A paid time off (PTO) payout is compensation for earned time off that an employer must pay employees when they leave their jobs. Although the FLSA doesn’t require business owners to give their employees time off, some employers who give time off benefits to their employees must pay out their employees when they leave the company under law. Why is that? Some states require employers to handle an employee’s accrued vacation hours in a certain way. According to state law, former employers must give their employees the cash value of their accrued time off balances upon leaving.
Who has to Pay Out Their Employees?
PTO payout rules depend on what state you reside. Currently, at the time of publishing, approximately 21 states require business owners to pay out their employees regardless of whether they leave of their own free will or when they’re terminated. In general, most states that require payouts consider accrued time off as “vested” hours, which means that the employee earned those hours and should receive compensation.
States without payouts:
Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Iowa, Kansas, Maine, Michigan, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Oklahoma, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington
States with payouts:
California, Colorado, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Montana, Nebraska, New York, North Carolina, North Dakota, Ohio, Rhode Island, South Carolina, Washington D.C., West Virginia, Wisconsin, Wyoming
For the most up-to-date information, it’s recommended that you consult with your state’s labor board.
Unsurprisingly, each state that requires payouts has their own rules and regulations. Some states require employers to pay the employee within 14 days of their last day, while others require employers to pay the employee in their final paycheck. In general, states encourage employers to have internal handbooks with policies in place. Employers can check out state payout conditions in this article; however, we suggest that you check with your state labor board to get current information.
Rules for calculating payouts depend on your state and company policies. As stated previously, states require employers to pay out employees based on several factors. California, for instance, requires employers to pay their employees for any unused PTO in their last paycheck. Ultimately, the value of the any payout is entirely up to state and company policy.
If your handbook or state doesn’t require PTO payouts, and you haven’t contractually agreed to pay the employee for earned time off, then you may not have to pay anything when the employee leaves!
However, if your handbook, contract, company policy, or state law requires payouts, you have some math to figure out.
Finding the Value of PTO Time
To start, you’ll need to figure out how many time off hours the employee has in their bank. If you’re keeping track using a service like Timesheets.com, you should have quick access to their accrued balances. If you keep track of PTO manually, you might have to calculate many hours they earned yourself. To calculate an employees time off accrual balances by hand, take a look at this article.
In general, an employer doesn’t have to pay an employee for any accrued time off they would have earned in the future. For example, let’s say that an employee earns 8 hours of PTO each month, or 96 hours of time off each year. If this employee leaves the company with a PTO balance of 40 hours, the employer would pay out 40 hours. Although the employee technically can earn up to 96 hours in that year, they did not earn all of their hours yet. Therefore, you would only need to compensate the employee for their earned hours.
Some employers choose to give employees time off during the beginning of the year. Employers who follow this practice should update their termination policies to protect themselves from any surprises. It’s recommended employers state that the total time off given in advance is not entirely eligible for a PTO payout. Upon leaving, only time that would have been earned by that point in the year is eligible for a PTO payout. You may want to consult with your state to determine the specifics of how to handle time off allocated before it was actually earned.
Once you’ve figured out the employee’s final accrual balance, you’re ready to calculate the cash value.
For Hourly Employees:
- You simply must multiply the employee’s hourly pay rate by their final accrual balance.
For example, if the employee earns $15 an hour and they have 32 hours of unused PTO, you would multiply $15 X 32 hours= $480. The employee would have earned a $480 payout before taxes. Note that payouts are taxable, just like any other form of compensation.
For Salaried Employees:
1. Calculate the employee’s hourly pay rate based on their annual salary. Most employees work 40 hours a week, 52 weeks a year. This totals to approximately 2,080 hours a year, but some companies may factor out paid holidays. To find out their hourly rate, you must divide the hours they’re expected to work by their annual salary amount.
For example, if the employee makes $52,000 a year, you should divide their annual salary by the amount of hours they worked. $52,000 / 2080= $25. The employee’s hourly rate is $25 an hour.
2. Multiply the employee’s hourly pay rate by their final accrual balance.
Let’s assume this same employee had 86 hours of PTO remaining. Since this employee’s hourly rate is $25, you must multiply their hourly rate by their remaining time off balance of 86 hours. 25 X 86= 2,150. This employee earned a $2,150 payout before taxes.
If you’re an employer, you must ensure that you follow state laws regarding payout compensation. It’s also wise to check in with your HR representative and review your company policies and handbook to ensure you’re compliant with the law.
Once you understand the ins and outs of your payout policy, we recommend that you find a time tracking solution that tracks employee time off balances automatically. This will make the payout process faster because you’ll have the employee’s remaining time off balance available, rather than having to search for answers or spend time calculating accruals yourself.
Need to track your employee’s attendance and time off with accurate accrual balances? Try Timesheets.com