Human Resource Blog

Payout of accrued vacation

I have a client who only allows employees to carryover 40 hours of accrued vacation per year. They pay out the excess at the end of the year. When they calculate how much to pay they use the employees hourly rate at the time they accrued the vacation not at their current salary. Is that ok?

If your client is in any state except California, this policy is lawful — in fact, it is extremely generous, and might be costing the employer too much money.

Vacation payment is a matter of state, not federal law. Therefore, it would be better if we knew which state your client was in. However, every state except California currently permits a *use it or lose it* vacation policy — meaning the employee cannot carry over any vacation time from one year to the next. (This policy is currently being tried in courts in Maryland and a few other localities.) So it is very generous for the employer to permit employees to carry over 40 hours of accrued vacation and to offer a payout of unused vacation.

There is no requirement outside of California (and possibly Maryland) for the employer to pay workers for the lost vacation time. Doing so is extremely generous and costly.

In California, the employee would be entitled to payment for the unused vacation time at the employees current rate at time of payout. However, in other states, if the employer has a written policy that the payout will be at the same rate that was in effect when the employee earned the vacation time, and enforces that policy consistently, that is lawful. (However, if an employees rate is reduced, that means the employer must pay out vacation at the previous, higher rate.)