Human Resource Blog

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