Before hiring an employee, you must decide whether you want to provide paid time off (PTO). Offering PTO also requires that you create a policy that explains how your company will handle accrued time off. However, state PTO payout laws may limit whether you can establish a use-it-or-lose-it policy.
Certainly nothaveto grant your employees paid leave. But,over 60% of small business employeeshave access to PTO for sickness, leave and holidays. And if you're offering paid time off, you need to know your state's PTO payout laws.
Read on to learn more about accrued time off, use-it-or-lose-it policies, and what your state has to say about them.
Summary of accumulated free time
When employees have paid time off, the number of days they receive typically accumulates over time. Active time off is the time an employee earns but has not yet used.
An employee can use their accrued time off to do the following:
- Use it
- Cash it out
- Roll it over
- renounce it
As a rule, employees have to decide on their vacation time at the end of the calendar year. Termination of workers is another point where PTO demarcations come into play.
Your company's policies—and your state's laws—contribute to what an employee can do with their accumulated PTO.
Some companies place limits on what employees can cash out or transfer. For example, you can only pay your employees up to 40 hours and transfer up to 40 hours of PTO.
Include the pros and cons of your deferral policy in yoursEmployee Handbook. And wait until you know which states require employers to pay for unused vacation time before creating your policy.
What is a use-it-or-lose-it policy?
A use-it-or-lose-it policy states that employees must either use their PTO by a certain date or risk losing it. Use-it-or-lose-it policies prohibit employees from cashing out or transferring their earned time.
Employers who implement use-it-or-lose-it policies must communicate this clearly to their employees. Employees need to know when to use their PTO before it expires.
Use-it-or-lose-it policies limit an employer's payout obligation to employees who do not use their vacation or sick leave. However, dealing with restrictions can be frustrating for some employees who want to save their PTO days for next year or receive a year-end bonus.
Not to mention that use-it-or-lose-it policies are illegal in some states.
Do states dictate how you calculate accruals?
When an employer voluntarily offers employees paid time off, they usually determine how the time is accumulated.
Businesses can calculate accruals based on the number of:
- working hours
- days worked
- weeks worked
- pay periods worked
How you calculate accruals determines how you pay employees for time off earned but not used. To find out how much you owe an employee, you need to prorate their time off.
Make sure your handbook explains how employees collect time off.
Remember that states with are mandatoryPaid Sick Leave Lawsdecide how employers should calculate provisions.
PTO Payout Laws by State
Although states do not require employers to provide employees with paid leave, some regulate PTO delineations.
What Exactly Do State PTO Payout Laws Mean? States may have unused vacation pay laws that require employers to:
- Provide accrued vacation pay or carry over unused days at the end of the year (aka prohibiting “use-it-or-lose-it” policies).
- Include accrued vacation time as wages in an employee's wageslast payslip
- Do both 1 and 2
Not all states have PTO payout laws. Many do not address whether employers must pay employees for time off that is accrued.
Whether or not your state requires a payout of accrued leave, you must reflect this in your policies. You can pay employees for the accumulated time.And if your company policy says you will do it, then you must do it.
Most states have PTO payout lawsonly apply to earned leave.
So, which states prohibit employers from enforcing use-it-or-lose-it policies? Which states require a PTO payout upon termination?
Learn more about PTO payout laws by state below.
Employers cannot implement a “use-it-or-lose-it” policy in their company. However, employers can set a cap on provisions.
California requires employers to pay terminated employees accrued vacation time on their last paycheck. Under California law, vacation pay is considered a form of wages if an employer chooses to offer it to employees.
California Accrual Time Act applies to vacation time or vacation time combined with sick time under a PTO policy.
For more information on California vacation pay laws, click heregovernment website.
Colorado requires employers to pay employees for accrued vacation time when they are fired. And Colorado prohibits use-it-or-lose-it policies. Under Colorado law, vacation pay is considered a form of wages.
Colorado law only applies to vacation time, not sick time.
BoxColorado State websitefor more informations.
Illinois does not prohibit use-it-or-lose-it policies in the workplace. However, they take care of that.
Employers can require employees to use vacation time by a specific date, as long as they give them reasonable time.
In addition, Illinois law requires employers to provide PTO payouts to terminated employees.
You can review Illinois' policies in detail by visiting theirsgovernment website.
CorrespondingIndiana State Website, the employer must pay the employee for the accrued vacation time if the employee is terminated.
But Indiana says vacation policy is generally left up to employers. Employers can set conditions that employees must meet in order to receive vacation pay.
The state itself does not require employers to pay employees for accrued time off. Louisiana law requires employers who offer employees paid leave to pay the accrued time upon termination.
The state does not require employers to pay employees for accrued time off. However, Maryland requires employers to pay employees for unused vacation time unless the employer has a forfeiture policy stating otherwise.
You can learn more about the Maryland vacation pay ruleConsult their website.
Although employers cannot force their employees to lose their earned time, they can set policies where it is use it or lose it. Employers may set an expiry date for accrued leave, so long as it is reasonable. And employers can limit the amount of vacation time employees accumulate or earn.
Massachusetts employers are required to pay accrued vacation pay to employees who have been terminated.
For more information, seeMassachusetts' furlough policy advice.
Employers who offer paid leave cannot set a "use-it-or-lose-it" policy. However, you can set a cap that limits how much an employee can accumulate.
Montana law requires employers to pay employees for accrued vacation time upon termination.
BoxMontana State Websiteto learn more about their payout laws.
If you are a Nebraska employer, you cannot establish a use-it-or-lose-it policy for your business.
If an employee is fired, their employer must pay them for the earned and unused vacation time.
To learn more about PTO payout laws, visitNebraska website.
New York does not require employers to pay employees for time off accrued. However, employers must notify workers in advance of any implemented “use-it-or-lose-it” policy.
viewNew York sitefor more information on the PTO payout.
North Carolina does not require employers to pay employees for time off accrued. Employers must pay employees for accrued leave at the time of termination if their policy doesn't specify what happens to it.
For more information on North Carolina employees' PTO payout rights, see theirswebsite.
Although North Dakota law requires employees to be entitled to unused vacation pay if they are terminated, there are some exceptions.
Employers with employees who leave voluntarily may withhold accrued holiday pay if:
- The employer provided the employee with a written notice of the PTO payout terms
- The employee has worked for the employer for less than a year
- The employee informed the employer less than five days in advance
You can view more information aboutNorth Dakota Lawson your website.
Oregon's PTO payout rules are a bit trickier than other states.According to their website, you may need to include accrued vacation time in an employee's final wage if your policy is open to interpretation.
Rhode Island does not deal with use-it-or-lose-it laws. However, the country says employers must pay accrued vacation pay if the worker has worked there for at least a year.
Learn more atRhode Island State Website.
The employer can decide whether or not to pay accrued vacation pay upon termination. However, employers who do not have a written forfait policy are generally on the hook for unpaid leave payments.
viewWisconsin websitefor more information on the PTO payout.
Wyoming does not require employers to pay employees for time off accrued. Employers must pay terminated employees for accrued vacation time if they do not have a written forfeiture policy recognized by the employee.
BoxWyoming State Websiteto learn more.
Use-it-or-lose-it vacation policy by state chart
Check out our easy-to-follow table below to see if you can implement a use-it-or-lose-it vacation policy. And find out if your state requires you to pay employees for unused vacation time when they leave your company.
Keep in mind that many states don't address accrued vacation pay. In general, this means that employers are free to implement use-it-or-lose-it policies or refuse to offer a PTO payout upon termination.However, you should contact your stateto ensure you comply with restrictions and ever-changing policies.
And even if your state doesn't prohibit a use-it-or-lose-it policy or require a PTO payout, you must do so if you state it on your policy.
|condition||Does the state have a law prohibiting use-it-or-lose-it policies?||Does the state require employers to pay a PTO payout upon termination?|
*Please see the state sections above for details.
Quick tips on how to deal with unused vacation pay
Here are some steps you can take to comply with state PTO payout laws and keep your employees happy:
- Familiarize yourself with your state's PTO payout laws
- Contact your state for verification
- Create a writtenpaid time off policyDetails of how time has been accumulated and what employees can do with the accumulated time
- Include your vacation policy in your employee handbook
- Follow your company's policies
- Calculate the employee's accrued PTO and pay the employee for that time, if applicable
This article has been updated from the original publication date of August 28, 2019.
This is not intended as legal advice; for more information pleaseclick here.