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It’s “What’s Up? Wednesday”. Time to talk about VACATION PAY FOR TERMINATED EMPLOYEES . . .

By July 31, 2013July 23rd, 2018Uncategorized

You asked:  Do we have to pay employees for their unused vacation if they quit?

Alex answers:

In order to answer this, we need to ask you a few questions.

First, in which state is your business located?

I ask what state you are in because, while neither the federal government nor any state requires that employers provide employees with paid time off, if your company does choose to provide this benefit to employees (as most do), the state in which you reside puts some rules around how that vacation time is handled. The reason for this is that some states define vacation, sick, personal or any other paid time off (PTO) as “earned wages.”

In most states, with the exception of California, employers are pretty much free to design PTO plans as they wish related to the amount of time off granted, eligibility, if/how it can be carried over year to year, etc. Some states, though, do put restrictions on how PTO is treated at an employee’s termination, how and when it can be forfeited, as well as requirements for private employers to communicate their PTO policy.

Which brings us to the second question we have for you: What is your company’s policy on vacation pay?

One of the most important distinctions that states and courts look at in determining if employees are due to be paid their unused PTO or vacation time when they leave their employer is how the time off is granted to the employees. Specifically, it is important to understand whether your company has a practice of making employees accrue (or earn) PTO before they can use it or if the PTO will simply be “advanced” to them. For example, will PTO build up over the year as the employee works (e.g. employee earns five hours of PTO for each 40 hours worked) or will there be a yearly allowance available on the first day of the year (e.g., 15 days beginning on January 1)? The difference is important because in most cases, PTO that is earned (or accrued) but not yet taken by the employee must be paid out upon his/her termination.

In states such as Maryland, Indiana, Pennsylvania and Ohio, there are no clear regulations requiring the payout of unused vacation time at termination. However, these states emphasize the importance of clear communication of the PTO policy to employees at the time of hire. If the company’s policy states that employees will forfeit their unused, accrued vacation time upon termination then this would be permissible. On the other hand, if the employer does not have a written policy on this matter, then employees are entitled to the cash value of whatever unused PTO they have when they leave. In North Carolina, any vacation time (regardless of whether the time was accrued or advanced) must be paid out at an employees’ termination unless the employer has a written policy explaining how and when employees would forfeit the vacation time benefit.

Bottom Line: A well-written vacation time or PTO policy is essential to any company who grants employees paid time off. It will allow you to put limits on how and when employees can use their PTO and provides employees with required information such as eligibility, amount of PTO provided each year, and the rules for forfeiture. If you choose not to have a written policy, you can safely assume that any vacation time or PTO that the employee was given or earned must be paid out to the employee in his/her last paycheck.

On the other hand, if you have a poorly written policy in the company handbook (one that does not follow state laws or conflicts with the company’s actual practices), you have opened your company to legal woes. That inadequate policy will become gold in the hands of a dissatisfied employee who uses it to prove unfair treatment regarding vacation pay or practices.

As always, if you need help with writing or revising your company’s PTO policy, we are here to help! Feel free to contact us at 724-864-8745 and ask for Cara or Alex. For more information about PTO and vacation policies and any other Human Resource issues, please send your questions to If you’d like email notification of all blog updates, just click the follow button at the bottom of the window.

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