Does your employer have to pay you for unused vacation time?

Posted on June 21, 2021

Some states require employers to pay workers for unused vacation time at termination. Most states, however, allow “use-it-or-lose-it” policies that leave current employees uncompensated for unused vacation time. In states that allow these policies, though, employers can still choose to pay current workers for unused time off in the employment contract. In these cases, the contract is binding.

Where do employers have to pay for unused vacation time at termination?

Some states have passed laws that require employers to pay for unused paid time off, a PTO cash out, when the worker is terminated. This includes vacation days and sick leave. Some of these laws were passed by the legislature. Others come from courts, through the common law process. Others are non-binding interpretations of the law by the state’s executive branch.

These states include:

• California,¹
• Illinois,²
• Louisiana,³
• Massachusetts,⁴
• Montana,⁵ and
• Nebraska.⁶

In many of these states, forms of PTO like vacation leave and sick time is legally considered to be a form of wage. Once it has been accrued, the employer is legally required to pay it when the employee leaves or is discharged.

Neither federal law nor the U.S. Department of Labor have issued any regulations or guidance on the issue.

Where can employers have “use-it-or-lose-it” policies for vacation pay?

Fewer states require employers to compensate current employees for PTO. Some of the states that make employers pay departing workers for unused vacation time also allow employers to cap the amount of PTO that can accrue, or set an expiration date on vacation time.

These practices, which force a worker to either use his or her PTO or lose it without being reimbursed for it, are legal under the following states’ laws:

• Alaska,
• Arizona,
• California,
• Colorado,
• Illinois,
• Indiana,
• Kansas,
• Kentucky,
• Maine,
• Maryland,
• Massachusetts,
• Minnesota,
• Nevada,
• New York,
• North Carolina,
• North Dakota,
• Ohio,
• Oklahoma,
• Oregon, and
• Texas.

For it to be enforced, employers will generally have to notify employees of the “use-it-or-lose-it” provision in the vacation policy. The terms of this written policy have to be set out clearly in the employment contract, the company policy, or the employee handbook.

Some of the states that let employers limit the accrual of PTO also require them to pay the full amount of any accrued vacation time at the employee’s termination. These states include:

• California,
• Illinois, and
• Massachusetts.

What if the employment contract covers the accrual of vacation days?

Unless regulated by state employment law, employers are free to dictate the accrual and payment of vacation benefits in the employment contract. Once in the contract, they become binding on the parties.

Even in states that allow for “use-it-or-lose-it” policies, employers can choose to let their workers accrue unlimited vacation time or other PTO. Doing so can be a perk of employment, a way to boost worker morale, or an incentive to pull skilled workers from competitors.

If these rules are set out in the contract, then they are binding. If the employer offers to pay for unused vacation time in the contract, the employer cannot then refuse to honor that commitment. This would be a breach of contract.

Where states do have binding regulations regarding vacation time, the employer’s policy cannot contract around them. A California company, therefore, cannot have a provision in the employment contract that states that PTO will not be compensated if the worker leaves the company. If such a provision is in the contract, it will not be enforced by courts.

What happens if the employer refuses to payout PTO?

If the employee is entitled to payment for unused vacation or PTO, but the employer is refusing to make the payments, aggrieved workers can file a wage and hour lawsuit. If the violation was widespread and affected a large number of workers, they can form a class action lawsuit.

The employee can be entitled to payment either through state law or the employment contract.

If the employee was terminated for exercising his or her rights to payment for unused vacation time, it can lead to a wrongful termination claim, as well. This claim would argue that the termination was unlawful because it was an act of retaliation.

What is the law in California?

In California, vacation time is a form of wage.⁷ This means that the employer has to pay the employee all of their unused vacation pay in their final paycheck covering their last pay period.⁸

For current employees, though, California’s legal protections are weaker. The state prohibits “use-it-or-lose-it” vacation time policies. Subject to a collective bargaining agreement, though, employers are free to limit the amount of vacation time that employees can accrue.

The practical effect of these rules means that workers can still see their vacation time disappear without being compensated. While it does not expire, as it would under a “use-it-or-lose-it” policy, it would still fail to accrue once a set number of vacation hours had been earned.

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