When an employee quits or gets terminated, it’s important to know whether you need to pay out accrued paid time off (PTO), which is usually a combination of vacation days, sick leave and personal time off.
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At the federal level, there aren’t any 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.
You see, paid time off laws tend to view PTO as vacation since, in the end, all PTO time can be used for vacation days. So, if you’re in a state that requires you to pay out unused vacation time, you’ll likely have to pay out all accrued PTO when an employee is terminated.
Are sick days and vacation days paid out differently?
Some employers wonder if they can separate the accrued vacation days they’re required to pay out with 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 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 contracts.
So what states require PTO payout at termination? Use the chart below to see if your business has to pay out unused vacation, sick time, or personal days.
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?|
|California||Yes||In California, PTO payout must be included in your employee's final paycheck|
|Illinois||In Illinois, the PTO payout law says yes, unless your employment agreement says otherwise||If PTO is offered by the company, when an employee 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|
|Kentucky||Yes, and payment must be sent by the next pay period or 14 days after the employee's last day, whichever is later||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|
|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|
|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|
|Missouri||No||Employees may be allowed to attempt to recover wages|
|Nebraska||Yes, unless your employment agreement says you won't pay out PTO||If you have a contract indicating you won't pay out PTO, you don't have to|
|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|
|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|
|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|
What if I offer unlimited vacation?
Unlimited vacation is a relatively new invention 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 speaking with an employment lawyer who understands the specific laws in your state.
Does it matter if my employee quit on their own or was fired?
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.
What happens if my employee already left and I didn’t pay out PTO?
Skipping the PTO payout can be illegal, 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 required PTO promptly to avoid these extra costs and stressors.
A clear PTO 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 smooth as possible.