Key Takeaways
Summary | |
Definition | PTO payout refers to paying employees for unused accrued paid time off when they leave a company. |
Federal vs State Law | There is no federal requirement to pay out unused PTO, but many states have specific PTO payout laws. |
What’s Covered | PTO payout laws generally apply to vacation and sick leave when they are combined into a single PTO bank. |
Policy Importance | Employer PTO policies and employee handbooks can be legally enforceable and may require payout even if state law does not. |
Purpose | Helps employers understand when PTO must be paid out, avoid legal risk, and manage employee separations compliantly. |
When an employee quits or gets terminated, it’s essential to know if you need to pay out accrued paid time off (PTO), which is usually a combination of vacation days, sick leave, and personal time off.
There aren’t any federal laws requiring you to pay employees for unused vacation time when they leave your company. Many states, however, do have specific PTO payout laws.
If your state’s paid time off laws require you to pay out accrued vacation time when an employee is terminated, you can’t typically separate vacation, personal, and sick time from PTO. Although, if your state has no relevant laws, you can divide those categories as you see fit.
Do PTO payout laws apply to both vacation and sick leave?
Generally, yes, PTO payout laws apply to both vacation and sick leave. That’s because paid time off laws tend to view PTO as vacation, since all PTO accrual can ultimately be used for vacation leave.
Some employers wonder if they can separate the accrued vacation days they’re required to pay out from accrued sick leave and personal days. Since accrued sick time is a type of PTO, your state PTO payout laws also apply to your team’s unused sick days, meaning you may have to pay them out when an employee leaves.
What happens to PTO or vacation pay when an employee leaves?
Unless your employees are members of a collective bargaining agreement (i.e., a union) or have a contract explicitly stating you’ll pay out PTO when they leave, your requirements depend on your state’s paid time off laws.
Make sure you know the answers to these two questions:
Does your state require it? Some states have explicit paid time off laws. For example, in California, employers are required to pay out unused accrued vacation time when employees leave the company. In Washington state, however, the law says PTO payout is not required for employers.
Does your state have limitations for PTO payouts? Some states require you to pay out accrued vacation time in certain situations. For example, in Rhode Island, employers only need to pay out earned vacation upon termination after an employee has worked at the company for at least one year.
Here are two other things to keep in mind:
Most states don’t require you to provide your employees with vacation time. However, if you do provide vacation time, you may be required to pay it out. If your employee handbook explicitly says you will pay out vacation time, you need to pay out PTO when your employee leaves. And if you have a habit of paying out PTO, keep that policy consistent—courts may see it as enforceable. Remember: Many employee handbooks are enforceable as employment contracts.
Which states require PTO payout when an employee leaves a job?
The following states require you to pay out PTO when an employee leaves their job:
California
Colorado
Illinois
Indiana
Louisiana
Maryland
Massachusetts
Minnesota
Montana
Nebraska
New Mexico
New York
North Carolina
North Dakota
Ohio
Rhode Island
South Carolina
Washington D.C.
West Virginia
Wisconsin
Wyoming
However, some states have special stipulations that say you don’t have to pay out PTO if your employment agreement says you won’t. For a better understanding of your state’s laws, check out our chart below.
PTO payout laws by state
This chart is simplified and reflects laws on the books at the time of this article’s publication—make sure to check with your state’s Department of Labor for the most up-to-date rules and any additional requirements.And keep in mind that if your company’s PTO policy says you will pay out PTO, that’s generally legally enforceable, regardless of the PTO payout laws listed below.
Do I have to pay out unused PTO? | Are there any conditions? | |
|---|---|---|
Alabama | No | No |
Alaska | No | No |
Arizona | No | No |
Arkansas | No | No |
California | Yes | In California, PTO payout must be included in your employee's final paycheck |
Colorado | Yes | Employers have to pay out unused time within 14 days, or they’ll receive a penalty |
Connecticut | No | No |
Delaware | No | No |
Florida | No | No |
Georgia | No | No |
Hawaii | No | No |
Idaho | No | No |
Illinois | In Illinois, the PTO payout law says yes, unless your employment agreement says otherwise | If PTO is offered by the company, when a person’s employment is terminated, all unused PTO must be paid out to the terminated employee in accordance with company policy or employee agreement |
Indiana | Yes | In Indiana, you can stipulate conditions for PTO payout—like number of days worked |
Iowa | No | No |
Kansas | No | No |
Kentucky | No | No |
Louisiana | Yes, unless your employment agreement says you won't pay out PTO | If your employment agreement says you won't pay out PTO, you don't have to |
Maine | No | No |
Maryland | Yes, unless your employment agreement says you won't pay out PTO | If company policies explicitly state you won't pay out PTO, you don't have to |
Massachusetts | Yes | No |
Michigan | No | No |
Minnesota | Yes, unless your employment agreement says you won't pay out PTO | If your company policy explicitly says you won't pay out PTO, you don't have to |
Mississippi | No | No |
Missouri | No | Employees may be allowed to attempt to recover wages |
Montana | Yes | No |
Nebraska | Yes | No |
Nevada | No | No |
New Jersey | No | No |
New Mexico | Yes, unless your company policy says you won’t pay out PTO | No |
New York | Yes, unless your employment agreement says you won't pay out PTO | If you have a policy stating unused PTO time is forfeited, you don't have to |
North Carolina | Yes, unless your employment agreement says you won't pay out PTO | If you have a policy stating unused PTO time is forfeited, you don't have to—excluding sick leave, which does not have to be paid out |
North Dakota | Yes, unless your employment agreement says you won't pay out PTO | You do not have to pay out PTO if you have a written policy, the employee worked for you for less than a year, and if they gave fewer than five days' notice |
Ohio | Yes, unless your employment agreement says you won't pay out PTO | A written policy forfeiting unused PTO time supersedes Ohio law |
Oklahoma | No | No |
Oregon | No | No |
Pennsylvania | No | No |
Rhode Island | Yes | Only if an employee has worked for you for at least one year |
South Carolina | Yes, unless your employment agreement says you won't pay out PTO | No |
South Dakota | No | No |
Tennessee | No | No |
Texas | No | No |
Utah | No | No |
Vermont | No | No |
Virginia | No | No |
Washington | No | No |
Washington, D.C. | Yes, unless your employment agreement says you won't pay out PTO | If your contract or handbook explicitly says you will not pay out PTO, you don't have to |
West Virginia | Yes | You can specify requirements and payment schedules |
Wisconsin | Yes, unless your employment agreement says you won't pay out PTO | If your contract or handbook says you won't pay out PTO, you don't have to |
Wyoming | Yes, unless your employment agreement says you won't pay out PTO | Your policies can supersede this by establishing notice requirements or denying PTO payouts altogether |
New Hampshire | No | The policy of the organization (or the contract signed by the employer and employee) will dictate whether unused vacation is paid out upon separation |
Do PTO payout laws vary for part-time, contract, or temporary workers by state?
Not usually. For states that require PTO payout, any employee who has unused PTO is entitled to that pay, regardless of whether they’re part-time or full-time.
However, full-time employees are usually the only ones accruing PTO, since most employers don’t offer PTO to part-time, contract, and temporary workers.
Can employers in at-will states choose not to pay out unused PTO?
Employers in at-will states must adhere to both their state and company policies regarding the payout of unused PTO. Just because you’re in an at-will state—meaning you can terminate an employee for any reason (as long as it’s lawful)—doesn’t mean you’re exempt from your state’s PTO payout law.
If your state requires you to pay out unused PTO, you need to do so. If your state requires you to pay out unused PTO only if your company policy already says so, you need to abide by your company policy.
What if I offer unlimited vacation?
Unlimited vacation is a relatively new concept that’s not quite tried and tested with current PTO payout laws. But generally, you do not have to pay out any PTO in this situation.
This is because most states that require you to pay out vacation time stipulate “accrued” vacation time that is already “vested,” meaning the employee has already earned the vacation time. Unlimited vacation doesn’t vest, so there’s nothing to pay out.
However, if you offer an unlimited vacation policy, we recommend getting legal advice from an employment lawyer who understands the specific laws in your state.
How do “use-it-or-lose-it” PTO policies work under state law?
It depends on which state you’re in. A “use-it-or-lose-it” PTO policy essentially means you won’t pay out unused PTO. So, if your state defers to your company policy when it comes to PTO laws, you won’t have to pay out unused PTO with a “use-it-or-lose-it” policy.
States that don’t enforce PTO payout if your company policy specifically opposes it include: Illinois, Louisiana, Maryland, Minnesota, New Hampshire, New York, North Carolina, North Dakota, Ohio, South Carolina, Washington D.C., Wisconsin, and Wyoming.
If you have a “use-it-or-lose-it” policy but your state still mandates PTO payouts—and doesn’t allow exceptions for company policy—you’re required to follow your state law. Keep in mind that some states, like Colorado, have explicitly banned employers from creating and implementing “use-it-or-lose-it” policies that prohibit PTO carryover.
Does it matter if my employee quit on their own or was fired?
Generally, no.
If your state requires you to pay out unused PTO, it doesn’t matter if an employee was fired, laid off, or quit. However, you may be able to specify that fired employees are not eligible for payouts in your company’s PTO policy.
Talk to an employment lawyer in your state to make sure you’re following your state’s laws.
Are employers required to include PTO payouts in an employee’s final paycheck?
It depends. Most states that require PTO payouts don’t have stipulations about when the payout has to occur. California is the one state that requires employers to include PTO payouts in an employee’s final paycheck. Colorado requires employers to pay out unused PTO within 14 days of the employee’s written notice, while Kentucky requires final wages payment by the next pay period or within 14 days of the employee’s last day, whichever is later.
What happens if my employee has already left and I didn’t pay out PTO?
Skipping the PTO payout can be unlawful, so talk to a small business HR expert or lawyer if you think you may be in this situation.
Your former employee can take you to court for unpaid wages or breach of contract—depending on whether your state requires PTO payouts or if your policy or company habits establish precedence. In addition to paying out PTO, you might also have to pay attorneys’ fees and damages. So make sure to pay out the required PTO promptly to avoid these extra costs and stressors.
A clear PTO employer’s policy is the best way to keep you and your employees on the same page. While some states require you to pay out any accrued vacation time, others do not. Regardless of which way your state falls, setting up a policy beforehand will help your company’s offboarding process run as smoothly as possible. Quick note: This is not to be taken as legal or HR advice. Since employment laws change over time and can vary by location and industry, consult a lawyer or HR expert for specific guidance. Learn about Gusto’s HR services
