How does paid time off (PTO) work for hourly employees?

Life happens. Whether your employees need to tend to their mental health, move to a new house, or take a well-deserved vacation, paid time off (PTO) ensures they return to work refreshed, not stressed.

Calculating PTO for hourly and salaried employees can quickly complicate PTO policies. Salaried workers typically receive a set amount of PTO regardless of their work hours, whereas hourly teams have varying schedules and fluctuating hours. You need a clear PTO policy to ensure fairness and accurate PTO allotments.

How does PTO work for hourly employees? Let’s explore how to build an effective policy for your team. 

What’s PTO?

Paid time off is a benefit that allows employees to take time away from work while still being paid. It’s a standard perk included in many employees’ total compensation.

Leave can be used for vacations, illness, personal matters, or other reasons. Typically, companies lump different types of leave—vacation time, sick leave, and personal time—under a single “PTO” category to simplify time tracking and paid leave management. However, some jurisdictions have PTO laws requiring business owners to separately track and allocate personal leave and paid sick leave. 

Should hourly employees receive PTO?

In the United States, no federal law mandates paid time off for hourly or salaried employees, although some states or local governments may have special mandates. So, should you extend PTO benefits to your workers? 

Paid time off is usually straightforward for salaried employees. They receive a predetermined amount of PTO, helping HR manage accrual and usage. This simplicity often encourages companies to offer generous PTO policies—a pivotal selling point for attracting and retaining top talent. A transparent and predictable PTO structure is a win-win, supporting employee well-being and streamlining administrative processes. 

For hourly workers, policies are less clear-cut. Hourly workers have varied schedules and fluctuating hours. PTO calculation is often a complex, case-by-case process, especially if you have full- and part-time employees. Additionally, hourly workers’ schedules are built around flexible team needs. PTO can add extra operational challenges that impact staffing and workflow. 

Despite the challenges, there are plenty of strategic benefits that offset the extra cost, including the following:  

• Increased retention: PTO relieves employees’ stress when taking necessary time off, enhancing job satisfaction and reducing turnover. Employees who feel valued and supported are more likely to stick with their jobs, saving employers money on recruitment and training costs. 
• Boosts productivity: Everyone needs a break sometimes. Hourly employees with access to PTO will return to work refreshed and motivated after a relaxing paid vacation. This can translate to higher productivity and better performance.
• Attracts talent: A generous time off policy helps a company stand out. Businesses that offer vacation days, sick leave, and personal days promote a workplace culture that values well-being and work-life balance—top concerns for today’s workforce.
• Equity and fairness: PTO for hourly employees ensures that they receive the same benefits as their salaried counterparts, promoting fairness and unity across the organization. 

How to calculate PTO for hourly employees

Businesses choose the exact number of PTO days they give to hourly workers. But your PTO policy doesn’t have to be a shot in the dark. It’s an opportunity to build a strategic plan that keeps your team happy and attracts talented new team members. 

So, how does PTO work? Here’s a guide to help you calculate PTO for hourly employees: 

1. Decide between accrued PTO and annual PTO

PTO can accrue over time, or employees can receive a set amount of PTO at the beginning of each year. Each method has distinct advantages and disadvantages.

• Accrued PTO: Employees earn time off based on the number of hours they work. This approach tends to be the most fair. Plus, it offers flexibility to employees who contribute at different levels, maintaining equity between part-time and full-time employees. However, this method requires detailed tracking and careful management of PTO balances. 
• Annual PTO: This approach provides employees a set amount of time off at the beginning of each year or employment period. This system simplifies administration and offers predictability for employers and employees alike. However, annual PTO can cause problems if unused PTO carries over or accumulates. 

Ultimately, the choice between accrued and annual PTO depends on your company’s operational needs, workforce size, and administrative capabilities. Employers that can handle detailed tracking will benefit from the fairness of PTO accrual. Conversely, annual PTO might be more suitable for businesses that value simplicity and consistency.

Flexible time off (aka unlimited PTO) policies are also popular, although this is often reserved for full-time salaried employees. 

2. Define the accrual rate

If you opt for the accrual method, determine the rate at which PTO is earned based on how much time off they would accumulate annually. Here’s an example:

Imagine a PTO policy that allows two hours of PTO for every 40 hours worked. The accrual rate would be 0.05 hours of PTO per hour worked (2 hours PTO ÷ 40 hours worked).

Once you define an accrual rate, you can track accumulated vacation pay. The equation is simple—multiply the total hours worked per year by the vacation accrual rate. Employees who work every week clock in 2,080 hours per year (40 hours x 52 weeks). 

2,080 hours per year x 0.05 = 104 hours of PTO earned per year

3. Define a protocol to approve and deny paid time off

Hourly workers tend to be scheduled when they’re needed. To avoid staffing or operational bottlenecks, define best practices for approving and denying paid time off. Here are some crucial details to address:

• What’s the minimum notice for requesting PTO?
• What is and isn’t eligible for PTO (e.g., vacation, personal errands, sick leave)?
• How is PTO accrued?
• How is unused PTO handled (e.g., carryover, payout, lost)?
• Is PTO based on seniority or first-come, first-served?
• Does the accrual rate increase with seniority?
• Do part-time employees and independent contractors get paid vacation?

Best practices for implementing a PTO policy for hourly employees

Careful planning ensures that your PTO policy is fair and compliant while meeting everyone’s needs. Consider the following factors: 

1. Research local and state laws

Although U.S. federal law doesn’t require you to offer PTO to your employees, some state and local regulations may impose requirements. Check your local laws to understand minimum PTO accrual rates, carryover limits, and required payout of unused PTO. Regularly review and update the policy to reflect changes in legislation. 

2. Offer additional leave options

Consider providing separate leave categories such as sick leave, vacation time, and family leave. The approach helps address different employee needs and ensures compliance. Offering a mix, such as unlimited sick leave and set vacation time, helps employees feel better about taking necessary time off without depleting their leave balance. 

3. Set up prorated PTO 

Typically, new hires receive prorated PTO to ensure fairness. Using your accrual rate, calculate their PTO eligibility and communicate clearly to manage their expectations. 

Benefits of offering PTO to hourly employees

A robust PTO policy ensures your workers feel valued, which can provide real benefits for your company. Whether you manage a small business or a multinational corporation, there are numerous ways PTO for hourly employees can improve your business:

• Better employee retention: Generous PTO reduces burnout and supports work-life balance. Plus, it makes you a more attractive employer. When a business takes care of its employees, those workers tend to stick around. 
• Increased productivity: Employees who take time to rest and relax will return to work ready to hit the ground running. They won’t stress about losing wages whenever they take time off, ensuring that they make the most of their time on and off the clock.
• Legal compliance: Some state and local governments have laws regarding PTO. Ensure compliance to avoid costly fines and litigation. 
• Strong reputation: Many consumers care about how a brand treats its workers. Substantial benefits, including generous PTO, will reflect positively on the company and attract loyal customers.

Empower your workforce and build trust with Oyster

PTO is a win-win. It doesn’t just afford exotic paid vacations for your workers—it also provides stronger retention, increased productivity, and happy employees.

If you aren’t sure where to begin, Oyster’s Total Rewards will help you build an attractive and compliant PTO policy. Oyster simplifies compliance and enables you to attract top talent, making your company a destination for happy, high-performing employees.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.