How To Calculate Vacation Pay For Hourly Employees

Small businesses aren't required to offer paid vacation to employees, but this perk can help you attract better employees and keep your current workers happier. According to the Bureau of Labor Statistics, paid vacation is available for about 70% of workers in small establishments. As a small business owner, it's important to outline your strategy for handling paid vacation for your hourly workers. Read on to learn how you can calculate vacation pay for your hourly employees.

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Setting Up Your Vacation System

The first step in calculating vacation pay for employees is outlining your system. How much paid vacation do employees receive in a year? Common choices are either 40 hours for one week of vacation or 80 hours for two full weeks of paid time off. Multiply the number of vacation hours you offer by the employee's hourly rate to see how much your vacation policy will cost the company per worker. Make sure you work the cost of vacation time in with your other financial policies, so you're not offering more than you can afford.

Decide when employees receive their vacation time. Does this happen immediately upon hiring, or will your workers need to stay with the company for a set period first? Make this policy clear to your new hires so they understand when and how paid vacation becomes available.

Next, you need to decide what happens to unused vacation. Does this roll over into the next year, or are employees required to use their accrued vacation within a certain time frame? Check the legal requirements in your state, as some jurisdictions will not allow you to revoke this earned benefit.

Finally, you must decide how and when to calculate vacation accrual throughout the year. There are several methods, outlined in the sections below.

Annual Vacation Accrual

If your employees accrue vacation time annually, they receive their entire allotment for the year at a given time. This typically happens either at the beginning of the year or on the employee's hiring anniversary. Annual vacation accrual is ideal if you prefer for employees to reach their one-year anniversaries with the business before they earn paid vacation.

With a yearly accrual method, you simply assign annual vacation hours to the employee on the set date each year. Your human resources department will then subtract from this vacation bank as it's drawn on throughout the course of the year.

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Vacation Accrual by Pay Period

If you assign vacation time in small chunks on each pay period, you will need to divide the number of hours each employee receives in vacation time by the number of pay periods in a year. For monthly pay, divide the vacation accrual by 12. If you have twice-monthly pay periods, there are 24 in a year, while bi-weekly pay happens 26 times. If you pay weekly, you will divide your vacation time by the 52 weeks in a year.

If you provide 80 hours of paid vacation time each year, the calculations look like this:

  • 80/12 = 6.67 hours per pay period
  • 80/24 = 3.33 hours per pay period
  • 80/26 = 3.08 hours per pay period
  • 80/52 = 1.54 hours per pay period

Daily Vacation Accrual

If your employees work the same number of hours every day, you may set your vacation accrual to happen daily. Daily allocation requires a bit more math. First, you must determine how many days employees are scheduled to work in a year. Remember to subtract the vacation time you're allotting to your employees as well as any paid or unpaid holidays when employees are not in the office.

  • 5 (workweek days) x 52 (weeks per year) = 260 workdays
  • 260 – 10 (days of paid vacation) = 250 workdays
  • 250 – 5 (holidays) = 245 paid workdays each year

Once you've determined how many days your employees actually work, you can divide their vacation time among them.

  • 80 (vacation hours)/245 (workdays) = 0.33 hours per day

Hourly Vacation Accrual

Hourly vacation accrual is the best method when the hours your employees work are irregular. If you run a seasonal business or have a lot of part-time workers with schedules that change often, an hourly accrual method will keep things consistent. You must determine how many hours the employee is expected to work in a year to determine how much vacation employees will earn for each hour worked.

If your employees work 8 hours a day, multiplied by the 245 days calculated in the previous section, you expect 1,960 hours from each worker annually.

  • 80 (vacation hours)/1,960 (annual work hours) = 0.04 vacation hours per hour worked

Choosing a consistent way to track vacation pay makes it easier for you to work vacation days into your company's budget. Employees who receive paid vacation are generally more productive and in better mental health than those who don't, so this is a benefit that's worth including for your workers.

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