Workers may be entitled to receive compensation for any unused vacation time after they quit. In some states, workers forfeit their unused paid time off (PTO) when they separate from the company. In other states, including California, employers must pay out any unused vacation time immediately upon termination.
Many companies, however, maintain a policy of paying departing employees for any accrued vacation time that they have not used.
Can an employer set their own accrual rules for PTO?
In most cases, the employer can dictate what happens to unused paid time off when an employee quits. These rules will be included in the written policy on accrual and use of PTO. The policy will generally be in the employment contract or the employee handbook. When employees are a part of a union, it can be outlined in the collective bargaining agreement.
Federal law and the Department of Labor (DOL) do not govern how employers have to handle PTO after an employee leaves. Instead, the federal government delegates it to state laws to govern.
Only a few states have laws that regulate an employer’s policy for unused vacation time. In other states, employers set their own rules for PTO and what happens to it after the worker leaves. These rules, however, are contractual. The employer has to follow them or they can face a lawsuit for breaking the contract.
What is PTO and how does it accrue?
Even when they are not legally required to do so, many employers provide certain forms of paid time off to support their employees’ well-being. This PTO can include:
- vacation leave,
- sick leave,
- holidays,
- family and medical leave, and
- personal days.
Employers typically determine how PTO accrues in their company policies. Workers usually build PTO at a rate based on how long they have been on the job, calculated by:
- hours,
- days,
- weeks, or
- pay periods.
Are there any states that let employers deny vacation pay for unused hours?
Yes, most U.S. states allow employers to refuse to pay departing employees for any unused PTO they have accumulated. However, employers in these states must pay unused PTO if they promised to do so in their vacation policy or PTO accrual rules.
These states include:
- Alaska,
- Arizona,
- Illinois,
- Indiana,
- Kentucky,
- Maine,
- New York,
- Nevada,
- Pennsylvania,
- Rhode Island,
- Tennessee,
- Texas, and
Employers in these states can even have a “use-it-or-lose-it” policy for vacation time or other PTO. Employees under these policies can see their accrued PTO disappear if they do not use it before the expiration date. They will not be compensated for their loss.
However, suppose an employer in any of these states has a written company policy stating that an employee will be paid for unused PTO upon leaving the company. In that case, the former employer is contractually obligated to fulfill that promise.
What states require a payout for unused PTO?
Far fewer states require employers to provide a payout for unused PTO, including sick time and vacation days.
These states include:
- California,
- Illinois,1
- Louisiana,2
- Massachusetts,3 and
- Nebraska4
If an employer in any of these states fails to pay a worker for accrued vacation time or other PTO, they may be violating the law and face a wage-and-hour lawsuit.
Are there any states that fall between these extremes?
Plenty of states carve a middle path between requiring employers to pay unused PTO and letting employers act unregulated. Each state has its own unique rules, though there are certain commonalities between them.
Many of these states have specific conditions for when an employer can withhold payment for accrued PTO. For example, in North Dakota, an employer can only refuse to pay for unused PTO if the employee:
- left voluntarily,
- provided less than 5 days’ notice,
- had only worked there for less than a year, and
- had received a written policy stating that PTO payouts would be withheld.5
Similarly, both Colorado and Indiana allow employers to condition when a departing employee will receive payments for accrued but unused vacation time.6
Other states, like Maryland, require employers to pay for unused PTO unless the employee has agreed to a policy that explicitly forfeits it.7
What is the law in California?
In California, unused vacation pay – as well as vacation time that is combined with sick time – is a form of wage.8 Along with all other forms of wages, employees can cash out unused vacation time upon separation from the company.9 This is informally referred to as a “PTO cash-out“.
While California vacation pay law forbids employers from using “use-it-or-lose-it” PTO policies, they can cap the amount of vacation time that an employee can accrue.
Additional Resources
For more in-depth information, refer to these scholarly articles:
- The effect of paid vacation on health: evidence from Sweden – Journal of Population Economics.
- Title to Accrued Vacation Pay: The Bankrupt’s or the Trustee’s in Bankruptcy – Hastings Law Journal.
- Work Hours, Wages, and Vacation Leave – ILR Review.
- Economic Analysis on Attributes of Workers and Method to Take Annual Paid Vacation – Journal of Human Resource and Sustainability Studies.
- Vacation Pay: Theory vs. Practice – Compensation & Benefits Review.
Legal References:
- 820 ILCS 115/5.
- Beard v. Summit Institute, 707 So.2d 1233 (1998).
- M. G. L. c. 149, s. 148.
- Roseland v. Strategic Staff Management, 272 Neb. 434 (2006).
- ND Cent. Code 34-14-09.2.
- Williams v. Riverside, 846 N.E.2d 738 (Ind. App. 2006) and Nieto v. Clark’s Market, Inc., 2019 COA 98 (Colo. App. June 27, 2019).
- MD Code, Labor and Employment, 3-505.
- California Labor Code 200.
- California Labor Code 227.3.
