A use-it-or-lose-it paid time off (PTO) policy sets an expiration date on PTO. After this date passes, employees can't carry over or cash out their accrued PTO.
Employers have administrative, operational, and financial reasons for implementing a use-it-or-lose-it PTO policy, but company policy can't go against state laws.
To get a complete picture of whether employees can lose their PTO in the U.S. and better understand your obligations as an employer, you'll want to familiarize yourself with state-level PTO policies.
First, we'll give an overview of PTO so you can get a solid foundation. Then we'll dive into what, exactly, use-it-or-lose-it PTO is and when it's allowed.
What Is PTO?
For many people, PTO just means paid vacation days, but it can also include other types of time off, such as sick leave, parental leave, or bereavement days.
- Annual PTO: This policy usually involves allocating your employees a year's worth of PTO at the start of the year.
- Flexible PTO: This PTO policy is similar to annual PTO, but it has fewer restrictions. For example, under a flexible PTO system, your HR department may not categorize leave type when tracking PTO.
- Unlimited PTO: Also called open leave, this type of PTO does not specify a set amount of vacation time an employee is eligible to take.
- Accrued PTO: This type of PTO is built up as an employee works. This means that an employee could start out the year with no PTO and gain a day of PTO for every month worked.
Bonus tip: If you currently use an attendance tracking sheet to calculate your team's accrued PTO, consider switching to a time-tracking software solution like Hourly to simplify your admin tasks and eliminate the risk of human error.
Is PTO Required by Law?
In the United States, no federal law or state law requires employers to provide paid vacation leave. However, some states do require you to provide paid sick time. Regardless, many employers voluntarily offer PTO for various reasons. That said, many employers voluntarily offer PTO for various reasons.
For example, PTO can help companies increase productivity and attract top talent. And according to a Forbes survey, 31% of respondents rated mandatory PTO as a top benefit.
What Does Use-It-or-Lose-It PTO Mean?
"Use-it-or-lose-it" PTO is an employer's policy that prevents employees from carrying over or cashing out their PTO after a certain time period has passed, such as the end of the year.
The employee may get a new batch of PTO the next year, but their old leave goes up in smoke.
This time period can be a calendar year, but that's not always the case. For example, a PTO limit might be every 3 or 6 months, or it may coincide with an employee contract end date.
Employers can word this policy differently in employee handbooks, so it's important for employees to fully read all the policy fine print long before they face their PTO deadline.
Is Use-It-or-Lose-It PTO Legal?
At the federal level, it's perfectly legal for your company to have a use-it-or-lose-it PTO policy. However, states might have different policies on whether it's legal or not. And even then, the waters can be murky.
For example, a collective bargaining agreement could prohibit a use-it-or-lose-it vacation policy.
Here's the lowdown on use-it-or-lose-it PTO at the state level.
What States Do Not Allow Use-It-Or-Lose-It Vacation Policies?
If you operate a business in California, Colorado, Montana, or Nebraska, then state statute prohibits you from implementing a use-it-or-lose-it policy.
Here are the policy details in each of these states:
|End of employment
|The state prohibits use-it-or-lose-it vacation policies and considers earned vacation time to be wages.
Employers can cap PTO to ensure employees don’t accrue too much of it.
|According to California’s Department of Industrial Relations, employee vacation accruals cannot be taken away, even after termination of employment.
However, if a collective bargaining agreement stipulates that this PTO can be forfeited upon termination, California allows this to stand.
Note that if you fire a CA employee, you must pay them any accrued PTO and their final paycheck immediately. If they quit without notice, you must provide their final paycheck within 72 hours.
If they give 72 hours' notice, you must pony up for their PTO on their last day.
|This state considers PTO to be wages and bans use-it-or-lose-it PTO.
Montana permits caps on accumulated PTO.
If their PTO reaches its limit, workers can begin to accrue PTO again once they use some of their accrued leave.
|According to Colorado’s Department of Labor and Employment, vacation pay is considered wages.
That said, employers can cap accrued vacation time.
Use-it-or-lose-it PTO has been a hot topic in Colorado in recent years, with Colorado’s high court reversing a decision by the appellate court on PTO forfeiture.
|PTO must be paid after separation.
Colorado doesn’t consider a furlough to be employment separation.
|Vacation pay is treated as a form of wages, and use-it-or-lose-it PTO is prohibited.
Company policy can limit the amount of vacation available.
|According to Revised Statute 48-1229, terminated employees must receive a payout for unused vacation days.
However, employers can provide paid sick leave that doesn’t need to be cashed out after termination.
According to the above statute, “unused sick leave is not a part of wages payable to a separating employee unless there is a specific agreement otherwise.”
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What States Allow Use-It-or-Lose-It Vacation Policies?
States where a use-it-or-lose-it vacation policy is allowed are Illinois, Indiana, Kansas, Louisiana, Maine, Massachusetts, New Hampshire, New York, North Carolina, North Dakota, and Oklahoma.
However, some of these states have certain caveats that offer employee protection. Here are a few examples of state outliers:
|The state permits use-it-or-lose-it vacation as long as the employee has a reasonable opportunity to use their leave.
Also, the employer must be able to prove that they gave sufficient notice of its policy to employees.
|You’re free to operate your own PTO expiry policy. That said, the policy needs to be in writing.
If you have five or more employees, you must provide at least 40 hours of paid sick leave per year. That number goes up to 56 hours if you have over 100 staff members.
|Companies can ban PTO rollovers as long as that policy is in writing. Also, PTO does not have to be paid out at termination.
Bear in mind that North Carolina expects you to stick to your promises when it comes to wages and wage benefits, such as vacation pay.
Here’s what the North Carolina Department of Labor’s website says: “Once a promise is made by an employer, then the employer must pay all promised wages, including wage benefits.”
|Use-it-or-lose-it PTO is allowed, but you must give employees “reasonable opportunity” to make use of their paid vacation, and they need to be given proper notice about any stipulations.
Also, under the North Dakota Minimum Wage and Work Conditions Order, you can’t create a policy or contract that makes employees forfeit earned PTO upon separation.
What States Do Not Mention Use-It-or-Lose-It PTO Policies?
Along with the District of Columbia, there's a laundry list of states that don't even address vacation use-it-or-lose-it policies in statutes. Essentially, this leaves any decision on unused vacation pay up to employers.
In alphabetical order, these states are:
- New Jersey
- New Mexico
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
What Are the Benefits of Use-It-or-Lose-It PTO?
From a company perspective, if you already provide PTO to employees, a use-it-or-lose-it policy has financial, staffing, and employee welfare advantages.
Since it's hard to tell when an employee is going to resign or retire, budgeting for years of unused PTO is difficult. But if you set an expiration date on unused PTO, your business's cash reserves won't take an unexpected hit.
If you don't have a PTO expiry policy and a long-term employee builds up years of unused PTO that you've allowed them to roll over indefinitely, you could be stuck with a hefty compensation tab once they move on to new pastures.
If you give your employees PTO without a sell-by date, some staff could decide to accrue their vacation and take an extended trip.
Hard to blame them, but how does that affect your company?
If you grant a months-long absence to a key employee, you could be left short-staffed for an extended time. What's more, rejecting their leave could cause disappointment and conflict.
For these reasons, it could make sense to stipulate a PTO cutoff period and inform employees of it well in advance.
Some employees are tempted to build up their unused vacation time for future use, but this may not be in their best interest. If your employees don't take the rest they need, they can suffer from burnout and low morale.
A use-it-or-lose-it PTO policy would encourage employees to take regular breaks from work and take full advantage of their earned vacation time before it expires.
What Are the Disadvantages of Use-It-Or-Lose-It PTO?
While a use-it-or-lose-it PTO policy has plenty of advantages for businesses, it's not without drawbacks.
For example, prohibiting carryover leave can:
- Hurts employee morale
- Leads to staffing difficulties during busy periods
- Could cause legal issues
If an employee has been too busy with work to use vacation time or has other reasons for not doing so, they may feel unfairly treated if they end up losing all their PTO as they ring in a new year.
This could be particularly damaging for your workforce if a loyal, hardworking staff member has been delaying vacation time for company reasons and ends up losing it.
Could Be Short-Staffed
If all employees' PTO expires at the end of the calendar year, your HR department might receive a deluge of leave requests for the busy holiday period. If you reject these requests, you could have some unhappy campers among your ranks.
On the flip side, if you grant PTO to too many employees, you run the risk of being short-staffed during a critical time for your business. You do have some workarounds for this issue, however.
For example, you could stagger employees' PTO cutoff dates to prevent a vacation stampede.
We mentioned above that two Colorado courts had different interpretations of what the statutes said about use-it-or-lose-it vacation.
This underscores the opportunity for error and misinterpretation of what's acceptable when it comes to PTO policies, both among legal experts and your employees.
Therefore, it's essential that you do your due diligence and find out if your state actually allows this policy and under what circumstances.
If you don't, you could risk your business's reputation—and a hefty fine—for violating labor laws.
Documenting Your Company's Use-It-Or-Lose-It PTO Policy
If you plan to implement use-it-or-lose-it PTO, it's important to have a written policy so that employees know what to expect.
If employees don't have access to your policy in writing, it may not be enforceable in some states.
You may wish to enlist outside help from an employment law specialist to ensure that its content doesn't leave any room for ambiguity.
Before you begin to draft your company's policy, ask yourself some important questions, such as:
- What are the aims of my use-it-or-lose-it vacation policy?
- What do the state statutes say about PTO use-by dates?
- How long should employees get to use their PTO?
- Is full or partial PTO expiry best?
- Should I include a PTO cap?
- Should all leave types be included in this policy?
- How often should employees be reminded about their PTO expiry?
- Does the state require that I pay employees for all PTO after termination?
- How can I help employees understand the need for this policy?
- Will the policy improve business operations?
- Should any exceptions to the policy be included?
When you've finished writing the first draft of your PTO policy, go through it with a fine-tooth comb and make sure all of the above questions are covered.
Understanding Use-It-Or-Lose-It PTO
Many businesses in the U.S. have a use-it-or-lose-it PTO policy, but it's up to you to decide whether it's the best option for your business.
While this policy can assist with scheduling and forecasting, it's vital that your written PTO policy is crystal clear and not in conflict with any state or federal laws.
Want to get information on state laws straight from the source? Use the U.S. government's directory of state labor offices to find your point of contact.