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.
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.
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