Parting ways with an employee is never fun for a business owner, but it does happen. When you face separating from an employee, you may have questions like, "What happens to their paid time off?"
The answer to that question depends on state laws and company policy.
Let's take a closer look at paid time off (PTO) payout laws. We'll even go into the laws for every state so you can know what to do in your region.
Are Employers Required to Pay Out PTO?
There's no federal law requiring employers to pay out unused PTO when an employee is terminated or resigns. However, some states require PTO payouts—in which case you'll need to follow your state law.
Most states consider PTO payouts to apply to vacation time and have different laws concerning sick days.
Employers that pay out accrued vacation time usually do so as part of the employee's last pay period paycheck.
Which States Require PTO Payout?
Some U.S. states always require PTO payout but more defer to company policy. These states require PTO payouts in most cases.*
- North Dakota
- Rhode Island
- Washington, D.C.
Most states have some exceptions or hold companies responsible for payments if company policy calls for it. And other states treat private employers and government employers differently. See the full chart for more information.
|State||PTO Payout Required?||Are there Exceptions?|
|Alaska||No||If your company policy or employment contracts say that you will pay out unused PTO when an employee leaves, you must follow your own rules.|
|Arizona||No||You can choose to pay out earned and unused PTO, but you’re not required to do so.|
|Colorado||Yes.||Yes. A “bona fide furlough” does not count as separation in Colorado, therefore PTO payout is not required. “Bona fide furlough” must meet the following criteria: |
1. It is caused by a partial or full shutdown of business operations.
2. It’s a planned furlough, and you genuinely do not expect it to last more than 30 days OR it resulted from a state of emergency (state or federal), and you don’t expect it to last longer than the declared state of emergency.
If your furlough meets those two qualifications, it’s considered a bona fide furlough and not a separation. This means you don’t have to pay out earned unused PTO. Planned furloughs that continue past the conditions of these criteria will trigger PTO payout requirements.
|Connecticut||No||Yes. While the state does not require PTO payout, it does say that you should follow your own policy and collective bargaining agreements. If you agree to a PTO payout in one of those forms, you should provide it upon separation.|
|Delaware||No||Yes. While the state does not require PTO payout, it does say that you should follow your own policy and collective bargaining agreements. If you agree to a PTO payout in one of those forms, you should provide it upon separation. |
If you agree to provide PTO payout upon separation, you must make the payment within 30 days. This does not apply to employers who instead fall under Part I of the Interstate Commerce Act.
|District of Columbia||Yes||Yes. If your company policy states unused leave is not paid out, then your PTO policies can be followed.|
|Illinois||No||Yes. If your employment contracts or any other agreements provide for PTO payout upon separation, you must provide it.|
|Indiana||Yes||Yes. You can create conditions for a PTO payout in your company policy. For example, you may require that terminated employees return company property before receiving PTO payouts.|
|Iowa||No||Yes. If you agree to payout PTO upon separation, you must follow your own policy.|
|Kansas||No||Yes. If you have a policy or a set pattern of paying out PTO, you should provide payment for accrued vacation time.|
|Kentucky||No||Yes. If you have a policy or a set pattern of paying out PTO, you should provide payment for accrued vacation time.|
|Louisiana||Yes||No. Once paid vacation is earned, it must be paid out on separation. However, Louisiana does not require that you give employees paid vacation.|
|Maine||No||Yes. If your company policy states that you will pay out unused vacation, you must do so.|
|Maryland||Defers to company policy||Yes. If you have a written policy that says terminated employees forfeit their unused vacation upon separation, you do not have to provide PTO payout. |
For example, you may have a clause that says employees who quit before they reach one year of employment with you forfeit their right to a PTO payout. However, if you don’t have any written policies stating that your employees forfeit unused vacation when they leave, you have to pay it out.
|Michigan||Defers to Company Policy||Yes. You only have to pay PTO if you have a written policy that says you pay out PTO after separation.|
|Minnesota||No||Yes. If your employment contracts, employer policy, or employee handbook suggests that employees will receive a PTO payout when they leave, then employees can seek payout through conciliation court.|
|Missouri||No||Yes. If you agree to payout unused vacation in your employer policies or your employee contracts, then your employees are entitled to PTO payout when they leave.|
|Montana||Yes||Yes. If employers offer PTO, then they have to pay out any earned and unused PTO. The law doesn’t require you to offer PTO in the first place though.|
|Nevada||No||Yes. Employers can set policies limiting PTO payouts or instituting use-it-or-lose-it plans.|
|New Hampshire||No||Yes. If your policies or contracts say that you will pay out unused PTO when an employee leaves, then they are considered wages. In that case, you must follow your policies and provide PTO payout upon separation.|
|New Jersey||No||Yes. You should provide PTO payout if your employment agreement or company policy says that you will.|
|New Mexico||Yes||Yes. You can state in your employment policy that unused PTO is not paid out. The policy must be given to all employees for review, and employees must sign the policy.|
|New York||Yes||Yes. You do not have to pay out unused vacation if you have a written forfeiture policy that says employees lose their right to a PTO payout under certain conditions. |
You are responsible for defining the conditions, and you must provide written notice to your employees explaining what conditions will result in them forfeiting their right to a PTO payout. For example, you may have a clause that says employees who quit before they have worked with you for one year forfeit their right to a PTO payout.
|North Carolina||Yes||Yes. You can create a forfeiture clause in your company policy or employment contract that outlines scenarios where your employees forfeit their right to a PTO payout.|
|Ohio||Yes||Yes. You can create a forfeiture clause in your company policy or employment contract that outlines scenarios where your employees forfeit their right to a PTO Payout.|
|Oregon||No||Yes. If you have a company policy that provides for PTO payouts when employees leave, you must follow your policy.|
|Pennsylvania||No||Yes. If you have a company policy that provides for PTO payouts when employees leave, you must follow your policy.|
|Rhode Island||Yes||Yes. If an employee has worked for you for less than one year, you are not required to pay out unused PTO when they leave.|
|South Carolina||No||Yes. If you have a company policy that provides for PTO payouts when employees leave, you must follow your policy.|
|Texas||No||Yes. Your employees may be entitled to receive payment for unused vacation time if you have provided PTO payouts to other employees in the past and you don’t have a written policy stating that employees forfeit their unused vacation when they leave.|
|Wisconsin||Yes||Yes. If you have a written forfeit policy, you do not have to pay out unused vacation time. If your policy has conditions, you must follow them. For example, let’s say that only employees who worked for less than one year when they left the company forfeit unused vacation. You can withhold PTO payout for those employees, but you must pay for unused PTO for employees that worked for you for more than one year.|
|Wyoming||Defers to Company Policy||In order to avoid PTO payouts, you must have a written forfeiture policy that is acknowledged by every employee.|
Note that even in states without listed exceptions, written employment contracts and employee bargaining agreements are often enforceable.
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What if Your State Doesn't Require You to Pay Out PTO?
If your state doesn't require PTO payout on separation, then you get to decide as a business owner if you want to. Whatever you put in company policy or contracts, though, you have to follow.
What's more, some states have policies on how you pay out your PTO (even if they don't require it.)
For example, while the state doesn't require PTO payouts, Delaware's leave laws state that employers who offer them must provide those payments within 30 days of separation from the employee.
In contrast, companies don't have to pay out PTO in Georgia, but the state doesn't have any additional requirements if they choose to do it.
And even if your state doesn't regulate PTO payouts, they may have laws on whether or not you can have a use-it-or-lose-it policy for vacation days, so time may not carry over.
Which States Prohibit Use-It-Or-Lose-It?
A use-it-or-lose-it vacation policy is not allowed in California, Colorado, Montana, and Nebraska.
A use-it-or-lose-it vacation policy means that employees can't build up vacation time indefinitely.
They have to use their accrued paid vacation hours by a certain deadline, or they forfeit some or all of the unused hours.
For example, your vacation leave policy might give employees until the end of the year to use their PTO days. They can't roll them over into the next year if they don't use them.
For all other states, use-it-or-lose-it policies are specifically allowed or not mentioned. In that case, employers can use a use-it-or-lose-it vacation policy unless other circumstances like union contracts forbid it.
What Happens to Your PTO When You Leave a Job?
When you leave a job, some employers let you cash out your unused earned vacation PTO days. In other cases, you may simply forfeit those hours, which means you won't receive compensation for unused PTO.
Most companies only pay employees for vacation PTO, not sick leave. This means that employees who leave the company or are dismissed usually forfeit unused sick time off.
If you want to know how your employer handles payouts for unused vacation time or sick leave, check your company's policies on PTO, leave, and wages.
Handling PTO Payouts as an Employer
Unused vacation pay at separation may be required by your state. If it is, you can include a vacation payout for earned and unused vacation when you give an employee their final wages on their final payday.
If it isn't state-mandated, it's up to you to decide whether or not to provide vacation pay after separation. Paying someone for their unused vacation time can be a good way to part on better terms.
This way, you're still known as an employer that cares about your team, which can help your reputation on the job market.
Whatever you choose, make sure it's included in your policies. This way, your employees know what to expect.