Some employees who have paid time off (PTO) are eligible to cash it out. Before going ahead with this option, there are four key things you should consider:
- not all states make employers offer this option,
- employers can limit how much PTO you can cash out,
- your employer’s policy should be in the employee handbook, and
- you may be legally entitled to it upon termination.
1. Not all states require employers to pay for unused PTO
There is no federal law that requires employers to pay employees for paid time off that they have not used. Instead, it is up to state law. While some states have laws that mandate payment for unused paid time off, others do not.
Generally, there are 2 types of state requirements regarding payment for unused vacation days and other PTO:
- laws that require payment for unused paid time off at termination, and
- laws that prohibit “use-it-or-lose-it” policies.
In states that have the first type of law, your paid time off is generally considered a form of wage. You are entitled to receive it in your final paycheck. However, you might not be able to cash out unused paid time off before leaving your job. A few of the states that have this type of law include:
- California,1
- Colorado,2 and
- Massachusetts.3
In states that ban use-it-or-lose-it policies, you may be entitled to payment for PTO that you have accrued. In these states, once you have accrued PTO, it does not expire. The only way for you to lose it is if your employer compensates you for it. Some of the states that ban use-it-or-lose-it policies are:
- California,4 and
- Colorado.5
However, many employers get around these laws by capping the amount of PTO that you can accrue. This means that your accrued PTO does not expire. However, you are kept from getting any more of it once you reach a certain point.
Colorado’s employment law only recently changed in 2021 to include both of these protections for workers.
Most states, however, have neither of these 2 types of employment laws. Some examples are:
- Oregon, and
- Nevada.
2. Your employer can limit how much PTO you can cash out
So long as it does not violate your state’s employment laws, your employer can set its PTO policy however it wants. This means that your employer can limit how much PTO that you cash out at once while you are still working with them.
It also means that your employer can:
- limit the amount of PTO you can accrue,
- set when PTO can be cashed out, and
- not offer PTO, at all.
3. Review your employee handbook for the PTO cash out policy
Because employers have so much latitude, it is important to review your employer’s PTO policy. It is generally laid out in your employee handbook by your company’s vacation policy.
The details of this policy matter. While most PTO policies are similar across companies, there are often nuanced differences.
If you do not feel like you fully understand your employer’s paid time off policies, you should consider talking to someone in your human resources department.
If you think that your company’s policies violate state law, you should consider talking with an employment attorney. It may break your state’s wage and hour laws.
4. When you leave your job you may be entitled to a cash out
Some states have laws that classify accrued PTO as a type of wage. In these states, you are legally entitled to payment for your unused PTO when your job ends. Even in other states, though, you can be contractually entitled to payment for that PTO if your employer’s PTO policies say so.
Many employers voluntarily have PTO policies that are more generous than state law requires them to be. They often do this to attract more talented personnel and increase worker morale.
What is the law in California?
In California, you are entitled to a cash payment for some of your unused PTO upon termination of employment.6 Additionally, state law forbids the use of use-it-or-lose-it PTO policies.7
PTO payouts can also occur during your term of employment. However, state law does not govern these cash-out options. Instead, your employer’s policies, as outlined in the employee contract or handbook, will.
You are entitled to a PTO payout on termination
California law treats accrued paid vacation time as a type of wage.8 You are entitled to receive all wages that you are owed when you leave work. This includes if you:
- got fired,
- were laid off,
- resigned, or
- quit.
However, this only applies to accrued vacation days. You are not entitled to cash out any unused sick leave you have.
You accumulate paid time off on a pro rata basis during the calendar year.9 For example, if you get 12 days of vacation time per year, they will accrue at the rate of 1 per month. If you are terminated 6 months into the year and you did not use any of them, you are entitled to cash out the 6 that you have accrued.
The payment that you are entitled to receive must be at your final rate of pay.10
The payout has to be included in your final paycheck. This paycheck includes your PTO payout as well as the final wages earned during your last pay period. If you were terminated or resigned with at least 72 hours of notice, this final paycheck must be provided immediately. If you resigned with less than 72 hours of notice, payment usually has to be provided within 72 hours.11 If these final wages are not paid on time, your employer can be subjected to a waiting time penalty.
If you have a collective bargaining agreement, that contract dictates how PTO payouts occur.
No use-it-or-lose-it policies for paid time off
California forbids use-it-or-lose-it policies for paid time off.12 However, employers are allowed to cap PTO accumulations. Some common terms and conditions are:
- requiring advance notice before using vacation time,
- putting a maximum number on the vacation days or the number of hours of PTO that you can take,13
- creating different PTO plans and vacation accrual policies for different groups of workers, like part- and full-time employees,
- limiting how many days of accrued vacation time that you can use in a row, and
- restricting when PTO can be used, often by “blacking out” busy times of the year.
These limitations can be significant, but they cannot be discriminatory. Additionally, the California Division of Labor Standards Enforcement (DLSE) has found at least 2 types of PTO limitations to be unfair:
- mandating all vacation time be used before the end of the year that it was accrued,14 and
- stopping you from accruing new vacation time until you used what you could carry over from the prior year.15
Legal References:
- California Labor Code 227.3 LAB.
- Nieto v. Clark’s Market, 488 P.3d 1140 (2021).
- Massachusetts General Law Chapter 149, section 148.
- Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774 (1982).
- Nieto v. Clark’s Market, 488 P.3d 1140 (2021).
- California Labor Code 227.3 LAB.
- Suastez v. Plastic Dress-Up Co., supra note 4.
- California Labor Code 200 LAB.
- Suastez v. Plastic Dress-Up Co., supra note 4.
- California Labor Code 227.3 LAB.
- California Labor Code 202 LAB.
- Suastez v. Plastic Dress-Up Co., supra note 4.
- Boothby v. Atlas Mechanical, 6 Cal.App.4th 1595 (1992).
- DLSE Opinion Letter 1993.08.18.
- DLSE Opinion Letter 1991.01.07.
