Vacation Pay: Optional or Mandatory?

1428638_61478545An employee leaves without giving any advance notice.  Are you required to compensate that employee for unused vacation and personal time?

You are not required under any federal or state laws to offer vacation or personal time off benefits, with or without pay. (Note: Some cities and states do require paid sick leave). But if you offer vacation time with pay, sick leave with pay and/or paid time off (PTO), you need to be aware of possible regulations in your state regarding compensation.

Some state laws require the employer to pay departing employees for their unused vacation. In some states this includes unused PTO. In some states the employer must pay departing employees paid vacation, sick time and PTO only if the employer has a policy which obligates the employer to do so. In some states an employer has no obligation to pay departing employees for unused vacation and paid leave.

Federal and state wage and hour laws require an employer to pay departing employees any benefits the employer has promised them or agreed to pay them. So if your business has a policy – in writing or in practice – of allowing employees to earn and accrue paid time off (for vacation, illness or any reason) then employees are entitled to what they have earned and accrued. Most employers offer some type of paid vacation, paid sick leave, and/or paid time off benefits. They believe time away from the job for employees boosts morale and stimulates productivity. Paid vacation time certainly is a benefit employees value, and even more, expect.

So how should you proceed? Decide on the benefit plan which fits your business. Be sure it is non-discriminatory and specific. Put your plan in writing so that it is understandable to everyone. Address some of the following points:

  • Schedule for earning vacation.
  • When vacation may be taken.
  • Who is eligible.
  • With or without pay.
  • Pay in lieu of vacation.
  • Pre-approval of vacation requests.
  • Compensation at termination.
  • Vacation pay advances.
  • Holiday within vacation period.
  • Vacation carry-over.

Keep in mind, not having a policy in writing does not mean you do not have a vacation policy, it means your policy is how you have dealt with vacation in the past and what you have verbally promised an employee or employees. So it is wise to know your vacation and paid leave policies and put them in writing. And before finalizing your vacation and paid leave policies, get input from an attorney to be sure your policies conform to your state law.

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