Paid Time off Laws: A Comprehensive State Guide

Understand state PTO payout laws, including employer policy deviations, remote work, and required payout rules. Find out how various states handle final pay, sick time, and vacation time.

Having a positive work/life balance largely depends on how employees manage their time off. Most organizations today, though, manage PTO as one bank that includes time off for vacation, personal days, and even sick time. All companies earn PTO for time off, but the policy on what happens to PTO when an employee leaves the company is often a mystery. This is when the PTO Payout laws for each state come into focus.

Currently, there is no federal law that requires employers to pay out PTO upon separation. This law falls on each state, and how each handles it is different. Some state laws treat accrued PTO as guaranteed wages, while others leave it up to employers to determine their own policies on payouts. Some states take a mixed approach to the policies, and the rules on the payout are dictated by any policies the employer provides.

These differences in state laws are why both employees and companies need to understand how PTO payout laws work in the state where the employee is working. This is why the state PTO Payout laws are a focus of this research. Before presenting the state differences in laws, it is beneficial to understand the general concepts of these laws.

How PTO payout rules work

1. Explanation of PTO, Vacation, and Sick Leave

Many states consider PTO and vacation time as being earned. Sick time, however, is typically not included in the payout due to being earned and can usually be included when an employer amalgamates vacation time with sick time in what is termed a PTO bank. Once a PTO bank is established, the whole bank becomes subject to vacation payout regulations.

2. Accrued PTO as earned compensation

In states that require payout, the vacation that is not used is compensation that has been earned. If the employer refuses to payout unused vacation compensation, this is viewed as the employer not paying the compensation owed in a timely manner and can incur penalties.

3. Company policy matters

In states that do not require payout, the employer decides what happens to any unused time. If the employer has a handbook that states the employer is required to payout unused PTO, they must do so. If the employer has a policy that states unused PTO is forfeited, this is typically accepted.

4. Use-it-or-lose-it may not be legal

Some states do not permit employers to take away vacation time that has been earned. In states that consider vacation time part of earned wages, this is especially the case. If vacation time has been earned, an employer must either pay it out or carry it over.

States that require PTO payout at separation

Some states have laws that require employers to pay out accrued and/or unused vacation or PTO when an employee leaves a job. Employees in these states are guaranteed a payout as long as the vacation or PTO has been earned and properly logged.

Multiple studies show that these states are in the mandatory payout category:

1. California

California has the most employee-friendly policies. When an employee leaves a job, their accrued vacation time at the employer's highest pay rate must be paid out. Employers cannot use a 'use it or lose it' policy.

2. Colorado

Employees who leave a job are entitled to payment for any earned vacation. Employers cannot rescind earned vacation.

3. Illinois

Under the employer's policies, all employees must be paid for unused vacation upon job separation if the employee was entitled to it.

4. Massachusetts

Vacation that is accrued is considered a wage that is earned and must be paid out as part of the employee's final paycheck.

5. Montana

In the state of Montana, Employers are generally required to pay out vacation. The employer cannot take away used vacation.

6. Nebraska

Under Nebraska law, vacation is considered to be a wage, and any unused vacation must be paid out at the time of termination of employment.

7. Maine

Most employers are required to pay out any earned vacation, unless the employer's written policy states otherwise in a very limited set of circumstances.

8. Louisiana

If the employer has included paid vacation in their employee's compensation package, any unused vacation must be paid out upon employment termination.

9. New Mexico

Employers must compensate accrued leave unless specific provisions in the employer's written policy state otherwise.

10. North Dakota

Employers must compensate accrued leave unless specific provision exceptions apply, such as short employment periods or written forfeiture clauses.

11. Rhode Island

Employers must compensate accrued leave unless specific provisions in the employer's written policy state otherwise, if the employee has worked at least a full year.

All these states share the same principle. Once PTO has been earned, the employee has a right to it.

States where payout depends on employer policy

No law requires employers to pay employees for PTO that has not been used. For these states, everything comes down to what the contract states. If the contract states that employees must be paid for the PTO, the employer must do so. If the contract states that employees will not be paid for PTO that has not been used, this is legal.

A few examples are:

• Texas

• Florida

• Georgia

• Arizona

• Alabama

• Idaho

• Pennsylvania

• Ohio

• New York

• South Carolina

• Wisconsin

• Washington

• Oregon

• Kentucky

• Virginia

In these states, it is essential that employees read the PTO policy in the employee handbook and any contract that has been signed. Employers must have clear and consistent policies to prevent having to defend policies in court.

States with partial or conditional payout rules

Several states do not fall into either of these categories, as they may only require a payout of PTO in certain circumstances or require the policy to be clear in favorable conditions. Others require very specific conditions for the PTO to be forfeited.

These states are often listed as having “mixed rules”:

• Michigan

• Minnesota

• Nevada

• New Jersey

• Connecticut

• Hawaii

• Delaware

• Iowa

In these states, it is even more crucial to have carefully drafted policies. If the employer has not defined what happens to unused PTO, the employer will be assumed to have knowledge of the amount of PTO that the employee has not used.

Use-it-or-lose-it restrictions

There are some states that impose restrictions on use-it-or-lose-it PTO policies. These restrictions could be in states that have mandatory payout regulations. For example, if there are earned vacation days, employers cannot legally recoup them.

Some of these states include:

• California

• Colorado

• Montana

• Nebraska

In these states, employers are required to either allow employees to carry unused PTO into the next year or limit accrual through a max accrual cap. What employers cannot do is extinguish the unused time.

How remote employees and multi-state companies should interpret PTO laws

While remote work doesn’t necessarily mean employees can work wherever they want, remote work has changed how companies think about compliance as it relates to PTO payout rules. Remote employees work immediately from the location of the company to which they provide services. This is big as companies based in one state, Texas, may now work under the obligations of another, Colorado, if a worker is remotely located in Denver.

Given that in several states, PTO can be treated as earned wages, particularly those located in the western United States to which Colorado belongs, the company must understand which state governs which employees’ accrual and payout rights for PTO.

This obviously creates a compliance risk. PTO is employee-earned time and is granted at the employer’s discretion. In this regard, other states and countries define PTO, sick leave, vacation, and wage obligations differently. Some states, like California, Colorado, and Massachusetts, treat PTO as wages, while others let employers set their own rules, leaving it to the employee at the end of the day. This means if there are remote employees from a dozen states, this one-size policy approach will lead to more wage complaints and more employees not being treated the same.

To mitigate such challenges, organizations are now including state-specific PTO addenda in employee handbooks. These addenda detail how rules surrounding accruals, rollovers, payouts, and forfeitures vary depending on where in the country the employee performs their duties. Employers can also mitigate risks by ensuring that employers use reliable time tracking systems and communicate efficiently with remote workers regarding how their state’s law applies to their final paycheck. For remote employees who work across state lines, this approach also fosters transparency and ensures that employees fully understand how their PTO is earned and what happens to that time when they leave the company.

Best practices for employers

An employer communicates PTO allocation policies and practices effectively and consistently helps employers and employees alike. Paycor, Paycom, and Deel recommend the following practices:

1. Ensure PTO policies exist and are documented in a written policy.

2. Describe the method and intervals in which PTO hours are accrued, and whether PTO hours roll over or not.

3. Indicate whether there are cash payouts upon separation from employment for accrued allotments that were not utilized.

4. Ensure payroll and PTO balances are consistently and regularly updated.

5. Educate managers on PTO policies so that they can communicate and discuss PTO policy accurately and consistently.

6. If available, use PTO management software to accurately and consistently maintain PTO balances.

A clear policy promotes equity and protects employers in states that require policies, as the employees can no longer enforce obligations unilaterally.

Best practices for employees

Employees can better protect themselves by actively informing themselves, rather than assuming there will be a cash settlement for any PTO that was not utilized. Some actions that will help employees protect their earned PTO are the following:

1. When reviewing the company's employee handbook and policy regarding PTO, pay particular attention to how PTO credits are granted, the policy on PTO rollover, and whether the employer promises cash settlement upon separation from employment.

2. Be well-versed in your state's employment law for cash obligations regarding unutilized PTO at the end of the employment relationship.

3. Periodically, and not just at the time of separation from employment, track your PTO accrual balances so that you can identify discrepancies that may require correction.

4. Given that you may work in a state with no payout obligation, think about your PTO usage before providing your notice. Using your time off before resigning helps you avoid losing your PTO balance.

5. After you resign, consider asking your HR department for a final pay stub that shows the breakdown. This will help confirm that your PTO has been processed correctly and that your payroll records match your expectations.

6. Your efforts in seeking accurate information are appreciated, and it results in you receiving the compensation that you legally have.

Conclusions

PTO payout laws differ significantly throughout the nation. Some states have no exceptions with mandated PTO or vacation pay out. Other states grant employers complete discretion, while others have a hybrid model that dictates the outcome based on policy language.

Knowing these laws can directly help employees financially at the end of a position. From the employers' perspective, these laws help avoid unnecessary wage claims, legal risks, and monetary losses.

In both cases, both parties should have no surprises. When policy and law are in harmony, PTO is one of the easiest and most equitable aspects of a job.

FAQs:

1. Do federal laws require employers to pay out unused PTO?

There is no federal requirement. This issue is governed by state law and employer policy.

2. Do states require payout for sick leave?

Generally no, sick leave is not subject to payout laws unless the employer combines sick leave with a general PTO bank.

3. Is a use-it-or-lose-it policy legal?

It varies by state. Some states ban it for vacation time, while others permit it, provided the employer gives notice in advance.

4. Can an employer refuse a payout if their policy says so?

Yes, but only in states that grant employer discretion. In states that require payout, employers may not refuse.

5. Which state’s law applies to remote workers?

Generally, the employee’s physical work location is what determines which state law applies.