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. It's a significant part of the total rewards package, with paid leave benefits representing 7.4 percent of total compensation costs for employers.

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.

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What's PTO?

Paid time off (PTO) is a benefit that allows employees to take time away from work while receiving regular pay. It typically covers vacation days, sick leave, and personal time, either as separate categories or combined into one flexible bank of hours.

Do Hourly Employees Get 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. For context, many private industry workers receive 10 to 14 days of paid vacation after one year of service. 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 often have varied schedules and fluctuating hours; in fact, within industries like retail and food service, about one-third of workers have employer-set irregular schedules. 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.

The strategic benefits far outweigh the challenges:

• Increased retention: Employees who can take time off without financial stress stay longer, reducing costly turnover
• Boosts productivity: Rested employees return refreshed and more motivated
• Attracts talent: Generous PTO policies help you stand out in competitive hiring markets
• Equity and fairness: Offering the same benefits to hourly and salaried workers builds organizational unity

How Does PTO for Hourly Employees Compare to Salaried Workers?

Here's how PTO works differently for each group:

• Salaried employees: Get a fixed number of PTO days annually, regardless of hours worked—simple and predictable
• Hourly employees: Earn PTO proportionally through accrual based on hours worked—fair but requires careful tracking

How to Calculate PTO for Hourly Employees

How much PTO should you offer hourly workers? It doesn't have to be guesswork—your policy can strategically boost retention and attract top talent.

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? It often does to reward loyalty. For example, after 10 years of service, 31% of private industry workers receive between 15 and 19 days of paid vacation.
• Do part-time employees and independent contractors get paid vacation? Access to paid leave often differs significantly by employment type; while 77% of full-time workers receive paid sick leave, just 32 percent of part-time workers do.

Legal Requirements and Compliance Considerations

No federal PTO requirements exist, but state and local laws? That's a different story entirely.

Key compliance areas to monitor:

• Mandatory paid sick leave: Some jurisdictions require minimum paid sick time, often tracked separately from PTO
• Accrual rates and caps: Local laws may set minimum earning rates and maximum accumulation limits
• Payout on termination: Many states require paying out unused PTO when employees leave

Staying compliant means knowing your local rules inside and out.

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

What's the real payoff of offering PTO to hourly employees? The benefits extend well beyond employee satisfaction:

• 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.

Build Competitive PTO Policies 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.