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Workforce Management

Does my Company Have to Pay Out Banked PTO?

One Minute Takeaway

  • A departing employee with unused accrued PTO may be entitled to payment for their time.
  • Federal law does not require PTO to be paid out to departing employees.
  • PTO payout is determined by state regulations and employer policy

When it comes to paying out banked PTO, there is no federal law in place that mandates employers to do so upon separation of employment. However, the answer to knowing whether or not your company has to pay it is not so simple. It is up to each state to choose to mandate the payout of unused PTO at the separation of employment. And within the state, it is up to the employer to decide if they want to provide it.

Some states require employers to pay out banked vacation time upon separation; others let companies determine their own policies. It’s easy to see why it’s very important that, if your company has locations in multiple states, HR reviews each state’s rules regarding separation pay.

Managing PTO during the separation of employment is one of the most difficult tasks an HR professional has to do. The laws are different in every state, and they are constantly changing. As an HR professional, it is your responsibility to keep up with these changes and make sure that your organization’s policies are compliant.

Employment laws in the United States are not simple to follow, mostly because we have to look at federal, state, and local policies. We also have to look at the organization’s policies and ensure that they are in line with employment laws specific to their state. Fortunately, we’ve prepared some helpful information to help you navigate this issue.

Why Do You Need a Clearly Defined PTO Policy?

It is important to have a straightforward outline of what your PTO policy is, or it could end up costing your organization more than it would cost to have a PTO policy in place. For example, in California, where there is no “use-it or lose-it” policy, this case challenged an employer’s initial decision: McPherson v. EF Intercultural Foundation, Inc.

The employer was sued for unpaid PTO by 2 employees who worked a combined 40 years for the organization. They did not receive the same PTO benefits as salaried employees from the organization, but were given an “unlimited” amount of PTO, and all they had to do was let the supervisor know when they would be off work. However, they were given times that they could not take off work; so it was not an unlimited plan. Due to the nature of their jobs, they only took around 2 weeks per year.

The employer felt that it was a verbal or written agreement through email, but the court found it as an undefined arrangement, and was in favor of the plaintiffs. They were awarded 20 days of unused vacation time per year of working, which was the maximum amount that the employees who were able to accrue vacation could receive. This could end up costing employers a lot of money for having undefined and loose PTO arrangements. It leads to employee confusion, and they often are not aware of their rights.

What exactly is PTO?

Paid time off is a benefit employers choose to provide. Some employers offer paid time off as a way to attract and retain employees, while others believe it’s simply the right thing to do. Paid time off can include vacation days, sick days, holidays, and personal days.

Employers are not required to offer paid vacation, but many do as a way to compete for top talent and keep workers happy.

Paid Time Off (PTO) can be used for a variety of purposes, such as:

  • Vacation Days
  • Holiday
  • Sick time
  • Bereavement
  • Personal time
  • Maternity/paternity leave

Employers should consider the benefits of PTO when crafting their policies. PTO can lead to happier and more productive employees when they can find everything in their employee handbooks. It can also help with recruiting and retention.

Some companies distinguish between sick pay and vacation pay, while others consolidate all time off under the umbrella of a paid time off policy.

The manner in which your company policy dictates that employees build up their banked paid time off is called “accrual.” 

You can give out all of an employee’s PTO in a lump sum at the beginning of the calendar year, or you can have the vacation accrual throughout the year, with employees earning a set number of PTO hours per pay period. It depends on your vacation policy.

You can also require new employees to work a certain number of days (most commonly 90) before they can start acquiring PTO, or you can offer PTO immediately as an attractive recruitment incentive.

calculating-PTO

PTO Accrual Policy Example

During the first 90 days of employment, a new employee doesn’t accrue PTO. When they complete their 90-day probationary period, they begin to accrue PTO on a pro rata basis per pay period according to the following schedule.

Time in Service Annual PTO Accrued 
0 – 5 years 18 days 
6 – 11 years 23 days 
12+ years 28 days 

When building your PTO policy, it’s important to also decide and communicate in advance whether your company will allow PTO to be carried over to the following year.

What happens when an employee leaves the company?

At separation, most employers pay out PTO at the employee’s current pay rate, while others use the pay rate the employee was making at the time the paid time off was earned. There may be rules that the employee has to give advanced notice to get their unused PTO. This is up to the employer as it is not mandated by law to give notice.

California, for example, requires all PTO pay, regardless of when it was earned, to be paid out at the employee’s current rate of pay. Several states also consider earned PTO to be wages. This must be paid to the employee as part of the final wages they receive upon termination of employment.

If an employee has unused vacation time accrued PTO when they quit, are fired, or otherwise separate from the company, they may be entitled to be paid for that time. Around half of the 50 states have statutes that require companies to pay out employees’ unused PTO time when the employment relationship ends. 

However, states such as North Dakota allow employers to withhold payment of unused and accrued PTO if an employee who quits has been employed for less than a year or gave fewer than five days’ notice.

Even if you don’t have a state law on the books requiring it, many people still expect payouts for unused vacation days when they leave a job.

If you have a policy, employment contract, or a practice of doing so, you’re required to pay accrued PTO to every employee who leaves the company in their form of wage.

That means, you can’t arbitrarily pay banked PTO to salaried employees and not to hourly employees; the practice and policy must equally apply to all employees.

The best way to avoid this headache is by making sure your employees are aware of the laws in place regarding their PTO. If they are part of a union, this will be outlined in their collective bargaining agreement.

What is a PTO payout?

PTO payout is based on the number of unused days that you have accrued at the end of your employment. An employer may give a PTO payout when an employee separates depending on their policies, and state regulations.

Does a company have to pay out PTO?

This varies by state, and also the company’s policies. There is no federal law in place requiring PTO to be paid out.

How is PTO Pay Out Calculated?

It is calculated based on the number of days that are accrued by the employee, based on the organization’s policies, and then they are paid based off of their current form of wage. For example, if they have 10 hours of unused PTO, and make $25/hr, then they will receive $25 x 10 = $250.

Is PTO Payout Taxed at a Higher Rate?

Yes, and this is because the IRS considers it to be supplemental wages since it is a lump sum payment.

Paycor Can Help

Paycor Time helps makes labor management both efficient and cost effective for employers. With our flexible mobile application, Paycor Mobile employees can request time off, see how much PTO they’ve accrued and easily access employer PTO policies. Employees can also review schedules, clock in and out with ease, and view pay stubs all from one place.