Accrued Vacation

Accrued Vacation refers to leave days an employee accumulates from allotted leaves earned but unused by them. The unused portion is usually paid to employees upon separation or when the calendar year concludes, depending on company policy. It is an important part of a company’s compensation and benefits policy. 

Unused vacation days are considered benefits for employees, but from an employer's perspective, they are a liability. When an employee's employment concludes, they have to be compensated for their accrued vacation time. Companies must pay the balance due based on an employee's most recent hourly rate. An accrued vacation policy typically defines what constitutes accrual based on employment duration and the employee separation process. 

Accrued vacation is the vacation time employees have earned but not utilized or been paid for in accordance with a company’s accrued vacation policy. It is an important part of compensation and benefits, as it is only fair that employees are compensated for the accrued vacation time. 

It is a key aspect of compensation packages that typically include holidays, sick leave, and other benefits outlined in company policy. The compensation an employee receives may vary with their current employment status, such as whether they are under contract, working part-time or full-time, their length of employment, etc. Though it is based on company policy, state and labor laws play a major role in how compensation policies are designed. These laws ensure fairness and enable employees to receive fair compensation for the work they do. 

An organization determines the maximum number of leaves (vacation days) that can be carried over from one calendar year to the next. The unused days/hours that exceed the maximum allowable limit are credited to an employee’s leave balance. Some companies require the completion of certain years of employment before an employee can qualify for additional vacation leave accrual. 

Some companies may have a Use It or Lose It Policy. They may place limitations on how vacation time can be used. The policy lays down a date (such as the closing date or end of the year) by which employees must use their leaves and a certain number of unused leaves (or hours) are carried forward into the next year. Companies usually also define the process that employees are required to follow to use their vacation days, specifying how and when to apply for leave. These processes facilitate planning, operations stability, and accountability. 

As employers are required to pay their employees for unused leave, they consider it a liability. However, it can improve an employee’s well-being, engagement, motivation, and job satisfaction, which can boost workplace productivity. Hence, it can prove beneficial to both employees and employers. While such vacation time is not mandatory, it is advisable to refer to state laws for any specific rules and regulations.

Computing accrued vacation time is of utmost importance to ensure no side is disadvantaged in the process. While some companies may use an accrued vacation calculator, it can be calculated using the simple steps outlined below.

• Arrive at the accumulated vacation time figure: The amount of vacation time accumulated over the period in question is calculated.
• Add vacation hours/days earned in a given period: The number of hours earned as a vacation in the period is added.
• Minus the hours/days utilized: The next step is to subtract the actual number of hours utilized in the current period from the previous value.
• Arrive at the payable amount: The last step is to multiply the accrued number of hours by the hourly rate payable to the employee in question.

From the discussion above, we know that defining policies and accrual rules for such vacation time is crucial. In this section, let us study some examples to understand the concept in detail.

Example #1

Suppose Dianne, who works with GoodGlad Ltd., had accumulated 40 hours of unused vacation time from her previous year (2023). For the current year, she has 10 hours of vacation time. She used 20 hours of vacation time for the year. Lola, her manager, computed Dianne’s accrued vacation time as shown below without an accrued vacation calculator:

(40 hours + 10 additional hours) - 20 hours utilized

Suppose Dianne makes $50 an hour; her total accrual would be 30 hours , and the corresponding payment to her will be $150 (30*50). 

The compensation Dianne will receive is $150.

Example #2

An AFAR article updated in January 2024 talks about how vacation days are not being put to good use by employees in the US. The article is based on the results of several surveys conducted over the years to see if employees in the United States use their vacation days effectively. 

Upon comparison with other countries, these surveys showed that employees in the US do not effectively utilize the vacation days assigned to them despite being aware of how beneficial time off from work can be. From the findings published in this article, it seems like a two-way problem. US employees get fewer vacation days than other countries, and they allow these days to remain unused. 

While employees in the US cited varied micro-level reasons for not taking time off work, the state of the economy was also recognized as a major cause for employees not using their vacation days.   

The article highlighted some important observations. Unused vacation days turn into accrued vacation, which both employers and employees must manage carefully to ensure they are not disadvantaged.

Company policies, processes, and protocols differ based on the type of leave or vacation defined in employees’ employment contracts. It is important to distinguish accrued vacation, annual vacation, and paid time off or personal time off (PTO).