals, you are free to choose the accrual frequency that is best for your employees and the company without having to incur any extra labor hours or headaches.
Lump Sum PTO Accruals
A lump sum accrual is a single, all-at-once grant of the full annual PTO amount. For example, if an employee receives 80 hours of vacation per year on January, a lump sum policy grants the entire 80 hours all at once on January 1.
Doing a single, lump sum accrual once per year is the simplest scenario in most respects. The company only has to award the time off amount on one day in the year. Employees know exactly how much time off they have to use, and they can immediately use it. There’s really just one number to track throughout the year: the amount remaining.
The main downside to a lump sum accrual is that you’ve given the full PTO amount to the employee. The employee can immediately use the full amount they received, and then quit. It’s fairly common for employees to want to use up all of their time off before leaving a job. If your company pays out unused time when an employee leaves, a lump sum approach creates an immediate financial liability for your company.
Pay Period PTO Accruals
Pay period accruals involve dividing an annual amount of PTO into smaller, equal amounts throughout the year. Accruals are often synchronized with with the payroll schedule for ease of accounting. For example, an employee who receives 80 hours of vacation per year may earn 3.08 hours every two weeks on payday.
One of the main advantages of doing pay period accruals is to solve the main con of lump sum accruals. Employees earn time off throughout the year, an employee who leaves mid-year can only have used a portion of their time off. If unused time off is paid out to the employee, only a percentage of the annual amount must be paid. Financially speaking, the pay period accrual has a strong advantage over the lump sum accrual.
Because employees earn time off as the year progresses, it can take a while to earn enough to actually take a vacation. This can lead to a situation where no one takes vacation at the beginning of the year, and everyone takes vacation at the end of the year.
Additionally, pay period accruals are more complex than lump sum accruals. Employees need to understand how they earn time off and what the rules are regarding the use of the time off. Calculating and recording accruals also requires more work than a once-per-year scenario, but having an automated accrual system can help resolve that issue.