September 25, 2023
What is a Mandatory Vacation Policy?
The concept of the mandatory vacation policy is a new and novel approach to paid time off. It goes against wh...
In this article we’re going to explain each US state’s stance on PTO payout, and what states require payout of unused vacation pay at termination.
This is important information to know if you’re running a company, because there are serious consequences for breaking state labor laws, not just financial punishment but damage to your company’s reputation as well.
So while you might be hoping to save money paying out unused paid time off, it’s more important that you do right by the law. Read on for more.
Please note: we are not employment law professionals, and this is not legal advice. Please contact an employment lawyer or reference official state guidelines for full information.
By “PTO payout”, we mean whether or not companies need to pay out any accrued vacation time employees have remaining when they leave their job.
For example, if an employee quits or is let go and still has two weeks of vacation time, the company may be required to pay this unused vacation time in the employee’s final pay.
However, in some states, PTO payout is not required, which means any accrued vacation pay left over upon separation (when the employee officially stops working for the company) will be forfeited.
In almost all cases, unused PTO is paid out at the employee’s regular rate of pay at the time they leave their job.
For example, if an employee is paid hourly at $20 per hour and has 40 hours of unused PTO, their vacation pay will be $800 ($20 x 40).
If an employee is paid a yearly salary of $50,000 (on a regular schedule of 40 hours per week) and has 12 days of unused PTO, their vacation pay will be $2307.72 ($192.31 equivalent daily salary x 12).
*The amount paid out is still subject to regular income taxes.
Now let’s look at which states require payout of vacation pay, and which allow unused PTO to be forfeited upon separation.
Here’s a quick summary of the 20 states that require PTO payout upon termination of employment:
The following table lists each state and their PTO payout laws, together with any notes or conditions attached.
Although PTO payout and “use it or lose it” policies are different things (we’ll explain more after the table), we also list whether or not each state allows use it or lose it for paid vacation time, sick leave or both.
|State||Payout of Unused Vacation Time Required?||Notes||Use It or Lose It Policies Allowed?|
|Colorado||Yes||Exception in the case of a “bona fide furlough”. This is when:|
1. Employees are furloughed for a full or partial shutdown of business operations.
2. The furlough is planned and expected to last not more than 30 days, or the furlough is caused by a state of emergency declared by the state or federal government, causing a shutdown of business operations.
Unless the situation meets this criteria, you are required to pay out unused PTO.
|District of Columbia||Yes||Courts have ruled that it is legal to implement a policy or contract that doesn’t allow for payout of unused vacation time, which must be agreed to by the employee.||Vacation Only|
|Indiana||Yes||It is legal to add a clause in employees’ contracts that outlines situations where they will not have their PTO paid out upon termination (e.g. requiring two weeks notice, or for company property to be returned before unused PTO is paid out)||Yes|
|Louisiana||Yes||PTO is not required by law in Louisiana, but once earned, it must be paid out upon separation.||Yes|
|Maine||Yes||The law applies only to companies with 11 or more employees. Companies with 10 or fewer employees are exempt.||Yes|
|Maryland||Yes||It is legal to add a clause in employees’ contracts that outlines situations where they will not have their PTO paid out upon termination.||Vacation Only|
|Michigan||No||PTO payout is only required if your company policy/employment contract states that it will be paid out upon separation.||Vacation Only|
|Minnesota||Yes||It is legal to add a clause in employees’ contracts that outlines situations where they will not have their PTO paid out upon termination.||Vacation Only|
|Montana||Yes||PTO is not required by law in Montana, but once earned, it must be paid out upon separation.||Sick Leave Only|
|New Jersey||No||Vacation Only|
|New Mexico||Yes||It is legal to add a clause in employees’ contracts that outlines situations where they will not have their PTO paid out upon termination. This must be given to employees for review and signed by all employees.||Vacation Only|
|New York||Yes||It is legal to add a clause in employees’ contracts that outlines situations where they will not have their PTO paid out upon termination. This must be seen and agreed upon by employees.||Yes|
|North Carolina||Yes||It is legal to add a clause in employees’ contracts that outlines situations where they will not have their PTO paid out upon termination, however employees may still be owed their earned vacation time even in the case of a forfeiture clause being in place.||Yes|
|Ohio||Yes||It is legal to add a clause in employees’ contracts that outlines situations where they will not have their PTO paid out upon termination.||Yes|
|Rhode Island||Yes||You are not required to pay out PTO for employees who worked less than a year for the company.||Vacation Only|
|Texas||No||If you have provided PTO payouts in the past, and don’t have a written forfeiture policy, you need to continue paying out PTO to current employees.||Yes|
|Wisconsin||No||PTO payout is not legally required in Wisconsin, but there must be a clear written forfeiture policy implemented. If the company is silent about it, then unused PTO must be paid out.|
|Wyoming||Yes||It is legal to add a clause in employees’ contracts that outlines situations where they will not have their PTO paid out upon termination. This must be seen and agreed upon by employees.|
Some states, as elaborated on in the table above, have exceptions to their PTO payout laws. In at least nine states, PTO payout is required by law but it is legal for companies not to pay out PTO if they clearly state it in their employment contracts, and employees read and agree to this.
On the other hand, though many states do not require payout of unused PTO, in most cases a company is legally required to follow whatever is stated in their own company policy.
So if a company in Arizona for example, where PTO payout is not required by law, specifies in their employment contract that any unused PTO will be paid out, they must follow whatever their company policy says.
We’ve mentioned “use it or lose it” policies a few times here. This type of policy is different from paying out PTO upon job separation, but similar in that it relates to how companies handle unused PTO.
A use it or lose it policy means that, at the end of the business year, any vacation time that has not been used will be forfeited.
So, for example, if an employee gets 12 days of vacation time per year, and at the end of the year they’ve only used 7 days, the remaining 5 days will be lost and they start the next year with 12 days again.
If the company does not have a use it or lose it policy, these unused days will generally roll over, and the employee will have 17 vacation days the next year (12 plus the 5 carried over from the previous year).
Though there is some debate over whether use it or lose it policies are ethical (as a policy like this means losing one’s earned employee benefits), only three states (California, Colorado and Montana) have made use it or lose it vacation policies illegal.
Unused PTO can present a big headache for a company. When employees start amassing large balances of unused vacation time, it becomes a liability hanging over the company. If you’re required to pay out unused PTO, you need to have the ability to do so any time an employee leaves the company, which can make a big dent in cash flow.
In one example of how unused vacation can stack up, one civil employee in Jacksonville had over $400,000 in unused vacation pay cashed out.
To avoid nasty surprises and big payouts, it’s important to have a plan for how to manage employees with unused PTO.
Here are some tips to help manage accrued vacation pay in your business:
First, and most important, is to follow what the law says. It’s never a good idea to try and circumvent the law to save a few bucks.
Best case, you save a bit of money but upset your ex-employees in the process, who are likely to spread bad word of mouth about your company.
More likely, you’ll be sued, and have to pay more than what the original cost to pay employees their unused vacation pay would have been, alongside the negative impact to your company’s reputation.
In many states, you don’t need to pay employees for unused vacation time. In some, you don’t even need to offer PTO. But that doesn’t mean you should go with the minimum required of you by law.
A more generous PTO policy can have a number of advantages. It helps you attract better talent, and helps you hold on to your top employees.
It also sets the standard that you care about your employees, and that you’re not only offering benefits because you have to. This helps develop a better relationship between employer and employee and foster a more positive work environment.
If you offer PTO, you should encourage employees to actually use their PTO.
There are a number of benefits to taking regular vacations, from reducing stress and improving mental health, to boosting brain power and productivity.
Generally speaking, well-rested and healthy employees who regularly take time off will perform better and contribute to a more positive team culture.
Taking regular vacations is even more important if you pay out unused PTO on separation, as it avoids unwelcome surprises and large payouts when someone quits, retires or is terminated.
Finally, make sure you have a way to know who has a lot of PTO stacked up, and an action plan to deal with them.
You’ll want to use a vacation tracker software like Flamingo to track accrued vacation time and keep each employee’s PTO balance up to date.
When you use Flamingo, it’s easy to see in the app exactly how many days off each employee has taken, how many they have remaining, and when their last day off was.
With this information you can follow up with employees who have large outstanding balances or who have had a long time without taking vacation time.
Encourage these employees to come up with a plan to take some time off in the near future. This will reduce the financial burden on the company from owed vacation pay, while simultaneously helping your employees avoid burnout and stay fit and healthy.
Flamingo makes managing your team’s paid time off a breeze.