Which States Require Payout of Unused Vacation?

If your employee benefits include a paid time off (PTO) policy, each member of the workforce typically receives a designated number of days for taking time away from work. Whether it's vacation time, sick leave, furlough, or any other form of PTO, these often build up over time. 

So what happens when somebody leaves their job with unused paid time off they never used?

In this case, there are state PTO laws that can impact both employees and employers. Understanding these payout laws is crucial for HR leaders. In certain states, companies are required to compensate employees for any accrued PTO if they are terminated. In others, the state has no laws at all.

Here’s a deep dive into the intricacies of these state laws and vacation policies, so your HR department can be equipped to know what is expected of your organization.

Understanding Vacation Payout Laws

How exactly do vacation payout laws work? Let’s start by examining the concepts of accrual and payout. 

Vacation accrual refers to the process by which employees earn paid time off based on their length of service and the company's vacation policy. Typically, employees earn a certain number of vacation hours or days for each pay period worked. The accrual rate may vary depending on factors such as years of service, job position, or company policy.

When an employee takes vacation time, those days hours or days are deducted from their accrued balance. Since not everyone drains their PTO before leaving a company, people might be entitled to a payout for any vacation time they built up but never used.

While the Fair Labor Standards Act (FLSA) doesn’t require employers to offer any PTO, most employers see the benefit of providing paid time off. Vacation days and sick days support work-life wellness, helping employees avoid burnout and remain engaged. Keeping employees engaged is a paramount priority for HR and employers, especially when a Gallup study found that, globally, disengaged employees account for $8.8 trillion in lost productivity every year.

If you do offer PTO, then you need to understand PTO payout laws. The laws regarding vacation accrual and payout vary from state to state, while others are silent on the topic.

States That Require Payout of Unused Vacation

Let’s get down to brass tacks: ​​which states require payout of unused vacation? 

Generally, if you decide to offer PTO, the state ensures that accrued time cannot be forfeited once it’s been earned. The following states have laws requiring the payout of unused vacation time to employees upon termination or separation from employment. Let's take a closer look at each state's regulations, limitations, and exceptions for vacation payout.

California

• Payout Regulation: California treats accrued vacation as earned wages, making it mandatory for employers to pay out unused vacation time to employees upon termination, regardless of the reason for separation.
• Limitations: There are no specific limitations mentioned in California law, and all accrued vacation must be paid out. In fact, implementing a use-it-or-lose-it policy is prohibited by state law.
• Exceptions: The few exceptions are primarily for certain union employees who are covered by collective bargaining agreements.

Colorado

• Payout Regulation: Earned vacation days are considered wages if you offer PTO, which has to be paid to employees upon employment separation.
• Limitations: Sick days do not count towards these wages.
• Exceptions: A “bona fide furlough” doesn’t qualify as a separation here, so PTO payout in this instance wouldn’t be required.

Illinois

• Payout Regulation: Illinois requires employers to pay out unused vacation time to employees upon separation, regardless of the reason for termination.
• Limitations: Illinois law does permit use-it-or-lose-it policies, where the employer can decide whether or not to allow the carry-over of annual unused vacation time.
• Exceptions: There are no significant exceptions mentioned in the Illinois law.

Indiana

• Payout Regulation: Indiana’s laws consider paid vacation as deferred compensation in place of wages.
• Limitations: The policy outlines whether earned and unused vacation is paid on separation, and the employer is otherwise entitled to any earned and unused vacation days without a policy in place.
• Exceptions: There are no significant exceptions mentioned in the Indiana law.

Louisiana

• Payout Regulation: Earned vacation time according to the organization’s policy is considered wages that should be paid out.
• Limitations: Forfeiture of earned vacation time at termination is not allowed.
• Exceptions: Louisiana doesn’t require that you provide paid vacation to begin with. If you do have a set policy where paid vacation is earned, that’s when those wages must be paid out on separation.

Maine

• Payout Regulation: In Maine, earned vacation time counts as wages when earned within the rules of the organization’s policy.
• Limitations: This state statute overrides any employer’s policies.
• Exceptions: As of 2023, forfeiture of unused accrued vacation upon termination is not allowed unless the employee is employed by an employer with 10 employees or less or by a public employer.

Massachusetts

• Payout Regulation: Massachusetts treats vacation pay as earned wages, making it mandatory for employers to pay out accrued, unused vacation time to employees upon termination.
• Limitations: Like Illinois, companies can have use-it-or-lose-it policies.
• Exceptions: There are no significant exceptions mentioned in Massachusetts law.

Nebraska

• Payout Regulation: Nebraska treats accrued vacation as a fringe benefit that counts as wages, making it mandatory for employers to pay out unused vacation time to employees upon termination, including resignations.
• Limitations: No use-it-or-lose-it policies are allowed in Nebraska. 
• Exceptions: There are no significant exceptions mentioned in Nebraska law.

North Dakota

• Payout Regulation: North Dakota requires employers to pay out unused vacation time to employees upon termination, including resignations.
• Limitations: Lose-it-or-lose-it policies are permitted by state law.
• Exceptions: You may revoke payment for accrued vacation time under several conditions. First, the employer gave the employee written notice at the time of hiring about this policy. Next, the employee has been employed for less than one year. Finally, the employee gave fewer than five days’ notice before separation.

Rhode Island

• Payout Regulation: Employee’s earned vacation time will be considered wages, but only after one year of service when an organization has a paid vacation policy program in place.
• Limitations: There are no state laws that establish a use-it-or-lose-it policy.
• Exceptions: If the employee has worked for you for less than a year, you are not required to provide them any wages based on their unused PTO.

In the states mentioned above, the vacation payout laws generally treat unused vacation time as earned wages, creating an obligation for employers to compensate departing employees for any accrued and unused vacation time. These laws are designed to protect employees and ensure they receive compensation for their earned time off.

States Without Mandatory Payout

Several states don’t require PTO payouts, leaving companies to determine their own policy. This means the employment agreement you create will determine whether unused PTO is paid out when the employment relationship ends. These states are:

• Alaska
• Arizona
• Arkansas
• Connecticut
• Delaware
• District of Columbia
• Hawaii
• Idaho
• Iowa
• Kansas
• Kentucky
• Maryland
• Michigan
• Minnesota
• Missouri
• Montana
• Nevada
• New Hampshire
• New Jersey
• New Mexico
• New York
• North Carolina
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• South Carolina
• Tennessee
• Texas
• Utah
• Vermont
• Virginia
• Washington
• West Virginia
• Wisconsin
• Wyoming

There are also states that have no PTO payout regulations whatsoever, including:

• Alabama
• Florida
• Georgia
• Mississippi
• South Dakota

PTO Payout Best Practices for HR Managers

Know (and Comply) with Applicable State Laws

HR departments should be familiar with the specific vacation payout laws in the state or states where the company operates. This includes understanding whether the state requires mandatory payout of unused vacation time, any limitations or exceptions, and any other relevant regulations. Staying updated on changes in labor laws is crucial to avoid potential legal issues.

Develop Clear Vacation Policies

Having a clear and comprehensive vacation policy helps employees understand how they accrue and use vacation time, as well as the rules regarding vacation payout upon termination. It’s a good idea to communicate these policies to all employees during onboarding, as well as in an employee handbook they can reference any time.

Communicate Policy Updates Within Your Organization

If any changes are made to your policies — whether it’s due to a company-level shift or new law — ensure that employees are promptly informed and provided with a written update. Every employee should know whether or not the company has vesting or carryover rules for vacation time and how these rules apply to their accrued time.

Process and Document Payouts Consistently

Consistency is key in vacation payout processes. It’s wise to document all vacation payouts, including calculations and any communication with employees regarding the payout. This is especially important during termination, which can be a sensitive experience for both the employer and the employee. This documentation allows your department to display how all employees received the same treatment, as prescribed by relevant laws, if you ever face a challenge from a previous employee. 

It's important to remember that labor laws can change, and specific regulations may be subject to court interpretations. Some states may have specific provisions for how vacation time is earned, used, or paid out, so employers and employees should consult their state labor departments or legal counsel for the most current and accurate information.

Navigating Multi-State Employment

Navigating multi-state employment can present various challenges for companies. You may have to juggle complex legal requirements, differing labor laws, payroll considerations, and potential administrative burdens. These are some of the challenges and strategies for companies with employees in multiple states, along with compliance solutions and legal counsel considerations.

Challenges

• Differing Labor Laws:  Each state has its labor laws, which can vary significantly in areas such as minimum wage, overtime rules, meal and rest break requirements, and vacation policies.
• Income Tax Withholding: Companies must be aware of state-specific income tax withholding requirements for employees working in different states, which can impact payroll processing.
• Employee Classification: States might have distinct criteria for classifying employees as exempt or non-exempt for overtime purposes, which can also complicate payroll management.
• Leave and Benefit Regulations: Family and medical leave, sick leave, and other benefits may be governed by state laws, requiring companies to understand and implement varying leave policies.
• Workers' Compensation: Companies with multi-state operations must address different workers' compensation requirements, coverage, and reporting obligations.

Strategies & Compliance 

• Centralized HR and Payroll: Establish a centralized HR and payroll system to streamline processes and ensure consistent compliance across states.
• Compliance Audits: Regularly conduct compliance audits to identify any gaps in multi-state employment practices and address them promptly.
• Legal Counsel and HR Expertise: Seek guidance from legal counsel and your fellow HR experts well-versed in multi-state employment laws to navigate complexities effectively.
• Employee Training: Provide training to HR staff and managers on state-specific employment laws to ensure proper implementation and compliance.
• State Registration and Reporting: Register the company with the relevant state labor departments, tax authorities, and workers' compensation boards to meet reporting obligations.
• Technology Solutions: Utilize HR software and payroll systems that can adapt to varying state requirements and streamline compliance processes.
• ​​Collective Bargaining Agreements: If dealing with unionized employees, ensure compliance with collective bargaining agreements and relevant labor laws.
• Interstate Commerce Clause: Understand how the Interstate Commerce Clause impacts certain aspects of multi-state employment, especially for businesses engaged in interstate commerce.
• Cross-Border Agreements: When employees work across state lines, consider cross-border agreements to clarify jurisdiction and applicable laws.

Paid Time Off Is Only One Way to Support Employee Wellbeing

Employees need time away from work to stay fresh and avoid burnout. Establishing policies and culture that support time off are a great way to show your workforce that you care about their wellbeing.

Offering an employee wellbeing program is another great way to institutionalize workforce wellness. It’s so effective, in fact, that three out of four HR leaders say their wellness program is very or extremely important to employee retention. Whether a team member is aiming for personal bests in the gym, a refreshed state of mental wellbeing, or an improved financial approach, a wellbeing initiative shows your company is dedicated to helping them grow. 

Talk with a Wellbeing Specialist to learn how Wellhub can help you deliver workforce wellness!

References

• Osman, M. (2023, July 10). PTO Payout Laws by State in 2023. www.hourly.io. Retrieved October 20, 2023 from https://www.hourly.io/post/pto-payout-laws-by-state 
• Pendell, R. (2022, June 14). The World’s $7.8 Trillion Workplace Problem. Gallup.com. Retrieved October 20, 2023 from https://www.gallup.com/workplace/393497/world-trillion-workplace-problem.aspx 
• PTO Payout Laws By State. (2023, February 23). Www.paycor.com. Retrieved October 20, 2023 from https://www.paycor.com/resource-center/articles/pto-payout-laws-by-state/ 
• PTO payout laws by state for 2023. (2023, May 18). Clockify Learn. Retrieved October 20, 2023 from https://clockify.me/learn/business-management/pto-payout-laws-by-state/