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Jan06

Are there requirements for Paid Time off policies & pay out for accrued vacation upon separation

Termination – Are there specific laws regarding Paid Time off policies? What states make you pay out accrued vacation upon separation? Specifically… Texas, California, Illinois, Michigan and Colorado?

Yes, there are specific requirements in many states for PTO or paid time off and accrued vacation.

California has the most restrictive PTO pay laws of any state. In California, PTO is considered earned wages, and the employee must be paid for all accrued PTO upon termination. If the employee is fired, usually their final paycheck is due within 24 hours, and it must include all accrued PTO.

Illinois and Colorado require that employees be paid for earned vacation upon termination. However, the states recognize that PTO is often a combination of vacation and sick time. In some cases it includes personal days or holidays, as well. Therefore, Illinois and Colorado permit the employer to designate what percentage of PTO is vacation, and only pay employees for that portion. Suppose XYZ Corp. gives employees 20 days of PTO per year, and specifies that 50% of that, or 10 days, is comparable to vacation time. If an employee with 20 days of earned and unused PTO quits, or is terminated, the employee would be entitled to payment for only 10 days of PTO.

However, Illinois and Colorado require that the employer be consistent in the ratio of vacation to PTO between employees, and that it be reasonable. If an employer tried to claim that only 1 of the 20 days of PTO was comparable to vacation time, the Department of Labor would likely require that the employer pay at least 50%, and perhaps all days of PTO. The DOL would file a suit to enforce this, if necessary.

Ideally, employers will have a written policy, perhaps in the employee handbook that details the amount of PTO that is comparable to vacation time.

Michigan and Texas do not require that employers pay workers for earned but unused vacation upon termination, unless the employer has a written policy or past practice of doing so.

Note that each state has its own vacation pay laws, and every one is different. Although we have lumped Colorado and Illinois together for the purposes of this answer, in reality the laws have some important differences.

To learn more about the vacation pay laws in each state, search our archives. For example, to learn more about the Colorado vacation law, you would search: Colorado vacation

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This entry was posted on Tuesday, January 6th, 2009 at 7:54 pm and is filed under
Human Resources Management, Termination.
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21 Responses to “Are there requirements for Paid Time off policies & pay out for accrued vacation upon separation”

  1. jack Says:

    We avoid these state laws by ERISA-fying our Paid Time Off plan.

  2. Caitlin Says:

    Hi Jack! What a novel idea! We’d be interested in hearing more about it.~ Caitlin

  3. Legal Advice Blogg Says:

    [...] » Are there requirements for Paid Time off policies & pay out for … [...]

  4. BJ Bernas Says:

    What if policy states PTO is use it or lose it and will not be paid out at time of termination. This is for the State of Illinois

  5. Caitlin Says:

    Hi BJ! Under state law, employees must be paid for unused vacation at termination. Illinois requires the employer to designate a portion of PTO time that is comparable to vacation time. If the employer does not, or if it is artifically low, the Illinois Department of Labor or IDOL will force the employer to pay all the unused PTO at termination.

    State law takes precedence over company policy. So the employer has to follow the law. This means if the employer designates 50% of PTO as comparable to vacation pay, the employer must pay out 50% of unused PTO at termination. HTH, and thanks for reading the blogs!~ Caitlin

  6. Al L Says:

    I know that unused vacation must be paid out upon termination in the State of Maryland,but what is the law regarding the treatment of unused Paid Time Off (PTO) upon termination in Maryland?

    Thanx,
    Al L.

  7. Caitlin Says:

    Hi Al! In Maryland as in other states that require payment of unused vacation, the regulations are slightly different when an employer offers PTO. Paid Time Off or PTO is usually a combination of vacation, personal leave and paid sick leave. The employer can designate in advance, in writing, the amount of PTO that corresponds to vacation (say, 50%) and pay only that portion. However if the employer designates an artifically low amount(10%), or does not make this designation, then the employer must pay all PTO at termination. HTH, and thanks for reading the blogs!~ Caitlin

  8. Sandy Kosiek Says:

    Need all info for IL, our company is thinking of going PTO, just need to know all laws to do this.

  9. Caitlin Says:

    Hi Sandy! Illinois requires that employers pay unused vacation at termination. If you switch to PTO, you will be required to designate a percentage of PTO as comparable to vacation, and pay that percentage at termination. Do not be tempted to designate 10% of PTO as vacation — if the percentage is too low, the Illinois Department of Labor will require that you pay employees for all PTO at termination.

    If you fail to designate any percentage of PTO as vacation in writing, you will be required to pay it all at termination. HTH, and thanks for reading the blogs!~ Caitlin

  10. Katey Says:

    Are employers required to pay for pto if they do not have a written policy saying they dont? For Colorado.

  11. Caitlin Says:

    Hi Katey! It is important to remember that PTO and vacation are separate things. In Colorado, an employer must pay workers for unused vacation at termination, unless the employer has a written policy that states workers will not be paid. However, the rules are different for PTO.
    In some cases, employers grant both PTO and paid vacation. In that case, the employer is only required to pay workers for unused vacation time at separation. In other cases, an employer will grant PTO only, as a combination of paid vacation, paid sick leave and sometimes other types of leave (such as paid holidays or personal time.) In that case, the employer must designate a percentage of PTO that corresponds to paid vacation (usually about 50%.) The employer is required to pay only that portion of PTO at separation. HTH, and thanks for reading the blogs!~ Caitlin

  12. Rhondlen Says:

    Does any one have the rules for Arizona, specifically for PTO pay with a termination? Any assistance would be greatly appreciated.

  13. hrlady Says:

    Hi, Rhondlen,

    Arizona does not have any specific rules for vacation (PTO) payout on termination. Arizona, like the federal government, states that vacation is matter between employer and employee.

    If an employer in Arizona has a policy regarding vacation payout on termination, the policy must be followed. Check your handbook or company policy for statements concerning payout on termination.

  14. chicago Says:

    Any insight into PTO carryover laws for Texas, IL and Missouri? We would like to implement use it or lose it policy in all three states that we operate.

  15. hrlady Says:

    Hi Chicago!

    All three states allow a “use it or loose it” policy. All three states require a policy to be established. Texas and Missouri law states that the policy must have a set date when the time will be lost. Illinois requires that the employer permit employees a reasonable opportunity to use the leave.

    Thank You for reading the Humanresourceblog.com

  16. Lynn Says:

    Does the state of Nevada require employers payout accrued unused PTO when an employee resigns? Our handbook states an employee must give 2 weeks notice to receive your full payment of PTO. If you do not give 2 weeks, the employee will forfeit the payout of unused PTO time.

  17. hrlady Says:

    Hi Lynn,

    Nevada has no laws requiring employers to provide vacation (PTO) benefits. An employer may lawfully establish a policy denying employee’s payment for accrued vacation (PTO) leave upon separation from employment.

    In addition, an employer in Nevada can lawfully establish a policy disqualifying employees from payment of accrued vacation (PTO) leave upon separation from employment if they fail to comply with specific requirements, such as giving two weeks’ notice.
    The policy established at your company is legal in the state of Nevada.

    Thank you for reading the Humanresourceblog.com

  18. Joe Says:

    In Colorado, how must the payment of unused vacation days of a “commission only” sales person be calculated, upon termination. Using Minimum Wage, average commission payments over the earned vacation period…or some other method? For example, a commission only sales person, at the date of termination, has accrued 15 days of earned (but unused) vacation. How must we calculate what he is to be paid for those days?

  19. hrlady Says:

    Colorado, like the federal government, believes vacation benefits are a matter of agreement between an employer and an employee. Thus, there is no guidance on this issue. The three most commons ways to calculate vacation payout for a commissioned employee is (1) use the minimum wage as the rate of pay for vacation/paid leave, (2) limit the total pay for vacation leave to the amount of the salespersons’ usual draw, and (3) use the total wages earned (base, commissions and bonus) over the previous quarter or other representative period and divide by the number of weeks in the quarter. It’s best to consider past practice and establish a vacation payout policy that is administered consistently.

  20. CH Says:

    If an employer has offices in Colorado and has a PTO policy (no designation between vacation and sick) and does not specify a percentage is equal to vacation time, do they have to pay out all accrued PTO upon termination? The policy states that PTO is not paid out upon termination unless required by state laws.

  21. hrlady Says:

    Hi CH,
    Unfortunately, Colorado law isn’t clear on this matter. The law states that any vacation time earned in accordance with a company’s policy or established practice is considered earned wages and owed to the employee at separation. Thus, it’s up to the employer to determine what percentage of the PTO is vacation time. If the employer chooses not to make such a determination it’s leaving itself open to a wage complaint.

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