Accrual methods, how to pay a vacation day when hours vary, how vacation affects overtime, and what happens to unused vacation.
The Fair Labor Standards Act does not require employers to give paid vacation. Vacation is a benefit set by your policy, an employment contract or a collective agreement. Once you promise it, though, state law may treat earned vacation as wages. In some states, such as California, accrued vacation is treated as earned wages that cannot be forfeited and must be paid out when employment ends. Other states let the written policy decide. That is why the calculation method and the rules about unused time both belong in writing.
Paid sick leave is different: a growing number of states and cities require it, with their own accrual and use rules. If you combine vacation and sick time into one PTO bank, the combined bank may need to meet the sick leave law where you operate. See paid time off and sick leave.
| Method | How it works | Best for |
|---|---|---|
| Per hour worked | Employees earn a set amount for each hour worked, for example 0.0385 hours per hour | Part-time and variable schedules |
| Per pay period | A fixed number of hours each pay period | Stable full-time schedules |
| Annual lump sum | The full year’s allowance is granted on a set date | Simple administration; higher payout exposure in some states |
| Tiered by tenure | Accrual rate increases after set years of service | Rewarding retention |
To find a per-hour accrual rate, divide the yearly allowance by expected yearly hours. For 80 hours of vacation and a 40-hour week (2,080 hours a year), the rate is 80 ÷ 2,080 = 0.0385 hours of vacation per hour worked. A part-time employee working 1,040 hours a year would earn 40 hours at the same rate. Our PTO accrual calculator does this math for you, and our article on PTO accrual policies covers caps and carryover.
For employees with fixed shifts, a vacation day is simply the scheduled shift: an employee who works 8-hour shifts uses 8 hours for a day off. When hours vary, you need a rule. Options include:
Pick one rule per employee group, write it down and apply it consistently.
The basic formula is: vacation hours taken × hourly rate = vacation pay. Most employers use the employee’s base hourly rate at the time the vacation is taken. Your policy should say whether shift differentials or other premiums are included; many employers pay the base rate only.
Worked example (fictional): Devon earns $21.00 an hour and works variable shifts. The policy uses the average daily hours over the last 13 weeks. In that period Devon worked 455 hours across 65 workdays, an average of 7 hours a day. Devon takes three vacation days.
| Item | Calculation | Result |
|---|---|---|
| Average daily hours | 455 ÷ 65 | 7 hours |
| Vacation hours used | 3 days × 7 hours | 21 hours |
| Vacation pay | 21 × $21.00 | $441.00 |
| Balance after | Accrued balance − 21 hours | Shown on next pay stub |
Show vacation hours and pay as a separate line on the pay stub, along with the remaining balance, so employees can check it.
Under federal law, overtime is owed for hours actually worked over 40 in a workweek. Vacation hours are not hours worked, so they do not count toward the 40. If an employee takes 8 vacation hours and works 36 hours in the same week, they are paid for 44 hours, but none of it is overtime under the FLSA. Payments for vacation are also generally excluded from the regular rate used to calculate overtime (29 CFR 778.218).
Some employers choose to count paid time off toward overtime as a benefit, and some union contracts require it. Some states have daily overtime rules based on hours worked. Check your state and your agreements before setting the rule. See our guide to FLSA overtime rules.
Policies handle unused vacation in a few ways: carryover of all or part of the balance, a cap on how much can accrue, or use-it-or-lose-it at year end. Not every option is allowed everywhere. California, for example, does not allow use-it-or-lose-it forfeiture of earned vacation, though it allows reasonable accrual caps. Other states allow forfeiture if the policy is clear and communicated in advance.
At the end of employment, some states require payout of accrued, unused vacation; others leave it to the policy. Check your state labor law page and our glossary entries on PTO carryover, accrual caps and PTO payout.
EZTime records hours worked from clock-ins, so accruals based on hours worked start from accurate data. Employees request vacation through time off requests in the mobile app, managers approve it against the schedule, and approved time off appears on the timecard separately from worked hours, so payroll can see the difference between vacation and overtime-eligible hours.
Use our PTO accrual calculator to work out balances, and our gross pay calculator to check the paycheck.
Many hourly employers accrue vacation per hour worked, for example 1 hour of vacation for every 30 or 40 hours worked. It is simple, fair to part-timers and easy to automate in a time and attendance system. Decide whether overtime hours earn vacation, whether there is a cap on the balance, and whether new hires can use vacation before a waiting period ends. Then put those answers in your PTO policy.
Tick each item your written policy already covers.
0 of 6. Your policy leaves too much to interpretation. Start with how vacation is earned and paid.
Multiply the vacation hours taken by the employee’s hourly rate. Your policy decides how many hours a vacation day is worth when schedules vary.
Not under federal law, which counts only hours worked. An employer policy, contract or some state rules may treat them differently.
Federal law does not require it. Your policy should say which rate is used, and some states or contracts may require a specific rate.
Only if your policy gives it to them. Accrual per hour worked is a common way to give part-timers a proportional benefit.
It depends on your state and policy. Some states require payout of earned vacation; others follow the written policy.
In many states, if clearly communicated. Some states, including California, do not allow earned vacation to be forfeited.
Approved hours leave EZTime as payroll-ready Excel or PDF reports for whoever runs your payroll. Plans start at $2 per employee per month, with a $20 monthly minimum.