Does my Company Have to Pay Out Banked PTO?
Does my Company Have to Pay Out Banked PTO?

Does my Company Have to Pay Out Banked PTO?

The short answer is “maybe.” Surrendering accrued and unused vacation time to an employee who separates from your company, whether by choice or not, isn’t a federal requirement, so there’s no federal law that your company has to comply with. However, the compliance headache is still there since paid time off (PTO) payout is governed by states’ laws, which vary wildly. 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.

What exactly is PTO?

Some companies distinguish between sick pay and vacation pay, while others consolidate all time off under the umbrella of a paid time off policy. [NOTE: We will not be discussing FMLA leave here as it’s a completely different animal that we’ll be tackling in another article.]

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 accrue throughout the year, with employees earning a set number of PTO hours per pay period. 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. 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 their final wages they receive upon termination of employment.

If an employee has unused 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 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 in states that don’t have a law on the books requiring PTO payout, you can still be on the hook for paying out unused PTO to a separating employee. 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. 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.

Paycor Can Help

Paycor Time makes labor management both time and cost effective. With our flexible mobile application, employees can request time off, see how much PTO they’ve accrued and easily access employer PTO policies. But that’s just the tip of the iceberg. Employees can also clock in and out, manage their schedules and view pay stubs, all while on the go. Want to learn more? Take a guided product tour.

Take Tour

More to Discover

What is a W-4 Form?

What is a W-4 Form?

What is a W-4 Form? W-4 forms are essentially very basic tax returns filled out by employees. Specifically, it tells employers the correct amount of tax to withhold from the employee’s paycheck. Need a W-4 Form? Download it here. Why are W-4s important? The accuracy of an employee’s W-4 submission will determine the size of their tax refund (or bill) at the end of the year. The amount withheld should be as close as possible to their actual tax obligation—a big deficit can be an unwelcome surprise and may be accompanied by further penalties. Withholding more than necessary is considered by some employees as an easy way to save but, while refunds may seem like a nice treat, you are taking away the chance for employees to invest (or use)...

Case Study: Price Brothers, Inc.

Case Study: Price Brothers, Inc.

A need for robust reporting tools and a modern HR and payroll platform with onboarding capabilities led Price Brothers, Inc., to Paycor. “We’re constantly hiring and looking for skilled trade help on a daily basis. Now they can fill out the application online and we can email them the new-hire paperwork. They can complete everything online before their first day.” - Kim McLaughlin, CFO, Price Brothers, Inc. Why Price Brothers, Inc., left their payroll provider Price Brothers, a Charlotte, N.C.-based plumbing contractor who specializes in new-home construction, needed a more modern HR and payroll platform that could keep up with their growing business. Their former solution wasn’t intuitive and didn’t collect all the data they needed for...

How to Pay 1099 Employees

How to Pay 1099 Employees

As the gig economy grows more employers are looking to hire independent contractors (aka 1099 workers). But since paying independent contractors isn’t a walk in the park, many employers are looking for step-by-step instructions. Here’s a breakdown of everything you need to know: How Do I Pay a 1099 Worker? This subject is something you will need to discuss in detail with the person you’re hiring for the job. Often, they will have a written contract that stipulates how and when they should be paid. The two most common methods of payment are hourly and by the job or project. Some independent contractors — such as attorneys — prefer to be paid on retainer, which means you pay them a lump sum at the beginning of each month in return for a...

States with Salary History Bans

States with Salary History Bans

Requesting job applicants’ salary histories has been a pretty common practice for employers over the years. Recruiters and hiring managers often use this knowledge to exclude people from the candidate pool, either because the applicant is “too expensive” or their previous salary is so low, hiring managers think the person is poorly qualified or inexperienced.Businesses have also used previous salary information to calculate new hire compensation—a process that can perpetuate pay disparity between women and men. To address this inequality, several states and municipalities have enacted bans on asking for previous salary information, although laws vary in terms, scope and applicability. The states and territories that have enacted salary...