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  B18 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.

If trying to get a handle on all of these statutes right now sounds overwhelming, it’s time to consider handing over all of that stress and work to a partner who has the experience and expertise you need. Our payroll solution pays more than one million people across all 50 states. We can help.

More to Discover

Payroll Software with Direct Deposit

Payroll Software with Direct Deposit

Organizations continue to look for ways to become more efficient without compromising service or security and choosing a payroll service that offers direct deposit is a good way to start. Eliminating paper checks from your payroll processing not only saves paper (win for the environment!) but also saves your workforce the hassle and time it takes to cash or deposit every paycheck. The majority of employees today prefer electronic transactions and the immediacy of direct deposit. If you’re considering a new automated payroll solution, it’s worth it to invest in one that can accommodate direct deposit services. But before you buy, review these frequently asked questions about the process. What are the Benefits of Direct Deposit? Instant...

Final Paycheck Laws by State

Final Paycheck Laws by State

Once upon a time, it was the norm for employees to stay with their employer for decades, oftentimes retiring from the same business at which they started their career. Today, however, employees are more transient, bouncing from job to job at various companies throughout their work life. As such, receiving a final paycheck from an employer is becoming commonplace. As an employer, it’s important to know the legal requirements surrounding an employee’s final check. Some states have differentiating laws depending on whether the employee quit or was terminated. Regardless, the final check should contain the employee’s regular pay from the most recent pay period along with any additional types of compensation such as accrued PTO or a bonus if...

How To Calculate Overtime Pay

How To Calculate Overtime Pay

Calculating overtime pay continues to be a hot topic. The Department of Labor plans to introduce new federal overtime regulations in 2019 which would redefine the current boundaries of whom is eligible to receive overtime pay. They also plan to revisit the way employers must calculate a worker’s “regular rate of pay” for Fair Labor Standard Act (FLSA) purposes. This could lead to a wider pool of employees receiving overtime wages. But before we get ahead of ourselves, let’s dive into some key factors to remember when calculating overtime. Who Can Receive Overtime? In the workplace, you’re either considered an “exempt” or a “non-exempt” employee based on your specific job duties. Only non-exempt employees are eligible for overtime pay...

Rise Above the Status Quo: An Executive Summary

Rise Above the Status Quo: An Executive Summary

Our Biggest and Best Web Summit Yet! More than 18,000 people registered for Paycor’s two-day online Rise Web Summit, held in February, where industry experts offered advice on all things HR, from employee engagement to hot button compliance issues. If you didn’t get a chance to watch the webinars live, feel free to watch them on-demand. In the meantime, here’s a quick overview of each session and some of the key takeaways. The Future of HR Now more than ever, executives depend on the unique insights HR can bring to the table. However, there is a problem. Many HR leaders just aren’t thinking big enough. Our keynote speaker, DisruptHR’s Jennifer McClure, outlined four key strategies HR leaders can use to push past their comfort zones and...