Giving your employees time off is a benefit that isn’t required by the FLSA. Since time off is nonobligatory, most employers believe that they are exempt from paying out employees when they leave. Although the federal government doesn’t regulate time off and payouts, state governments have different rules.
Most states take it upon themselves to implement employee leave laws. New Jersey, Arizona, and California, for example, have mandated sick leave law requirements. Although states are generous with sick time, not a single state requires employers to give employees vacation time. As a result, vacation policies are actually set up by the employer as a benefit to their employees. This would make you think that employers can choose what they can and can’t do with accrued time off, but that’s not the case! States have laws pertaining to how employers handle accrued vacation hours and how to pay them out.
Does an Employer Have to Pay Out Employees?
Yes…ish! This depends on what state you’re in. About half of the states in the U.S. don’t require employers to pay out their employees after they leave or are terminated. This is great for employers because they don’t have to worry about sending an employee extra cash after they leave. On the other hand, if you live in a state with payout regulations, you might have to pay up.
Generally, most payout states believe that accrued hours are hours earned (or “vested”). If the employee earned those hours, they should get paid for those hours. Any vested hours normally count as 1 hour of compensation; therefore, if the employee doesn’t use all vested hours, they will get compensated after they leave the company. California, for example, has strict laws when it comes to paying your employees’ vested hours:
“PTO” is earned on a day-by-day basis, vested paid time off days cannot be forfeited, the number of earned and accrued paid time off days can be capped, and if an employee has earned and accrued paid time off days that have not been used at the time the employment relationship ends, the employee must be paid for these days.California, Labor Code Section 227.3
To determine whether you are required to pay out your employees, we recommend that you check with your local labor board. In the meantime, check out the handy chart below:
State Payout Laws
|States without Pay outs||States With Pay outs||Conditions for States With Pay Outs|
|Alabama||California||PTO must be included in the employee’s final paycheck|
|Arizona||Illinois||Employers must pay out employee for PTO, unless their handbook or contracts says otherwise|
|Arkansas||Indiana||Specific conditions for PTO pay out|
|Connecticut||Kentucky||You must pay out an employee by the next pay period, or 14 days after the employee’s last day|
|Delaware||Louisiana||Employers must pay out employee for PTO, unless their handbook or contracts says otherwise|
|Florida||Maryland||Employers must pay out employee for PTO, unless their handbook or contracts says otherwise|
|Hawaii||Minnesota||Employers must pay out employee for PTO, unless their handbook or contracts says otherwise|
|Iowa||Nebraska||Employers must pay out employee for PTO, unless their handbook or contracts says otherwise|
|Kansas||New York||Employers must pay out employee for PTO, unless their handbook or contracts says otherwise|
|Maine||North Carolina||Payout depends on the agreement between an employee and employer|
|Michigan||North Dakota||Payout depends on the agreement between the employee and employer. Employees aren’t paid out if they worked for an employer for less than a year and gave fewer than 5 days notice|
|Mississippi||Ohio||Employees must get paid out for PTO, unless their handbook, agreement, or contract, says that employees forfeit their PTO|
|Nevada||South Carolina||Employees must get paid out for PTO, unless their handbook, agreement, or contract, says otherwise|
|New Jersey||Washington D.C.||Employees must get paid out for PTO, unless their handbook, agreement, or contract, says otherwise|
|New Mexico||West Virginia|
|Oklahoma||Wisconsin||Employees must get paid out for PTO, unless their handbook, agreement, or contract, says otherwise|
|Oregon||Wyoming||Employees must get paid out for PTO, unless their handbook, agreement, or contract, says otherwise|
What to Do When Sick and Vacation Time Are Combined
Normally employees would get paid for sick time and vacation time, but this is dependent on your state’s policy. Some think sick time is not accrued, which means that the employee did not technically “earn” those hours. As a result, the employee would not get paid out for sick time. Other states may disagree and say that sick time and vacation time count as earned PTO, and PTO must get paid out entirely. As a rule, you should check with your state government to clarify what regulations you must follow.
Paying Out and Paying up
Generally, an employer must pay an employee for any accrued time they earned. Regardless of whether the employee earns their PTO monthly, bi-weekly, hourly, or semi-monthly– the employee gets paid out for their earnings. Along with that, an employer doesn’t have to pay an employee for any time they were going to earn in the future. As an example, let’s say that an employee gets 10 hours of PTO each month, which totals to 120 hours at the end of each year. If this employee decides to leave in July with a balance of 70 hours, the employer would pay out 70 hours. Just because the employee can earn up to 120 hours each year, doesn’t mean that they actually earned all of those PTO hours. The employee would simply get paid out from whatever remaining balance they had left.
On the other hand, if you have a PTO policy that gives employees PTO hours at the beginning of the year as a “lump sum”, you will most likely have to pay them out for all hours. But again, this depends on your state’s policies.
Tracking Accruals Properly Can Help!
All in all, the best thing you can do for yourself as an employer is to track accrued time properly. If you don’t have accurate accrued balances, you won’t know how much time an employee earned. Consequently, when you don’t know how much time they’ve earned, you can’t pay out properly. Find a solution to track employee accruals so you can avoid making mistakes down the line. If you don’t issue the correct payouts to employees, or don’t pay out in a timely manner, you may find yourself with legal penalties– which can cost you more in the long run.