Do Employers Have to Pay for Unused Vacation Time?

When it comes to vacation, employers often have several questions.

“How much should time off should I offer?” “Is it time to update our vacation policy?” “Will I need to pay out any unused vacation time?”

If you’re puzzled, you’re not alone. Rules and regulations around paid time off generally — and paid vacation more specifically — can vary from state to state, even city to city.

Nationally, an estimated 77% of private industry workers have access to paid vacation benefits. So if you’re business is in the majority, or wants to be, it’s important to know what are the laws and requirements around paying out any unused vacation time an employee accrues. Bear in mind, it’s always important to refer to the relevant regulatory body, such as a department of labor, as laws can change.

We’ve answered some of the most commonly asked questions regarding vacation time and pay. Read on to learn the essential rules on vacation policies and payouts.

Are Companies Required to Pay Unused Vacation Time?

There is no national Federal law mandating paid vacation time or the payout of unused vacation time. However, if an employer chooses to offer paid vacation, unused time must comply with state law.

Eight states have strong regulations where accrued vacation time not used by the employee must be paid out if the employer offers the benefit as part of their policy. Thirty-six states and Washington D.C. have regulations where unused vacation pay must be paid out if the company’s employee contract or policy states it will provide a pay out for the accrued time. Only six states lack a law regarding vacation pay out policies.

In Colorado, for example, employers who establish a vacation policy are required to payout earned vacation time to those separating from the company. Colorado vacation pay is included as “wages” and “compensation,” therefore a payout is mandatory when the employee leaves or is terminated.

Meanwhile, in Maryland, the law doesn’t require an employer to pay out unused vacation time, but does state that if the employer doesn’t provide a policy setting a cap at the time of hiring, then the employee is entitled to whatever the cash value of accrued time. Another example of why it pays to have and regularly update your employee handbook.

While there are lists of basic state-by-state policies, the devil may be in the details. So be sure to consult with regulatory body in your location or a professional HR advisor.

Can an Employer Withhold Vacation Pay?

In most places, employers cannot withhold accrued vacation time if the employer 1) provides the benefit as a policy or under an employee contract, and 2) that policy doesn’t explicitly cap or state that the accrued time will not be paid out. Written disclosure and transparency are a smart way to avoid confusion.

Does your employer have to pay you for unused vacation time? Not always. Remember that the answer to this question and those above depend on state laws and the employment contract. Since each state’s law may be different, it’s always good to consult local statutes.

Vacation pay can be an attractive benefit for recruiting and retaining talent. A recent survey found that paid time off was the second most popular perk for small businesses behind health benefits.

But, like all perks, you need to ensure you’re following the rules at a national and local level.

This article is intended only for informational purposes. It is not a substitute for legal consultation. While we attempt to keep the information covered timely and accurate, laws and regulations are subject to change.

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