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How do you handle unused vacation days if an employee is terminated?

Is there a standard way to handle unused pto if an employee is terminated? Is the employer responsible for paying out the value of the unused days, or does the employee "lose" the days? Does this differ by state?


  • The rules very much vary by state, so your starting point is to determine what rules your states require. If all your states require PTO payouts, problem solves. If some do and some do not, then Very Senior Management gets to make a decision between being cheap or fair.

  • And many states then state it depends on employer policy and that the employer must be consistent with what they have promised employees and how they handle unused PTO at termination. So you've got several levels of laws/policies/actions to deal with to know about a specific employer.

  • Clear as mud! Thank you both so much for your help!

  • edited June 22

    Gonna put on my HR hat and my personal perspective....But honestly I feel best business practice is to pay out any earned but unpaid time and that is what I suggested to VSM -- otherwise you can get the blowback of employees who are leaving who use all their PTO right before they tell you they are leaving so as to not lose it...just when you might need them to actually be there!

    But the other best business practice is to actually require employees to use it and not save it up over time. At least have a cap to what can be earned and be due (I think that is legal in all states including CA, but DAW can correct me if I am wrong). I know many companies, especially in the financial sector, that require PTO be taken in increments to allow for auditing the employee's work while they are out (Banks used to require a whole week back in the old days not sure what they do now)... Otherwise you have work-a-holics that not only don't take their time, but don't see why others should and also increase the liability due over time (and usually at a higher pay rate at payout time)

    Eta: that said, I do think it is good to actually accrue it based on a calculation over time rather than giving it all at the beginning of the year, especially for non-white collar jobs in places with high turnover. I also don't think it is a good policy to let employees use more than they have earned, i.e. "go negative".... just a nightmare to get back (if you even can) if they leave.

  • What about companies with unlimited PTO policies? How does that work?

  • Darn if I know. I have never worked for such a place.You mean like take 52 weeks a year and get paid to never go to work?

    Lets flip the problem. There are three types of states

    • You must pay the PTO balance.
    • You must follow your own published policy. (Meaning Very Senior Management makes a policy decision).
    • We do not care what you do. The feds for example do not care what your do. Many states like FL do not care what you do, not just with PTO, but with pretty much anything. FL might have a law for minimum wage but they do not enforce it (not with an agency anyhow).

    As always, the starting point is to find out what the rules are for your state(s). Do so. If you have an "unlimited" PTO policy, then you either owe the employee "unlimited" money or nothing. If you really are not sure, call up the state and ask them. Have you got the rules from each of your states yet or is this just a "less jerk everyone around" kind of question. If there really is a "pay unlimited PTO" state out there, I have not heard of it. Of course, a really badly written company policy can ruin anyone's day.

    I have always worked for employers based in CA and we always paid everyone their balance. Not because we had to (in all states) but because Very Senior Management wrote the policy that way.

  • Unlimited PTO doesn't actually accrue anything -- the day you accrue it is the day you use it. You just take time off as needed/wanted while supposedly getting your work objectives/tasks/goals completed. So there is nothing in any "bank" to payout at termination. To me again I could see a lot of abuse for those unethical ones that know they are for some reason leaving the company's employment and slack off towards the end especially. I guess it shows up in performance appraisals and metrics. But it would be hard to discipline/terminate someone for using too much when it is "unlimited" as long as they are performing to standards set.

    I've heard of a few companies doing something like this, but I think it is a bit foolish unless you have very good hiring ability to not hire people who will take advantage of the situation. They trust that their employees/hires won't abuse the situation. Honestly it is very easy to do so unless someone is tracking closely either goals/performance or actual time used and why on a very consistent basis. Upper management must role model well in this type of environment or motivate the employees in a different way to make sure their focus is on the organization's goals.

    Honestly it is not a policy I would recommend at all.... maybe it's because I work/manage mostly lower blue collar type employees.

  • In the 1980s we did this for the Brass only. We fired one of them (for very good cause) and he took us to CA-DLSE. Claimed he was promised 4 weeks vacation each year and we did not pay it. No timesheets. No policy. No contract. No offer letter. Just his word against ours at CA-DLSE. We lost. Next year the brass was on the same system as everyone else.

    CA is a bad state to not have a PTO policy in. No policy means your policy is whatever CA-DLSE says it is. Any time you have a benefit, you are (maybe) looking at ERISA and a bunch of other laws, Even the "follow your policy" states have been known to spin policies out of whole cloth if any prior company actions imply a policy. ALWAYS best to have a formal written policy and FOLLOW IT where benefits are concerned.

    Worse, the Executive compensation laws (federal) got very tight a few years ago. I could make a decent argument that failing to collect and report PTO for brass violates those laws. IRC 409(a) if memory serves.

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